ERC-20

What is ERC-20?

ERC-20, short for Ethereum Request for Comments 20, is a well-known standard for creating tokens on the Ethereum blockchain. In simple terms, it defines a set of rules and guidelines that developers can follow in order to issue their ERC-20 tokens on Ethereum.

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ERC-20 has become a widely recognized term in the crypto space. It is currently the most popular standard for fungible tokens on Ethereum and one of the most commonly-used standards within the blockchain industry. 

History of the Most Popular Token Standard

Fabian Vogelsteller, a developer and thought leader on blockchain technology, first proposed the standard in late 2015. He submitted the proposal for the standard via the project’s GitHub page. It was assigned the designation ERC-20 as it was the twentieth comment.

The standard was officially accepted as an Ethereum Improvement Proposal (EIP) in September 2017. Subsequently, it provided developers with a universal token standard, allowing for greater interaction and easier integration with different projects and applications. 

ERC-20 Tokens

ERC-20 tokens are digital assets that are created using the ERC-20 standard. These tokens are built and operate on the Ethereum blockchain, which allows them to benefit from the vast and prosperous decentralized finance (DeFi) ecosystem of Ethereum. 

These tokens can represent numerous assets, ranging from cryptocurrencies to utility tokens or even digital representations of real-world assets like gold or real estate.

It is worth noting that all ERC-20 tokens have common functionalities and interfaces. This makes them easily interoperable with other ERC-20-compliant contracts and wallets

Furthermore, these tokens are fungible, meaning that each token is interchangeable and equal in value. This is in contrast to non-fungible tokens (NFTs), which include ERC-721 and ERC-1155 standards and have unique characteristics and varying values. 

Popular ERC-20 Tokens on Ethereum

  • Tether (USDT): Tether is the world’s largest stablecoin, with its price pegged to the US dollar. Aside from Ethereum, USDT is also issued on other networks, including Tron, EOS, Algorand, and OMG Network.
  • Chainlink (LINK): Chainlink is a decentralized oracle network that connects smart contracts with real-world data, enabling smart contracts to interact with external APIs and off-chain data sources.
  • Uniswap (UNI): Uniswap is a decentralized exchange protocol that allows users to swap ERC-20 tokens directly from their wallets, utilizing an automated market-making (AMM) system.
  • Maker (MKR): Maker is the governance token of the MakerDAO project, which aims to create a decentralized stablecoin called DAI.
  • Aave (AAVE): Aave is a decentralized lending and borrowing protocol that allows users to lend and borrow ERC-20 tokens in a permissionless manner.

Advantages of ERC-20

The ERC-20 standard offers several advantages, which have contributed to its widespread adoption within the Ethereum ecosystem. Here are the top 5 benefits:

  1. Standardization: ERC-20 is a widely accepted token standard in the blockchain ecosystem. It simplifies development and integration processes for token creators and users.
  2. Compatibility: ERC-20 tokens can be easily stored and transferred on any Ethereum wallet or platform that supports the Ethereum blockchain. This broad compatibility allows for seamless integration with various decentralized applications (dApps), exchanges, and other blockchain solutions.
  3. Interchangeability: ERC-20 tokens are interchangeable, meaning they have a unified format that allows for easy exchange and liquidity. This standardization makes it simpler for users to trade tokens on decentralized exchanges or swap platforms without worrying about compatibility issues or additional technical requirements.
  4. Community Support: ERC-20 has a strong community of developers, users, and token enthusiasts. This active community provides a wealth of resources, documentation, and support for token creators and users. 
  5. Smart Contract Functionality: As ERC-20 tokens are built on the Ethereum blockchain, they inherit all the advanced features and capabilities of Ethereum’s smart contract technology. This allows token creators to add programmable functionality to their tokens, such as automated transactions, complex tokenomics, and integration with other smart contracts.

Disadvantages of ERC-20

While ERC-20 tokens offer numerous advantages, there are also some potential drawbacks to consider:

  1. Lack of Flexibility: While ERC-20 provides a standardized framework for token creation, it also limits the flexibility for developers to create unique and custom token functionalities. 
  2. Vulnerability to Bugs and Security Risks: ERC-20 tokens are built on smart contracts, and any vulnerabilities or bugs in the code can lead to security risks. There have been ample instances of token hacks, and smart contract exploits, leading to significant financial losses for token holders.
  3. Scalability Challenges: As the Ethereum blockchain, which hosts ERC-20 tokens, faces scalability challenges, high transaction fees, and network congestion, these issues can affect the efficiency and usability of the tokens. During periods of high network activity, transactions can experience delays, higher costs, and overall reduced performance.
  4. Governance and Protocol Upgrades: ERC-20 tokens rely on the Ethereum network’s governance and protocol upgrades for their operation and evolution. Any changes to the Ethereum blockchain can impact the tokens, and token holders might need to go through migration or upgrade processes. 

The Bottom Line

ERC-20 has become an important part of the booming Ethereum ecosystem. It has standardized the tokenization landscape within the blockchain, facilitating interoperability, collaboration, and ease of integration among developers and projects.

While ERC-20 tokens have their advantages and disadvantages, they have seen continued growth and popularity over the years. They are currently the most popular token standard on Ethereum, followed by ERC-721, ERC-777, and others. 

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Ruholamin Haqshanas

Ruholamin is a crypto and financial journalist with over three years of experience. Apart from Techopedia, he has been featured in major news outlets, including Cryptonews, Investing.com, 24/7 Wall St, The Tokenist, Business2Community, and has also worked with some prominent crypto and DeFi projects.  He holds a Bachelor's degree in Mechatronics. Ruholamin enjoys reading about tech developments, writing, and nature-watching