ERC20 tokens are a type of cryptocurrency built on the Ethereum blockchain. They follow a specific set of rules that allow them to be created, managed, and traded seamlessly within the Ethereum ecosystem. Unlike standalone cryptocurrencies like Bitcoin that operate on their own networks, ERC20 tokens rely on Ethereum’s infrastructure for security and functionality.
This standardization has made it easier for developers, businesses, and even individuals to create their own digital assets without building a blockchain from scratch. As a result, ERC20 tokens have become the foundation for a vast range of applications, from decentralized finance (DeFi) to non-fungible tokens (NFTs) and utility tokens used in various platforms.
Understanding the ERC20 Standard
ERC20 stands for Ethereum Request for Comments 20. It is a technical protocol that defines a common set of functions and rules for tokens on the Ethereum network. This ensures that all tokens created using this standard can interact smoothly with wallets, exchanges, smart contracts, and other services within the Ethereum ecosystem.
Key functions mandated by the ERC20 standard include:
- Transferring tokens between users.
- Checking the balance of a token at a specific address.
- Approving and managing spending limits for decentralized applications (dApps).
- Providing data such as the token’s name, symbol, and total supply.
This interoperability is crucial. It means that any service built to support ERC20 tokens can automatically work with the thousands of tokens that follow these rules, fostering innovation and ease of use.
How ERC20 Tokens Work
ERC20 tokens are often called "smart assets" because their behavior is governed by smart contracts—self-executing code on the Ethereum blockchain. These contracts automate actions, such as distributing tokens when certain conditions are met.
For example, a smart contract could be programmed to:
- Release tokens to employees every minute they work, enabling real-time payroll.
- Distribute rewards to users for completing specific tasks in a dApp.
- Facilitate automatic trading or lending in DeFi protocols.
This programmability is a core feature of Ethereum and a primary reason for the explosive growth of the token economy. It allows developers to create sophisticated, automated, and trustless financial and operational systems.
"Creating a custom cryptocurrency using the ERC20 standard is a surprisingly accessible process. During a hackathon, I developed a functional token in about 20 minutes for a minimal cost in ETH. This token was designed as a reward for users of sustainable financial products, demonstrating how quickly an idea can be brought to life on Ethereum."
Popular ERC20 Tokens
The ERC20 standard is behind many of the most well-known and valuable digital assets in the crypto market. While some projects eventually migrate to their own blockchain, they often start as an ERC20 token on Ethereum.
Here are some prominent examples of tokens that use or have used the ERC20 standard:
- Tether (USDT): A leading stablecoin pegged to the US dollar.
- Chainlink (LINK): A decentralized oracle network that connects smart contracts with real-world data.
- Uniswap (UNI): The governance token for the Uniswap decentralized exchange.
- USD Coin (USDC): Another major dollar-pegged stablecoin.
- Binance Coin (BNB): Originally launched as an ERC20 token before migrating to Binance’s own chain.
- Maker (MKR): The governance token for the MakerDAO and its DAI stablecoin system.
- Aave (AAVE): The native token of the Aave lending and borrowing protocol.
This list highlights the diversity of projects built on Ethereum, spanning stablecoins, DeFi governance, infrastructure, and more.
A Crucial Note on Token Migrations
It is vital to understand that some projects launch as ERC20 tokens and later migrate to their own independent blockchain. When this happens, the old ERC20 tokens must be swapped for new native coins on the new network.
Warning: Always confirm which blockchain an asset is on before making a transaction. Sending tokens from one blockchain (e.g., Ethereum) to a wallet address on another blockchain (e.g., Binance Smart Chain) will result in the permanent loss of your funds. Always follow the official migration instructions from a project’s team if a token swap occurs.
Storing Your ERC20 Tokens: Supported Wallets
To hold and manage ERC20 tokens, you need a cryptocurrency wallet that supports the Ethereum network. Fortunately, due to the standard's popularity, most wallets that hold Ether (ETH) also support ERC20 tokens.
When choosing a wallet, consider security, user control, and convenience. Here are the main types of wallets compatible with ERC20 tokens:
- Software Wallets: These are applications you install on your phone or computer. They offer a good balance of convenience and security for everyday use.
- Web Wallets: These are browser-based wallets, often offered by cryptocurrency exchanges. They are convenient for trading but are considered less secure than self-custody options.
- Hardware Wallets: These are physical devices that store your private keys offline, providing the highest level of security for long-term storage.
- Custodial Wallets: These are wallets where a third party (like an exchange) holds your private keys. You sacrifice control for ease of use.
For the best security, it is widely recommended to use a non-custodial wallet where you control your private keys. 👉 Explore secure wallet options for your assets
Frequently Asked Questions (FAQ)
What does ERC stand for in ERC20?
ERC stands for "Ethereum Request for Comments." It is the formal process for proposing improvements to the Ethereum network. The number 20 is simply the unique proposal identifier that became the universal token standard.
What is the main difference between ETH and an ERC20 token?
Ether (ETH) is the native currency of the Ethereum blockchain, used to pay for transaction fees and computational services. An ERC20 token is a digital asset built on top of the Ethereum blockchain, using its infrastructure but having its own independent value and purpose.
Can I send ERC20 tokens to my Bitcoin wallet?
No, you must never do this. ERC20 tokens exist only on the Ethereum blockchain. Sending them to a Bitcoin wallet address, which is on a completely different network, will result in the irreversible loss of your tokens.
Are all tokens on Ethereum ERC20?
No, while ERC20 is the most common standard for fungible tokens, other standards exist. For example, ERC721 is the standard for non-fungible tokens (NFTs), which are unique and not interchangeable like ERC20 tokens.
How can I create my own ERC20 token?
Creating a basic ERC20 token is relatively straightforward for developers using Ethereum's smart contract functionality. However, it requires knowledge of Solidity (Ethereum's programming language) and ETH to pay for the gas fees needed to deploy the contract to the blockchain.
What are gas fees and why do I need ETH to send tokens?
Gas fees are transaction costs on the Ethereum network. Because ERC20 tokens operate on Ethereum, any action involving them—like sending them to another wallet—requires a small amount of ETH to be paid as a fee to network validators. You cannot pay this fee with the token itself.