ERC-20 tokens are digital assets created on the Ethereum blockchain that have become one of the most popular standards for cryptocurrencies and decentralized applications (dApps). The acronym ERC-20 stands for “Ethereum Request for Comment 20,” which is a proposal to standardize the interface for tokens on the Ethereum platform.
Thanks to this standard, any new token compliant with ERC-20 can be seamlessly supported by various wallets, exchanges, and applications within the Ethereum ecosystem. The ERC-20 token is a standard that includes several basic functions, such as transferring tokens between users, checking account balances, and retrieving information about the total supply of tokens in circulation. The standardization of these operations has greatly simplified the process of creating new cryptocurrencies and enabled interoperability between various applications on the Ethereum network.
Why was the ERC-20 standard created?
Before the introduction of the ERC-20 standard, developers who wanted to create a new token had to define how it would function themselves. This led to many compatibility and security issues since each token had its own unique features and didn’t always work with wallets or exchanges. The ERC-20 standard was proposed as a way to unify this process, making it much easier to create new cryptocurrencies on the Ethereum platform. ERC-20 is a set of rules that tokens on Ethereum must follow to be compatible with other applications operating in the Ethereum ecosystem. This ensures that users can easily transfer tokens between different wallets and exchanges without technical problems.
Basic functions of ERC-20 tokens
Every ERC-20 token must implement a few basic functions that define its operation on the Ethereum network. Below, we discuss and present some of them:
- totalSupply: Defines the total number of tokens in circulation.
- balanceOf: Checks the token balance at a given address.
- transfer: Transfers a specified number of tokens from one address to another.
- transferFrom: Allows the transfer of tokens from one address to another on behalf of the token holder.
- approve: Allows the approval of a token transfer by a specific address.
- allowance: Checks how many tokens can be transferred from one address to another.
The above functions create a standard interface for each ERC-20 token, which makes it easier for various applications in the Ethereum ecosystem to handle them.
How does the ERC-20 token work on the Ethereum blockchain?
ERC-20 tokens operate on the Ethereum blockchain, using smart contracts to manage their functionality. A smart contract is a program based on the blockchain that automatically performs specific actions when certain conditions are met. In the case of ERC-20 tokens, the smart contract manages all operations, such as token transfers, balance checks, and authorizations. Thanks to smart contracts, every transaction is recorded in a public ledger, ensuring complete transparency and security. Every ERC-20 token holder can check their transaction history and wallet status at any time. Moreover, smart contracts eliminate the need for trust in intermediaries, as all operations are executed automatically according to the code written in the contract.
Gas fees on Ethereum
Every transaction on the Ethereum blockchain comes with a “gas fee,” which is the cost for using the network’s computational power to process the transaction. In the case of ERC-20 tokens, each operation, such as a transfer or balance check, requires a certain amount of gas. The amount of gas fees depends on the current network activity and the complexity of the operation. In practice, this means that the more complex the contract, the more gas is required to execute it. It’s also worth noting that these fees are paid in ETH, the native cryptocurrency of the Ethereum network, which means that having ETH is necessary to conduct transactions with ERC-20 tokens.
How to create an ERC-20 token?
Creating your own ERC-20 token is not complicated, but it requires a basic knowledge of programming in Solidity and an understanding of how the Ethereum blockchain works. The process begins with writing a smart contract that will manage the new token. Such a contract defines the token’s name, symbol, total supply, and distribution method. Here are the basic steps to create an ERC-20 token:
- Define token parameters: Specify the name, symbol, total supply, and decimal places.
- Write the smart contract: Code the contract in Solidity that will manage the token.
- Test the contract: Conduct tests on Ethereum testnets to ensure the contract works as expected.
- Deploy the contract: Publish the contract on the main Ethereum blockchain.
- Distribute the tokens: Distribute tokens to users, for example, through an airdrop or sale on exchanges.
- After creating the token, it can be transferred between users, listed on cryptocurrency exchanges, and used in various decentralized applications (dApps).
Where can you store ERC-20 tokens?
