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ERC-20

Updated on January 5, 2024
Article byShrestha Ghosal
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is ERC-20?

ERC-20 is a commonly adopted technical standard for creating and implementing tokens on the Ethereum blockchain. It represents a set of rules and guidelines developers follow while designing and deploying new tokens in the Ethereum blockchain. This standard offers compatibility and collaboration within the cryptosystem.

ERC-20

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These tokens are fungible, meaning they are interchangeable with other tokens. They enable the creation of digital assets, including cryptocurrencies, loyalty points, and utility tokens, without developing an entirely new blockchain. The standard’s growing popularity resulted in many tokens being issued on Ethereum that supported several projects and decentralized applications.

Key Takeaways

  • ERC-20 is a technical standard that developers must follow while creating and deploying tokens on the Ethereum blockchain. It establishes rules, guidelines, and practices commonly accepted in this cryptosystem.
  • This standard provides a framework for generating fungible or interchangeable tokens compatible with several exchanges, wallets, and decentralized applications. These tokens serve as digital assets representing various things, like cryptocurrencies and loyalty points.
  • The emerging popularity of these tokens has contributed to the expansion of the Ethereum network.

ERC-20 Explained

ERC-20 is a widely-accepted technical standard within the Ethereum blockchain system. It is a set of rules and guidelines that developers must adhere to while issuing tokens on the Ethereum blockchain. These tokens are digital assets representing a broad range of things, like cryptocurrencies, utility tokens, in-game items, and loyalty points.

This standard has played a crucial role in expanding the Ethereum blockchain by providing a common framework for creating fungible tokens compatible with various decentralized applications, wallets, and exchanges. However, this standard has also encountered some challenges. The surge in popularity of the tokens led to increased congestion on the Ethereum network. It resulted in scalability issues and higher transaction fees. Despite its challenges, this standard has revolutionized how tokens are generated, deployed, and utilized within the Ethereum space.

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Functions & Features

Some ERC-20 token functions and features are:

  • Total Supply: These tokens specify a total supply representing the maximum number of tokens that users can create.
  • BalanceOf: Tokens built on this standard can track the balance of tokens associated with a specific Ethereum address.
  • Transfer: The transfer function facilitates the transfer of tokens from one Ethereum address to another.
  • Allowance and Approve: These tokens support the concept of allowances, where an address can grant another address permission to spend a certain number of tokens on its behalf.
  • Transfer Event: When tokens are transferred, this standard requires releasing an event that provides information about the transaction, including the sender, receiver, and the number of tokens transferred.
  • Name, Symbol, and Decimals: These tokens usually include metadata like names, symbols, and decimals. The name and symbol enable identification of the token, and the decimal represents the divisibility of the token.

How To Create?

The steps to create this token are as follows:

Step #1 – Setting Up The Development Environment

To begin the process, the user must install a code editor, like Visual Studio Code, and a package manager, like Node Package Manager, for managing dependencies.

Step #2 – Writing The Smart Contract Code

Next, they must open the code editor and create a new file with a .sol extension. This file will contain the Solidity code for the token. They must write the ERC-20 smart contract code using Solidity, the programming language for Ethereum smart contracts.

Step #3 – Compiling And Deploying The Smart Contract

Then they must open a terminal window and navigate to the directory containing the .sol file. They must then deploy the ERC-20 smart contract to the Ethereum blockchain using a development tool like Remix, Truffle, or Hardhat.

Step #4 – Interacting With The Token

Once deployed, the user can interact with the token using Ethereum wallets or custom scripts. They can use the transfer and approve functions to send tokens, approve spending, and transfer tokens on behalf of another address.

Examples

Let us go through the following examples to understand this token:

Example #1

Launched in 2018, UniSwap is one of the largest and most widely-accepted decentralized exchanges on the Ethereum blockchain. This token is traded on large centrally controlled platforms, which led to liquidity issues. However, Uniswap employs an automated liquidity protocol that allows users to pool their money together. As a result, each token consists of its pool.

