Ethereum is a network built for smart contracts, virtual agreements that can be programmed to execute automatically when certain conditions are met. This functionality provides for the ability to create many kinds of new decentralized applications.
As a result, many other platforms and their tokens are built on top of the Ethereum blockchain. Quite a few of the most popular utility tokens and decentralized finance (DeFi) applications are built on Ethereum. There are certain standards developers must follow if they want their tokens to be accepted by the network — standards often referred to as ERC20.
In this crypto guide we will answer the question “what is ERC20”, as well as how it relates to tokens issued on the Ethereum blockchain.
What is ERC20?
ERC20 is a form of token that can be issued on Ethereum (and only Ethereum) and it also represents a set of standards that cryptocurrencies can adhere to. The primary purpose of ERC20 tokens is to work with smart contracts and define a common list of rules that all tokens on the Ethereum blockchain have to abide by.
While Ether (ETH) is the native cryptocurrency of the Ethereum network, the ERC20 token represents a specific standard — or set of rules — that developers can follow to make Ethereum-based tokens.
This token standard is only for fungible tokens, and not non-fungible tokens (NFTs). One ERC20 token can be exchanged with another.
ERC20 smart contracts use ERC20 tokens to make payments when their protocol calls for it. Any smart contract that involves being paid will therefore pay the user in the form of an ERC20 token. Many popular stablecoins, like USDC and DAI, for example, are ERC20 tokens.
How Does ERC20 Work?
ERC20 is not a program or piece of software. It’s a standard protocol. This protocol governs the tokenization of new tokens, ensuring that they meet the required technical specifications. If a token doesn’t conform to the appropriate technical standards defined by ERC20, it won’t be called an ERC20 token, and won’t be issued on Ethereum.
An analogy might be HTTP: the Hypertext Transfer Protocol used for websites. HTTP defines how messages on the internet are formatted and transmitted, and how servers and browsers should react in response to various commands.
In a similar manner, ERC20 specifies the essential features that Ethereum-based tokens should have and how they should function. Tokens that don’t comply cannot be issued, traded, or listed on exchanges.
Smart contracts that want to use ERC20 tokens have to follow the appropriate ERC standards. There are currently 9 rules in total, 6 of which are mandatory. The other 3 are optional. These include:
|Mandatory rules||Optional rules|
|Approve||Decimal (Max: 18)|
Here’s a brief rundown of how the mandatory standards apply to the creation of tokens.
TotalSupply: Outlines the total number of tokens to be created.
Approve: Helps to eliminate the possibility of counterfeit tokens being created by requiring approval of smart contract functions.
BalanceOf: Returns the total number of tokens held by an address, allowing users to check their balances.
TransferFrom: Allows for the automation of transactions when desired.
Transfer: Allows for the transfer of tokens from one address to another, like any other blockchain-based transaction.
Allowance: When a smart contract wants to execute a transaction, it has to be able to see the balance held by the Ethereum wallet trying to transact. The allowance function allows the contract to carry out the transaction if the user has sufficient balance or cancel the transaction if they do not.
These six rules must be programmed into a token for it to be considered ERC20. It’s not hard to see why: without clear instructions for these rules or standards, the token wouldn’t be able to interact with smart contracts effectively, and all kinds of problems might arise.
The Importance and Impact of ERC20
The ERC20 standard made many initial coin offerings (ICOs) possible in recent years. The standard makes it easy for developers to create decentralized applications (dApps) on Ethereum. The whole process becomes streamlined when adhering to ERC20.
The standard makes implementing new tokens simpler for developers since there is a standard protocol to follow. ERC20 tokens can be made to offer high liquidity, and smart contract transactions are thought to be low-risk if the programming is done correctly.
What Tokens are ERC20?
ERC20 has enabled the creation of many new tokens. Here’s a list of the top 10 largest ERC20 tokens by market cap as of November 2021:
• USD Coin (USDC)
• Wrapped Bitcoin (WBTC)
• Axie Infinity (AXS)
• Theta Token (THETA)
• Fantom (FTM)
• Crypto.com Chain (CRO)
The largest by both trading volume and market cap is the USD Coin (USDC) stablecoin, which remains pegged to the U.S. Dollar at a 1:1 ratio. Stablecoins are popular among traders looking to lock in profits quickly without converting to fiat currency, as well as those seeking to earn a yield on their crypto.
A number of decentralized finance (DeFi) and metaverse tokens are ERC20 tokens as well. Decentraland (MANA) and Enjin Coin (ENJ) help users perform functions in video games and virtual or augmented realities. Uniswap (UNI) is the native token of one of the largest DeFi platforms, allowing users to borrow and lend funds to one another.
Tokens like these and many others have been made possible by ERC20.
How to Store ERC20 Tokens
To hold ERC20 tokens, users need an ERC20 wallet, as with any other crypto. The key is to make sure that the crypto wallet supports tokens of this nature. Fortunately, some wallets have been designed for the purpose of storing ETH and ERC20 tokens, including:
• Trust Wallet
• Mist Wallet
Wallets like these can also be used to interact with other blockchain-based platforms like DeFi apps and NFT marketplaces.
When storing crypto in any wallet, be sure to back up your private keys and seed phrase. Don’t let anyone else access either the key or the phrase, as doing so would allow them to take ownership of all the crypto in that wallet.
ERC20 is one of the commonly used standards for tokens issued on Ethereum. Many popular utility tokens are, in fact, ERC20 tokens, including Basic Attention Token (BAT), Shiba Inu (SHIB), and Crypto.com Coin (CRO).
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