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What is ERC20: The Backbone of DeFi and Web3

Ethereum tokens with a little ticket attached indicating their rules

Key Takeaways

  • ERC20 defines how tokens operate on the Ethereum blockchain, ensuring they are compatible with decentralized applications and simplifying token creation.
  • They are highly versatile, serving as utility tokens, governance tools, security tokens, and stablecoins across various industries.
  • ERC20 tokens have been pivotal in driving the growth of decentralized finance (DeFi) and enabling Initial Coin Offerings (ICOs) on Ethereum.
  • Ethereum-compatible wallets simplify the use and storage of ERC20 tokens, and developers can easily create them through smart contracts.

ERC20 is a token standard that prescribes how tokens should be created, transferred, and utilized in the Ethereum network. It was introduced in 2015 by Fabian Vogelsteller while working on Ethereum as an Ethereum Request for Comments (ERC) 20. The concept of ERC20 was to set up a standard so that every token developed on Ethereum can communicate with each other and with other dApps.

Before ERC20, developers had to create intelligent contracts from the ground up to manage token operations, which were inaccessible regarding compatibility and functionality. With the ERC20 standard, however, any token that complies with its rules can work seamlessly in other Ethereum-based platforms.

ERC20 Token in the Ethereum Network

The most crucial innovation of ERC20 is compatibility. Every ERC20 token is built according to guidelines that allow it to be bought, sold, and transferred between Ethereum platforms. Such standardization makes the development process more accessible and improves the tokens’ utility. These tokens have deployed smart contracts and decentralized applications (dApps) on the Ethereum platform.

Developers can program to perform certain functions independently without requiring third parties, which developers can design. It becomes essential, particularly in sectors such as finance, where DeFi applications enable users to lend and borrow assets or trade them directly. It is important to note that ERC20 tokens are not the same as ETH, the native currency of the Ethereum network. ETH is mainly employed to pay transaction fees and store value, while ERC20 tokens are digital assets, voting rights, or utility in decentralized environments.

More Than Just Currency

ERC20 tokens are versatile tools used in various ways across different sectors.

Utility

You can use utility tokens access specific products or services within a system. For example, in decentralized applications, you can pay for services provided within the platform using utility tokens.

Governance

Governance tokens allow holders to vote on important project decisions, such as protocol changes or future development plans. For example, many metaverse projects have deccentralized the management and future of their platforms by endowing their native ERC20 token with governance rights. Security tokens, on the other hand, represent ownership in external assets, such as company shares, and authorities regulate them.

Stablecoins

Lastly, various stablecoins are ERC20 tokens backed by real-world assets like fiat currencies. Tokens like USDT and USDC are pegged to the U.S. dollar, offering users a stable option amidst cryptocurrency volatility.

How To Start With ERC20 Token

Getting started with ERC-20 tokens is simple and requires a few basic steps:

  1. Set Up a Wallet: First, ensure your wallet can hold ERC-20 tokens. Some of the most used ones are MetaMask, Trust Wallet, and Ledger. These wallets allow you to manage your ERC-20 tokens by storing, sending, and receiving them.
  2. Get an Ethereum Address: Once you create your wallet, you will be given an Ethereum address. This unique address works as your wallet for storing your ERC-20 tokens. It’s also how you communicate with dApps and services within the Ethereum network.
  3. Purchase Tokens: To get ERC-20 tokens, you must purchase them on cryptocurrency exchanges such as Coinbase or Binance. Almost all exchanges let you swap Ether (ETH) for ERC-20 tokens. After acquiring them, you can move them to your wallet’s Ethereum address to use them.

How to Create an ERC-20 Token

Creating an ERC20 token is a relatively simple process, making it a popular choice for decentralized applications and fundraising initiatives. Here’s how it works:

  • Develop a Smart Contract

Write a smart contract in Solidity, Ethereum’s coding language. The smart contract defines your token’s details (name, symbol, total supply) and outlines essential functions like transferring tokens and tracking balances. It’s important to follow the ERC20 standards to ensure compatibility across the Ethereum ecosystem.

  • Deploy the Smart Contract

Once your smart contract is ready, deploy it on the Ethereum blockchain. This requires a gas fee paid in Ether (ETH). After deployment, your token will go live and be ready for use within the network.

  • Add Token to Wallets and Exchanges

To make your token accessible, it must be added to wallets like MetaMask and exchanges that support ERC20 tokens. This ensures users can buy, sell, and store it efficiently.

How to Store and Use ERC-20 Token

Storing ERC20 tokens is straightforward and secure, thanks to Ethereum-compatible wallets. Once you’ve acquired these tokens, you can store them in popular wallets like MetaMask Trust Wallet or hardware wallets like Ledger and Trezor for extra security. These wallets ensure your tokens are safe and accessible anytime you need them.

Beyond storage, ERC20 tokens are highly versatile. You can use them to interact with dApps across the Ethereum ecosystem. For example, you can trade ERC20 tokens on decentralized exchanges (DEXs) like Uniswap or SushiSwap, allowing users to buy and sell tokens directly without intermediaries.

Some ERC20 tokens also grant governance rights, enabling holders to vote on essential project decisions. Additionally, ERC20 tokens can be used in DeFiactivities such as staking or lending, further expanding their utility across various applications.

Why Are ERC-20 Tokens Important?

The importance of ERC-20 tokens lies in their ability to standardize how tokens behave on Ethereum. This in turn gave rise to interoperability, the cornerstone of the DeFi ecosystem.

Interoperability in DeFi

The ERC-20 token standard basically means that all tokens are speaking the same language. Many well-known tokens, such as Tether (USDT) and Maker (MKR), are built on the ERC-20 standard.

This standardization meant a whole ecosystem of protocols could spring up to cater to those tokens, enabling swapping, trading, lending and a host of other services. In other words, ERC-20 was the birthplace of DeFi. Without them, swapping tokens on decentralized exchanges like Uniswap wouldn’t be possible.

What Is the Difference Between ERC20 and TRC20

TRC-20 is another token standard used on the Tron blockchain. While both are token standards, they operate on different blockchains. ERC-20 is exclusive to Ethereum, while TRC-20 is for Tron. The critical difference lies in their networks and how they handle transactions.

Tron’s network tends to have lower fees and faster transaction speeds than Ethereum’s, which is why some projects prefer using TRC-20 tokens. However, Ethereum’s robust ecosystem of developers and dApps means ERC-20 tokens remain more widely used and trusted. Both standards allow for the creation of tokens on their respective blockchains.

Final Thoughts

ERC-20 tokens have been instrumental in Ethereum’s rise and the broader blockchain space by establishing a clear token functionality standard. This has resulted in immense innovation across sectors, from DeFi to gaming and real estate. Moreover, because of ERC-20, developers can create tokens that seamlessly integrate with Ethereum’s ecosystem, leading to the growth of dApps, fundraising through token sales, and the expansion of smart contracts.

If you’re interested in creating your token, investing in DeFi projects, or purchasing your first tokens, ERC20 technology puts you in the driver’s seat of a financial evolution. With ERC-20, you’re part of a decentralized system where you have more control over your assets, free from traditional intermediaries. Understanding how ERC-20 works gives you valuable insight into the future of finance, where blockchain technology is reshaping global markets.

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