Example #2

According to an official statement, PayPal has declared the launch of a new stablecoin. This dollar-backed stablecoin marks the initiation of a major financial company in the United States, creating a stablecoin. These are ERC-20 tokens that the Paxos Trust Co. has issued on the Ethereum blockchain and will be available from August 7, 2023. PayPal customers can send, purchase, fund purchases, and convert the Stablecoin.

Importance

The importance of the ERC-20 blockchain can be summarised as follows:

  • It has introduced a standardized framework for creating tokens on the Ethereum blockchain. This standardization enables seamless compatibility between tokens, wallets, exchanges, and decentralized applications.
  • Many decentralized finance platforms, including lending, borrowing, and decentralized exchanges, rely on these tokens. They enable users to participate in various decentralized finance protocols, contributing to the rapid growth and innovation in the decentralized finance framework.
  • The tokens are widely supported on cryptocurrency exchanges, providing liquidity and accessibility for trading. This liquidity is essential for token holders to buy, sell, and trade their assets efficiently.
  • The adoption of these tokens has contributed to Ethereum’s network growth and made it one of the most widely used and recognized blockchain platforms. It has attracted developers, entrepreneurs, and businesses to build and deploy applications which further contributed to the growth of the Ethereum space.
  • This standard has inspired similar token standards on other blockchains. As a result, it promoted collaboration between the different blockchain networks.

ERC-20 vs ERC-721

The differences are as follows:

  • ERC-20: This is a commonly accepted token standard on the Ethereum blockchain. It defines a set of rules and functions for creating fungible and interchangeable tokens. Each unit of this token is identical and is divisible into smaller units. They share common functions, including transferring ownership and approving spending.
  • ERC-721: This is a token standard on the Ethereum network, and it represents non-fungible tokens (NFTs). These tokens are unique and indivisible. Each token has its distinct properties. They are suitable for representing ownership of digital or physical assets like collectibles, digital art, real estate, and in-game items. These tokens enable verifiable ownership and have unique identifiers and support functions for transferring ownership.

ERC-20 vs BEP-20 vs TRC-20

The differences are:

  • ERC-20: This is the Ethereum token standard that defines the rules and functions for creating fungible tokens on the Ethereum blockchain. These tokens are interchangeable and divisible, making them suitable for various uses, including cryptocurrencies, utility tokens, and stablecoins.
  • BEP-20: It is the token standard on the Binance Smart Chain (BSC), a blockchain platform developed by Binance. These tokens are used to create fungible assets on the Binance Smart Chain. They have gained popularity due to the lower transaction costs and faster confirmation times than Ethereum.
  • TRC-20: This is the token standard on the TRON blockchain. It is designed to create and manage tokens within the TRON system. TRC-20 tokens provide the features of fungibility and interchangeability. The TRON network offers high bandwidth and lower transaction fees, making it attractive for decentralized applications and transactions. These tokens are integrated into various TRON-based projects, which resulted in this system’s expansion.

Frequently Asked Questions (FAQs)

1. What is the ERC-20 wallet address?

This wallet address is a specific alphanumeric string containing 42 characters representing a user’s Ethereum address. It sends, receives, and stores tokens on the Ethereum blockchain. Users can access their wallet address through Ethereum applications like MetaMask or MyEtherWallet. Users must provide their wallet address to the sender to receive the tokens.

2. Can you send ERC-20 to BEP-20?

No, it is not possible to directly send these tokens to BEP-20 addresses as they are native to the Ethereum blockchain, while BEP-20 tokens are specific to the Binance Smart Chain. Users must use an exchange service that supports such token swaps to transfer tokens between these two networks. These services allow these tokens conversion to ensure compatibility between the different blockchain networks.

3. Are ERC-20 tokens securities?

These tokens are considered securities based on their characteristics and the process through which they are issued or sold. Some tokens are classified as securities under the securities laws. However, all of them do not automatically fall under this category. The regulators treat tokens that promise future returns or represent ownership in a company or project as securities.

This article has been a guide to what is ERC-20. We compare it with TRC-20, BEP-20, & ERC-721, explain how to create it, its functions, examples, and importance. You may also find some useful articles here –

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