To facilitate interactions between smart contracts, ETH developers created a set of rules called ERC-20 — as a result, every newly created token that meets those rules will be converted into an ERC-20 token.

But what exactly is an ERC-20 token and what is it used for? What are its main advantages and disadvantages and is it worth investing in? Keep on reading to find out.

Learn in This Article

  • What ERC is
  • What ERC-20 tokens are
  • Advantages and disadvantages of ERC-20 tokens
  • ERC-20 token standards
  • Should you invest in ERC-20

What Does ERC Stand For?

Although the Ethereum ecosystem is decentralized, someone has to enforce the standards that determine what can be done on the blockchain. To do this, ETH users must create Ethereum Improvement Proposals (EIPs).

There are several subcategories of EIPs — one of them is ERC.

ERC stands for Ethereum Request for Comment. This term was coined by Ethereum developers in 2015 and was officially accepted in 2017. ERC is a technical standard for creating fungible tokens within the ETH blockchain. The most common ERC standards on the Ethereum blockchain are ERC-20, ERC-721, and ERC-1155.

What Is an ERC-20 Token?

ERC-20 tokens are fungible tokens that are built on the Ethereum network using the ERC-20 standards. They can represent different assets, from stablecoins to security and utility tokens. Since they are fungible, each token is interchangeable with one another, which means they have the same value.

Likewise, all ERC-20 tokens have the same symbols, names, decimals, and functions.

That said, some of the most popular ERC-20 tokens are Tether (USDT), Binance (BNB), and Uniswap (UNI). Keep in mind that these types of tokens rely exclusively on the ETH blockchain. This means that you’ll have to pay gas fees for their transactions.

How Does It Work?

The main goal of the ERC-20 standard is to define a list of common rules that all ETH-based tokens will adhere to using smart contracts. This standard applies only to fungible tokens. These smart contracts use ERC-20 tokens to facilitate transactions.

However, ERC-20 is not software but a standard protocol used to create new tokens. Tokens that don’t adhere to the ERC-20 technical standards will not become ERC-20 tokens — they won’t be issued on the Ethereum blockchain.

These standards make it easier for developers to create and deploy tokens on the Ethereum blockchain as they are compatible with each other.

What Is ERC-20 Used For?

ERC-20 tokens can represent different assets, from stablecoins and meme coins to governance tokens. With that in mind, ERC-20 tokens can be used for:

  • Buying, selling, and trading
  • As a medium of exchange
  • As NFTs
  • In gaming
  • For voting and governance
  • For fundraising through ICOs or STOs
  • As part of reward systems
  • As dApps contributors

ERC-20 tokens can be bought on both centralized and decentralized exchanges. However, you’ll be able to store them only if you have an ERC-20 wallet.

Advantages of ERC-20 Tokens

The main advantages of ERC-20 tokens include:

Ease of Use

The ERC-20 protocol ensures that all tokens that are built on the ETH blockchain adhere to the same standards. This means that users will be able to create their tokens with ease.

Interoperability

Another great advantage of ERC-20 tokens lies in their interoperability. Namely, all tokens follow the same standards, meaning they are interchangeable. This makes them very versatile.  

Security and Transparency

ERC-20 tokens are built on the Ethereum network. This means they use the same security features as ETH, such as decentralization and immutability. As such, they are more resistant to hacks and manipulations.

Moreover, ERC-20 tokens are transparent since all transactions are recorded on the blockchain — users will be able to verify the authenticity of each transaction.

Increased Liquidity

Due to their fungibility and compatibility, ERC-20 tokens have high liquidity. On that note, their owners can buy, sell, and trade them on all prominent crypto exchanges. This high liquidity makes them very popular among crypto investors.

Disadvantages of ERC-20 Tokens

ERC-20 tokens also come with certain disadvantages, such as:

Scalability

The scalability of the ETH blockchain will affect the way an ERC-20 token works. This means that high network congestion will lead to higher fees and slower transactions.

Gas Fees

For each transaction within the network, users will have to pay gas fees. These gas fees can be very high if the network is congested. This makes ERC-20 tokens less attractive to smaller investors.

Smart Contract Vulnerabilities

The codes of all smart contracts are subject to cyber-attacks and bugs. If there is a bug in the code of the ERC-20 tokens, you’ll lose all your funds. ERC-20 tokens are also the target of phishing attacks.

Lack of Flexibility

ERC-20 tokens have limited functionality due to their standards. As such, they cannot be used for more complex operations. This can be a big handicap for investors and companies that want to create more flexible tokens.

What Are the ERC-20 Token Standards?

As mentioned above, for a token to become available on the ETH network, it must follow certain protocols. ERC-20 tokens follow nine standards — six are mandatory and three are optional.

Mandatory standards include the following functions:

  • TotalSupply: A function that returns the total number of issued tokens
  • BalanceOf: A function that allows users to check their account balance
  • Transfer: A function that enables the automatic transfer of tokens to the specified address
  • TransferFrom: A function that enables the automatic transfer of tokens from one address to another
  • Approve: A function that allows a specific address to withdraw tokens from their owner’s account
  • Allowance: A function that allows the owner to withdraw a certain number of tokens from their account

Optional standards include the following:

  • Token name: Each token can have a name that will represent its identity
  • Token symbol: Each token can have its symbol that will represent its abbreviated name
  • Decimal points: Each token can have decimal points that will indicate its fractional value

If a newly created token doesn’t meet one of the six mandatory standards mentioned above, it will not become an ERC-20 token.

Should You Invest in ERC-20 Tokens?

Investing in ERC-20 tokens can be very lucrative as they have a wide range of use cases. As mentioned above, these tokens can be used as NFTs, in-game currencies, and as a medium of exchange.

Moreover, ERC-20 tokens are highly scalable, which means that their transaction fees will be much lower than Bitcoin’s. In addition to that, these tokens will enable you to generate passive income through staking. They can also be used for trading, borrowing, and lending.

Since many tokens are based on the ETH network, investors will be able to put their money into many new crypto projects in their pre-sale stages.

However, these types of tokens are also subject to network congestion, which can lead to high gas fees. Furthermore, like other digital currencies, ERC-20 tokens are highly volatile.

Finally, since anyone can create ERC-20 tokens, the market may become oversaturated. This will make it difficult for investors to find valuable ERC-20 tokens.

Conclusion

ERC-20 is the standard by which all new fungible tokens on the ETH blockchain are created. These standards enable tokens to be compatible with each other, meaning they are very versatile.

That said, these tokens can be used for transactions, fundraising, gaming, voting, and governance. They also have high liquidity, which makes them a popular investment choice. 

However, ERC-20 tokens also come with certain challenges, such as high gas fees and smart contract vulnerabilities. Moreover, you won’t be able to use them for more complex operations.

FAQs

Is ERC-20 the same as ETH?

Which wallet is ERC-20?

Is USDT an ERC-20?

Why are ERC-20 tokens so popular?