ERC-20: The Definitive Ethereum Token Standard

Ethereum launched in 2015 as a decentralized, blockchain-based global supercomputer that could serve as the foundation for an ecosystem of interoperable, decentralized applications (dApps) powered by token economies. However, the Ethereum developer community quickly realized that to create this ecosystem, they needed a shared standard for building the crypto tokens that powered those dApps. That standard is known as ERC-20.

ERC-20 is the common set of criteria that outlines rules and technical specifications an Ethereum token must follow to function optimally and interoperably on the Ethereum blockchain. Tokens are developed using smart contracts, which are self-executing software programs that define how blockchain protocols automatically control, execute, and/or document transactions. ERC-20 tokens can be exchanged on the Ethereum network as well as used interoperably between Ethereum-based dApps.

While other Ethereum token standards do exist, ERC-20 gives wallets, exchanges, and app developers a simplified entryway into the blockchain ecosystem. It is widely considered to be a catalyst for the huge surge in dApps and Ethereum-based crypto tokens in 2017 and the growth of decentralized finance (DeFi). Market data from June 2020 found that 47 of the top 100 crypto tokens by market capitalization were built using the ERC-20 standard.

ERC-20 is not only an important part of the Ethereum ecosystem, but a gateway into the broader blockchain space.

The Technicals

The ERC-20 standard was first proposed in late 2015 and was officially recognized via an Ethereum Improvement Proposal (EIP) authored by Ethereum founder Vitalik Buterin and Ethereum developer Fabian Vogelsteller in late 2017.

The standard outlines several features:

• Information about the total supply, or number of tokens, that will be generated

• Data on the account balance of the owner’s account

• Code to execute the transfer of tokens to a specified ERC-20 address

• Code to execute a transfer of tokens from a specified ERC-20 address

• Code to allow for the withdrawal of tokens from a specified account 

• Code to allow the return of tokens from a spender to the owner

In simpler terms, the ERC-20 standard directs how tokens can be transferred, transactions are approved, and users access data about the token and its infrastructure.

When transacting with an ERC-20 token, ether (ETH) isn’t sent, but it is used to cover gas costs (the fees used to pay miners on the Ethereum network for adding new blocks to the Ethereum blockchain that contain ERC-20 transactions).

The Usefulness

Building a token with the ERC-20 standard is useful for a number of reasons. First, developers don’t have to start from scratch every time they build a new token or dApp. Because the ERC-20 standard has become a popular token standard, it generates a significant network effect. Developers and users can have confidence that any token created using the ERC-20 standard will interoperate with the hundreds of other ERC-20 tokens and those services that already accept ERC-20 tokens.

Other advantages of the ERC-20 standard include fungibility and flexibility. Fungibility in this context means that all ERC-20 tokens are functionally identical and therefore completely interchangeable with each other, which is important if developers want their tokens to act like money. With respect to flexibility, ERC-20 tokens can be customized for a number of applications:

• Utility tokens, which can be used to obtain a specific service 

• Security tokens, which are used to represent securities, such as stocks, and often assign the holder a stake in that project 

• Stablecoins, which are pegged to more stable assets, such as fiat currency, certain cryptocurrencies, and commodities, allowing users to interact with blockchain applications with reduced risk.

ICOs, DeFi, and Beyond

With more than 1,000 tokens in circulation, the use cases for ERC-20 continue to expand. ERC-20 tokens represent a large variety of assets, both digital and physical. There are ERC-20 tokens that represent real estate, art, stocks, unused hard drive space, and more. ERC-20 tokens also serve many functions within the systems they are built for, including decentralized finance products, markets, exchanges, games, wallets, and voting for protocol upgrades as part of a project’s governance apparatus.

It’s also worth noting how the creation of the ERC-20 standard influenced the Initial Coin Offering (ICO) boom. ERC-20 made it possible for developers to quickly build a token using the framework provided, which meant a significant decrease in the technical know-how and amount of work required to launch a token. Developers were able to crowdsale the tokens to the Ethereum community and raise significant amounts of money. This played a role in funding many essential platforms and projects that make up the Ethereum ecosystem today.

While ERC-20 remains the definitive Ethereum token standard, there are several new token standards currently in development. These include ERC-223, ERC-777 and ERC-1155. Each one looks to improve upon the original standard, while maintaining ERC-20 as the foundation.

ERC-20 has been one of the key driving forces of the Ethereum ecosystem, and a boon for the blockchain space as a whole. By creating a common standard for participation in the blockchain industry, ERC-20 facilitated widespread adoption of decentralized technology. Its implementation is an example of the community-driven governance of Ethereum, and its network effect ensures that Ethereum currently is the focal point of blockchain development.