ERC-20 tokens can be stored in any wallet compatible with the Ethereum network. The most popular options are wallets such as MetaMask, Trust Wallet, or hardware wallets like Ledger Nano S. Each of these wallets allows for secure storage of tokens, transferring them, and interacting with smart contracts. It’s essential to always ensure that the wallet is well-secured and that private keys are stored safely. If the private key is lost, there is no way to recover access to the funds, so security is crucial.
Use of ERC-20 Tokens
ERC-20 tokens have widespread applications within the Ethereum ecosystem. They are used in a variety of applications, from games to decentralized finance (DeFi). They are most commonly utilized in the following areas:
- Payments: ERC-20 tokens can be used as a form of payment in various applications and trading platforms.
- Governance: Many projects use ERC-20 tokens for governing their ecosystems. Token holders can vote on project changes or decide on the allocation of funds.
- Investments: ERC-20 tokens are often used as investment tools. They can represent shares in projects, similar to stocks in traditional companies.
- Gaming: In blockchain-based games, ERC-20 tokens can represent in-game currencies that can be exchanged for other digital assets.
ERC-20 Tokens in DeFi
ERC-20 tokens play a key role in the growth of the DeFi (Decentralized Finance) sector. DeFi enables users to access various financial services such as loans, staking, or trading without the need for traditional financial institutions. ERC-20 tokens are often used as collateral in loans and as assets that can be staked in various protocols. Thanks to the ERC-20 standard, DeFi projects can easily integrate different tokens into their applications, enhancing their interoperability and usability. Examples of popular DeFi tokens based on the ERC-20 standard include USDT (Tether), which is a stablecoin, and LINK, which is used to support the Chainlink network.
How to Exchange ERC-20 Tokens on Exchanges
Currently, ERC-20 tokens can be easily exchanged on various cryptocurrency exchanges, both centralized (CEX) and decentralized (DEX). Before trading, it is important to familiarize yourself with the rules of the platform and ensure that it supports the tokens you are interested in.
- Centralized Exchanges (CEX): Exchanges such as Binance, Coinbase, or Kraken offer a wide range of ERC-20 tokens. Trading on these platforms is quick and simple, but usually requires identity verification.
- Decentralized Exchanges (DEX): Platforms like Uniswap or SushiSwap allow for token exchanges directly from the user’s wallet without the need to create an account or go through the KYC (Know Your Customer) process.
The choice of the right exchange depends on individual needs, such as transaction speed, fees, or the level of anonymity. In the case of DEXs, it is important to be aware of potential risks related to low liquidity and the possibility of encountering counterfeit tokens. For those who find the above methods too complicated, we recommend purchasing the most popular cryptocurrencies through our exchange. This way, you can start your crypto journey safely and without hassle!
Advantages of ERC-20 Tokens
Among the advantages for both developers and users, the following can be highlighted:
- Interoperability: Thanks to standardization, ERC-20 tokens can be easily integrated with various applications within the Ethereum ecosystem.
- Ease of Creation: Developers can quickly create new tokens that comply with the ERC-20 standard, making the development of new projects easier.
- Wide Application: ERC-20 tokens are used in various industries, from finance to gaming and digital art.
- Support for Smart Contracts: ERC-20 tokens can benefit from smart contract features, allowing for the automation of many processes.
Challenges Associated with ERC-20 Tokens
Despite many advantages, ERC-20 tokens are not without drawbacks. These include:
- Gas Fees: High gas fees can make transferring ERC-20 tokens expensive, especially with a high volume of transactions.
- Lack of Support for Complex Contracts: The ERC-20 standard does not support some advanced features, such as ERC-721 for NFTs or ERC-1155 for multi-tasking assets.
- Security: Like any blockchain technology, ERC-20 tokens can be vulnerable to hacking attacks or bugs in smart contracts.
Conclusion
ERC-20 tokens have become the foundation of the Ethereum ecosystem and play a key role in the development of modern decentralized applications. Their standardization makes it possible to create, manage, and exchange new tokens in a simple and efficient way. Despite some limitations, ERC-20 remains one of the most important standards in the cryptocurrency world, enabling the creation and development of numerous projects within the Ethereum ecosystem. If you are considering creating your own token, ERC-20 is an ideal choice for a start. If you prefer to focus on steadily earning money with cryptocurrencies, use our exchange and HODL the major cryptos!
