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What Are ERC-20 Tokens?

October 8, 2021

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Cryptocurrencies are virtual currencies backed by blockchain technology. Each cryptocurrency is either a coin or a token, depending on whether they are hosted on their own native network or not.

With that in mind, we define coins as any type of crypto that has its very own blockchain network. The list includes Bitcoin, Ethereum, Cardano, XRP, and so on.

On the other hand, we define tokens as cryptocurrencies hosted on another network.

Tokens are often encountered on decentralized smart contract ecosystems where developers build platforms, dApps, and all sorts of tools. Since all of these tools have a utility, they require a token to perform and regulate that activity.

Ethereum is currently the number one smart contract ecosystem. When interacting with Ethereum, investors often encounter an alien term known as ‘ERC-20.’ as the tokens themselves are referred to as ERC-20 tokens. But what does ERC-20 mean?

What is the ERC-20 Token Standard?

ERC-20 stands for Ethereum Request for Comment, which represents the official protocol for suggesting improvements to the Ethereum network. 20 is the personal identifier for the proposal, and it acts as a unique token standard for tokens developed on Ethereum.

Standardization is key in all technological sectors, and it is no different in the blockchain industry. For cryptocurrencies to seamlessly interact with each other, networks require a strict token standard that defines a set of rules for all tokens under that specific standard.

In the case of ERC-20, the token standard is used for wallets, exchanges, and dApps to be able to accept various tokens and facilitate exchanges between ERC-20 tokens without any issues.

Blockchain developers use smart contracts to program and define ERC-20 tokens. All ERC-20 tokens by design must possess the following functions in order to remain compliant with the native token standard:

  • TotalSupply: Data indicating a token’s total supply.
  • BalanceOf: Data indicating a wallet’s balance.
  • Transfer: Function used to transfer a specific number of tokens to another wallet.
  • TransferFrom: Function used to execute a token transfer from a specified wallet.
  • Approve: Allows a user to withdraw tokens from the wallet when spending tokens.
  • Allowance: Function that returns a specified number of tokens from a dApp to the owner.

Other Types of ERC Token Standards

Apart from ERC-20, several other token standards exist. All serve specific purposes and are either built on top of the basic ERC-20 standards or are built from the ground up. By utilization, the most popular token standards include:

  • ERC-223. Solves the problem of accidental token transfers arising from selecting the wrong network. ERC-223 rejects token transfers to addresses that are not part of the Ethereum network. For example, sending tokens to the Binance Smart Chain (BEP-20 standard) will result in a rejection, and no money will be lost.
  • ERC-721. ERC-721 is the de-facto token standard for non-fungible tokens (NFTs.) This standard removes the aspect of fungibility from tokens, making them unique in every aspect. For example, one ERC-721 token is not the same as another ERC-721 token. This is not the case with Ethereum, as every ETH token has the same properties and value as another ETH token.
  • ERC-677. This is a token standard used by decentralized oracles, primarily Chainlink, that transferAndCall function. The function can be called to transfer tokens to a contract and then call the contract to provide newly gained data - which is particularly useful for oracles as they not only transfer value but data as well.

More Lessons in

Ethereum Fundamentals