Ethereum has revolutionized the blockchain landscape by enabling developers to build decentralized applications (dApps) and issue digital assets through smart contracts. One of the most impactful innovations on the Ethereum network is the ERC20 token standard—a foundational protocol that powers thousands of cryptocurrencies and decentralized finance (DeFi) projects today.
In this guide, we’ll explore what ERC20 tokens are, how they work, their technical specifications, and why they’re essential to the Ethereum ecosystem.
👉 Discover how ERC20 tokens power the future of digital finance
Understanding the ERC20 Token Standard
ERC20 is a technical standard used for implementing fungible tokens on the Ethereum blockchain. The term stands for "Ethereum Request for Comment 20," with "20" being the proposal number assigned by the Ethereum developer community.
This standard defines a common set of rules that all Ethereum-based tokens must follow. By establishing a uniform framework, ERC20 ensures compatibility across wallets, exchanges, dApps, and other infrastructure within the Ethereum ecosystem.
What Does "Fungible" Mean?
Fungibility means that each unit of a token is interchangeable and indistinguishable from another. For example:
- One ETH is always equal to another ETH.
- One US dollar bill has the same value as any other dollar bill.
This contrasts with non-fungible tokens (NFTs), such as those based on the ERC721 standard, where each token represents a unique asset—like digital art or collectibles.
ERC20 became especially prominent during the 2017 Initial Coin Offering (ICO) boom, when countless new projects launched their own tokens using this standardized framework. Even today, it remains one of the most widely adopted token standards in the crypto space.
How Do ERC20 Tokens Work?
At its core, an ERC20 token operates through a smart contract deployed on the Ethereum blockchain. This contract maintains a ledger that tracks how many tokens each Ethereum address owns.
Think of it like a spreadsheet with two columns:
- Address: A public Ethereum wallet address.
- Balance: The number of tokens held by that address.
When you send ERC20 tokens to someone, you're initiating a transaction that updates this ledger. The sender's balance decreases, and the recipient's increases—all enforced by code.
However, there's one crucial detail: all ERC20 transactions require gas fees paid in ETH, Ethereum’s native cryptocurrency. Even if you're sending USDT or LINK, you still need ETH in your wallet to cover network costs.
👉 Learn how to manage ERC20 tokens and gas fees efficiently
Key Functions of the ERC20 Standard
To be considered ERC20-compliant, a token contract must implement specific functions and events. These allow applications to interact with tokens consistently and securely.
Required Functions
name()– Returns the full name of the token (e.g., "Chainlink").symbol()– Returns the ticker symbol (e.g., "LINK").decimals()– Specifies how divisible the token is. Most use 18 decimals, meaning 1 token = 1,000,000,000,000,000,000 base units.totalSupply()– Shows the total number of tokens in circulation.balanceOf(address)– Retrieves the token balance of a specific Ethereum address.transfer(address, amount)– Allows a user to send tokens to another address.approve(address, amount)– Lets a user authorize another party (like a dApp) to spend a certain amount of their tokens.allowance(owner, spender)– Checks how many tokens one address is allowed to spend on behalf of another.transferFrom(addressFrom, addressTo, amount)– Enables a third party to transfer tokens from one address to another—useful for automated trading or staking.
Mandatory Events
For transparency and tracking, every ERC20 contract must emit these events:
Transfer(from, to, value)– Triggered whenever tokens are sent or received.Approval(owner, spender, value)– Emitted when spending approval is granted.
These functions and events act like an API for developers—ensuring predictable behavior so wallets like MetaMask or Ledger can display balances correctly, and dApps like Uniswap or Aave can integrate tokens seamlessly.
Why Is the ERC20 Standard Important?
The true power of ERC20 lies in interoperability. Because all ERC20 tokens follow the same rules:
- Wallets can support thousands of tokens without custom code.
- Exchanges can list new tokens quickly.
- DeFi platforms can accept multiple assets for lending, swapping, or yield farming.
This standardization reduces development time, minimizes bugs, and enhances security. In fact, reputable projects often undergo third-party smart contract audits from firms like Certik or OpenZeppelin before launch—ensuring compliance and safety.
Moreover, because anyone can create an ERC20 token (with proper coding knowledge), it has democratized access to fundraising and innovation in Web3.
Frequently Asked Questions (FAQ)
What’s the difference between ETH and an ERC20 token?
ETH is Ethereum’s native currency, used primarily to pay gas fees. ERC20 tokens are digital assets built on top of Ethereum using smart contracts—they represent utility tokens, stablecoins (like USDT or USDC), governance rights (like UNI), or other value types.
Can I store ERC20 tokens in any wallet?
You can store ERC20 tokens in any wallet that supports Ethereum and its token standard—such as MetaMask, Trust Wallet, or hardware wallets like Ledger and Trezor. Just ensure your wallet is connected to the Ethereum network (or compatible layer-2 chains).
Do I need ETH to send ERC20 tokens?
Yes. Since all operations on Ethereum require computational resources, you must pay gas fees in ETH—even when transferring non-ETH tokens like DAI or SHIB.
Are all tokens on Ethereum ERC20?
No. While ERC20 dominates for fungible tokens, others exist:
- ERC721: Used for non-fungible tokens (NFTs).
- ERC1155: Supports both fungible and non-fungible tokens in one contract.
How do I check my ERC20 token balance?
Use a blockchain explorer like Etherscan. Enter your Ethereum address, and it will display all associated ERC20 token balances automatically.
Is creating an ERC20 token safe?
Creating a token is technically simple—but deploying it safely requires expertise. Poorly written contracts can lead to locked funds or exploits. Always audit your code before deployment.
Final Thoughts
The ERC20 standard has become a cornerstone of the Ethereum ecosystem. By providing a clear, reliable blueprint for building digital assets, it has enabled rapid innovation in DeFi, gaming, governance, and beyond.
Whether you're an investor managing diverse crypto holdings or a developer launching a new project, understanding ERC20 is essential to navigating the world of blockchain technology.
As Ethereum continues to evolve—with upgrades improving scalability and efficiency—the role of ERC20 tokens will remain central to decentralized finance and Web3 applications.
👉 Start exploring top ERC20 tokens and their real-world use cases