What Are ERC-20 Tokens on the Ethereum Network?

by Sep 17, 2023Blockchain Technology0 comments

Cryptocurrencies have revolutionized the way we think about money and financial transactions. While Bitcoin is the most well-known cryptocurrency, Ethereum has also gained significant popularity in the last few years. One of the key features of Ethereum is the ability to create and trade tokens on its blockchain. In particular, ERC-20 tokens have become a popular way for companies to launch their own cryptocurrencies on the Ethereum network. In this article, we will explore what ERC-20 tokens are and how they work.

What are ERC-20 tokens?

ERC-20 tokens

ERC-20 stands for Ethereum Request for Comment 20, which is a standard for creating tokens on the Ethereum blockchain. To gain a comprehensive understanding of ERC-20 tokens, we highly recommend starting with our blog post titled “The Complete Beginner’s Guide to Ethereum (ETH).” This informative piece will provide you with a solid foundation on Ethereum, the underlying blockchain technology, before delving into the specifics of ERC-20 tokens.

ERC-20 tokens are digital assets that are created and managed on the Ethereum network. These tokens are not standalone cryptocurrencies like Bitcoin or Ethereum, but instead, they are assets that are created on top of the Ethereum blockchain.

ERC-20 tokens were created by Fabian Vogelsteller in 2015, and they are now the most widely used standard for creating tokens on the Ethereum network. ERC-20 tokens are fungible, which means that they are interchangeable with other ERC-20 tokens. This makes them ideal for creating a wide range of applications, such as digital assets, loyalty points, and even cryptocurrencies.

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How do ERC-20 tokens work?

ERC-20 tokens

ERC-20 tokens are created using smart contracts on the Ethereum network. Smart contracts are self-executing contracts that are programmed to automatically execute when certain conditions are met. In the case of ERC-20 tokens, the smart contract specifies the rules for the token, such as the total supply, the name, the symbol, and the decimal places.

Once the smart contract is created, the ERC-20 tokens can be distributed to investors or used as a digital asset within a decentralized application. ERC-20 tokens can be stored in any Ethereum wallet that supports ERC-20 tokens, such as MyEtherWallet or MetaMask.

One of the key features of ERC-20 tokens is that they can be traded on decentralized exchanges (DEXs) such as Uniswap and SushiSwap. Decentralized exchanges allow users to trade ERC-20 tokens without the need for a central authority, which makes them ideal for creating trustless transactions.

Why are ERC-20 tokens important?

  • ERC-20 tokens have become an important part of the Ethereum ecosystem for several reasons. First, they allow companies to launch their own cryptocurrencies without the need to create their own blockchain. This makes it easier for companies to raise funds and create digital assets that can be used within their own ecosystem.
  • Second, ERC-20 tokens are interoperable, which means that they can be used across different decentralized applications. This creates a network effect, where the more decentralized applications that support a particular ERC-20 token, the more valuable that token becomes.
  • Finally, ERC-20 tokens are programmable, which means that developers can create smart contracts that use ERC-20 tokens as a form of payment. This creates a wide range of possibilities for creating decentralized applications that require trustless transactions.
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Functions of the ERC-20 Token Standards

The ERC-20 token standard serves a crucial role in establishing consistent and interoperable behavior across various ERC-20 tokens. This standard defines six essential functions that must be implemented by all compliant ERC-20 tokens. 

Here’s a table summarizing the six essential functions of the ERC-20 token standard:

NumberFunctionDescription
1totalSupply()Returns the total supply of the ERC-20 token.
2balanceOf(address _owner)Provides the balance of a specific address or owner.
3transfer(address _to, uint256 _value)Enables the transfer of a specified amount of ERC-20 tokens from the sender’s address to a designated recipient’s address.
4transferFrom(address _from, address _to, uint256 _value)Allows a third party (an approved spender) to transfer a designated amount of ERC-20 tokens from the owner’s address to another specified address.
5approve(address _spender, uint256 _value)Permits a token holder to grant approval to a third party (a spender) for transferring a specific amount of ERC-20 tokens from the token holder’s address.
6allowance(address _owner, address _spender)Returns the amount of ERC-20 tokens that a spender has been authorized to transfer on behalf of a token holder.

These six functions establish fundamental rules governing the creation, transfer, and management of ERC-20 tokens on the Ethereum network. By adhering to these functions, ERC-20 tokens can seamlessly integrate into diverse decentralized applications and be tradable on decentralized exchanges.

In addition to these core functions, certain ERC-20 tokens may incorporate supplementary features such as token burning (permanent removal from circulation) or token freezing (preventing transfers). These additional features offer heightened flexibility and control over the utilization of ERC-20 tokens within specific decentralized applications.

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Overall, the ERC-20 token standard provides comprehensive guidelines to ensure consistency and interoperability among ERC-20 tokens, empowering developers to create a wide array of digital assets that find utility within decentralized applications on the Ethereum network.

Examples of ERC-20 tokens

There are thousands of ERC-20 tokens on the Ethereum network, but here are some of the most well-known ones:

  1. Tether (USDT)Tether is a stablecoin that is pegged to the US dollar. It is the most widely used stablecoin in the cryptocurrency market.
  1. Binance Coin (BNB)Binance Coin is the native cryptocurrency of the Binance exchange, which is one of the largest cryptocurrency exchanges in the world.
  1. Chainlink (LINK) Chainlink is a decentralized oracle network that provides real-world data to smart contracts on the Ethereum network.
  1. Uniswap (UNI)Uniswap is a decentralized exchange that allows users to trade ERC-20 tokens without the need for a central authority.
  1. Aave (AAVE) Aave is a decentralized lending platform that allows users to lend and borrow ERC-20 tokens.
  1. Compound (COMP)Compound is a decentralized lending platform that allows users to lend and borrow ERC-20 tokens.

Conclusion

ERC-20 tokens have become an important part of the Ethereum ecosystem, allowing companies to launch their own cryptocurrencies and creating a wide range of possibilities for creating decentralized applications. ERC-20 tokens are fungible, interoperable, and programmable, which makes them ideal for creating trustless transactions. With thousands of ERC-20 tokens already in existence, and more being created every day, it is clear that ERC-20 tokens will continue to play an important role in the world of cryptocurrencies and decentralized applications.

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