What is ERC-20?

ERC-20 is a set of specific standards and rules that governs cryptocurrencies built on the Ethereum blockchain

Written by Andrew Loo

Read Time 5 minutes

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What is ERC-20?

ERC-20 stands for Ethereum Request for Comment Number 20. ERC-20 refers to a specific type of fungible digital token built on the Ethereum blockchain. The top five varieties of ERC-20 tokens are LINK, AAVE, BNB, USDT, and UNI tokens.

ERC-20 tokens comply with specific rules and guidelines, making them compatible with a wide variety of tokens. They have become the standard for building new tokens within the Ethereum ecosystem and can be traded with each other on decentralized exchanges (DEXs) based in the Ethereum network, like Sushiswap and Uniswap.

Unlike NFTs (non-fungible tokens), fungible tokens can be exchanged with other tokens, making them easy for developers and users to trade and interact with. ERC-20 tokens can be used with a wide variety of products and services, representing any type of ownership, right, access, cryptocurrency, or other transferable non-unique asset. For example, ERC-20 tokens can stand in for shares in a company or virtual goods in a video game.

Key Highlights

ERC-20 are fungible digital tokens that comply with a set of standardized rules in the Ethereum Blockchain network.
ERC-20 tokens are highly interchangeable and can easily be exchanged for other types of tokens with an equivalent value.
Because every ERC-20 token contains the same essential properties, they can easily be transferred across projects, and within different applications on the Ethereum network.

Importance of ERC-20

1. Defines common rules for all Ethereum tokens

To be created and deployed, new digital ERC-20 tokens must comply with the ERC-20 standards that define specific mandatory functions that each developer must include in the creation of new tokens. These rules determine the ways that tokens can be moved across addresses, how token holders can approve transactions, and how many ERC-20 tokens exist overall.

Because every ERC-20 token must follow the same basic standards, any token a developer builds in the Ethereum network will work easily with any other token in the Ethereum network. With the latest Ethereum upgrade, ERC-20 tokens can easily be traded, exchanged, and transferred for a wide variety of functions and projects.

2. Maintains the scalability of Ethereum

By complying with the ERC-20 standard, Ethereum can maintain the compatibility of a wide variety of different types of tokens. While each type of token has been created within the vast Ethereum system, adhering to the guidelines imposed by the ERC-20 standard allows users to maintain compatibility across this diversity.

Keeping tokens consistent with the same set of rules, it allows the Ethereum ecosystem to expand and grow without limits while it still retains optimal functionality.

3. Provides high-level transparency

Every ERC-20 token interaction and transaction is recorded in the general Ethereum Blockchain register, so any user can track the movements and trades of specific ERC-20 tokens as they travel from a particular address to another address.

With this high-level of transparency in every movement and exchange, token holders and investors can easily verify how authentic and valid their ERC-20 token transactions are.

4. Creates interoperability for Ethereum tokens

Perhaps the most significant benefit of using ERC-20 tokens is their interchangeable nature. Since each ERC-20 token will inevitably comply with the same overall guidelines and standard requirements, token holders and investors can easily exchange them for use across different projects and applications. ERC-20 tokens are extremely versatile and allow users to transform the usage of these flexible tokens.

Uses of ERC-20

The ERC-20 standard guideline-compliant tokens provide several key functions for token holders and investors, including the creation of decentralized apps, or dApps, within the Ethereum blockchain. ERC-20 tokens can be used for other functions as well.

1. Decentralized Apps on the Ethereum Network

The creation and widespread adoption of ERC-20 tokens compliant with the standard guidelines has allowed for the creation of dApps, decentralized applications, within the Ethereum network.

The Ethereum Blockchain is itself a decentralized platform, which means that all actions and transactions are recorded within the general register. There is no single central authority controlling the interactions or restricting access to information. Within this open-access context, individual developers can create and release dApps, smart contracts, and virtual tokens. The ERC-20 guidelines ensure that each developer follows the same basic set of rules to create their digital tokens, which allows for interoperability and ease of exchange among newly deployed decentralized applications.

2. Other Uses of ERC-20 Tokens

There are a variety of types of ERC-20 tokens, although each type is compliant with industry standards. ERC-20 tokens can include utility tokens, stablecoins (such as Tether, USDT, or USD Coin, USDC), security tokens, and others. Since this type of digital token is fungible, it can easily be exchanged for other types of tokens that represent an equivalent value and type.

ERC-20 tokens can be used to represent a wide variety of assets, including gaming assets, company shares, or insurance, among others. Token holders can contribute ERC-20 tokens to fundraising efforts, use these tokens to gain exclusive access to an organization’s services and products, or benefit from a particular loyalty program at their favorite retail outlet. ERC-20 tokens are highly versatile and provide easy interoperability within projects and across apps.

Top Five Types of ERC-20 Tokens

1. Tether (USDT)

Tether (USDT) is a type of ERC-20 token that represents a cryptocurrency known as a “stablecoin,” which offers token holders quick and easy transactions with low fees but more stability than most other highly volatile forms of cryptocurrency.

2. Uniswap (UNI)

Uniswap (UNI) is a type of decentralized cryptocurrency exchange that operates on an AMM, or automated market maker, model and is always in a constant state of development. In this model, smart contracts are used to automatically determine the price of each deposited token based on the current levels of supply and demand in real-time. In this protocol, there is no central authority that determines the prices of tokens within a trade context. Instead, the market governs the trade rates.

3. Binance (BNB)

Binance Coin (BNB) is among the top most popular forms of cryptocurrency currently available to traders. Binance Coin is unique in that each quarter, it buys back 20% of the overall available supply of Binance Coin and destroys it, thus driving down the supply and boosting the value of still existing Binance Coins, a process it repeats indefinitely.

4. Aave (AAVE)

Aave (AAVE) is used for the Aave protocol, which allows ERC-20 token holders to interact directly in the governance process of the Ethereum platform. With AAVE ERC-20 tokens, users can suggest protocol adjustments, gain rewards for contributing to the growth of the platform, and vote on proposed amendments to the platform’s protocol.

This process is meant to provide token holders with a decentralized community decision-making power, ensuring that each token holder has a voice that holds sway within the policy-making process.

5. Chainlink (LINK)

Chainlink (LINK) is a type of ERC-20 token that syncs real-world data points with smart contracts linked to Ethereum. LINK is intended to offer a secure space of interaction between payment systems, APIs, external sources of data, and smart contracts in the Ethereum Blockchain. Chainlink provides heightened security and resilience within a decentralized exchange network that can be used for everything from supply chain management to gaming trades.