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A Deep Dive Into ERC20 Tokens: Exploring Ethereum’s Most Popular Token Standard

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Calibraint

Author

July 11, 2023

Last updated: September 29, 2023

ERC20 Tokens

Getting Started With ERC20 Tokens

Imagine a world where anyone can create their own digital currency, where tokens can represent anything from shares in a company to virtual real estate or even voting rights in decentralized organizations.

“To quote an industry expert, Ethereum has emerged as a pioneering platform in the rapidly changing world of cryptocurrencies, fundamentally transforming our perspective on digital assets.” 

At the heart of Ethereum’s success lies its most popular token standard, ERC20. As the foundation for countless tokens, ERC20 has not only propelled the growth of decentralized finance (DeFi) but has also sparked a paradigm shift in how we interact with value on the blockchain.  ERC20 tokens have thus unlocked this incredible potential, unleashing a tidal wave of innovation and redefining the possibilities of blockchain technology.

What Is ETH?

ETH, short for Ethereum, is a decentralized blockchain platform that facilitates a peer-to-peer network for the secure execution and validation of smart contracts. These contracts enable participants to transact without relying on a central authority, ensuring immutability, verification, and widespread distribution of transaction records. It is also used for various purposes, including transactions, smart contract execution, and dApp development.

What Is ERC-20 Standard?

The ERC-20 standard, known as “Ethereum Request for Comment 20,” is a technical standard introduced by Fabian Vogelsteller in 2015 for smart contracts on the Ethereum Blockchain. The ERC-20 standard is also a widely adopted set of rules and protocols on the Ethereum blockchain that defines how tokens can be created and managed.

By providing a common set of interfaces and functions, the ERC-20 standard ensures compatibility among tokens, allowing them to be freely traded on decentralized exchanges like Uniswap and Sushiswap within the Ethereum ecosystem.

It also provides a common interface for the development of fungible tokens, allowing for seamless integration and compatibility between different decentralized applications (dApps) and token ecosystems.

What Are ERC20 Tokens? 

ERC-20 tokens are the actual tokens that adhere to the ERC-20 standard. These tokens are built and deployed on the Ethereum blockchain, following the guidelines set by the ERC-20 standard. They possess common functionalities such as transferability, balance tracking, and interaction with smart contracts. Nonetheless, ERC-20 tokens are compatible with one another, allowing for seamless integration and easy ERC20 exchange list on Ethereum-based platforms and decentralized exchanges. 

The development of ERC20 tokens has led to a rapid increase in new cryptocurrencies, making it easier for developers to create new tokens with standard functionality that can be easily integrated into existing platforms and exchanges. Many of the most well-known cryptocurrencies, such as Tether, Binance Coin, and Chainlink, are ERC20 tokens.

The popularity of ERC20 tokens and ERC20 wallets has also led to the development of other token standards, such as ERC721 and ERC1155, which are used for non-fungible tokens (NFTs) and multi-token contracts, respectively. In short, if the ERC-20 standard is the rulebook, then the ERC-20 tokens are the tokens that follow those rules.

What Is Gas On Ethereum?

Gas is the fee that the Ethereum network imposes for processing your transaction. In an analogy to a car, it’s similar to the amount a gas station would charge you to fill up your car, which is typically included in the cost per gallon or liter. In short, you are required to pay when you want to send ETH (Ether), engage with a smart contract, or perform any action that requires recording on the Ethereum blockchain. 

ERC20 wallet

What Are The ERC20 Token Contents?

ERC20 is a standard that outlines a set of functions and events that must be implemented in a token to ensure ERC-20 compliance. These functions, referred to as methods in the ERC, define the requirements for a smart contract-enabled token, while events describe specific actions. The mandatory functions that a token must include are as follows:

TotalSupply: This function provides the total number of tokens that will ever be issued.

BalanceOf: It allows querying the balance of tokens in a token owner’s account.

Transfer: This function automatically executes the transfer of a specified number of tokens to a designated address during token transactions.

TransferFrom: It enables the automatic transfer of a specified number of tokens from a given address, using the token.

Approve: This function permits a spender to withdraw a defined number of tokens from a specified account, up to a specific limit.

Allowance: It returns the number of tokens approved for withdrawal from a spender to the token owner.

The events that must be included in the token contract are:

Transfer: An event triggered when a token transfer is successfully completed.

Approval: A log that records an approved event, indicating that a specific address has been authorized to spend tokens.

Additionally, there are optional functions that enhance the token’s usability but are not mandatory. These include:

Token Name: A function to specify the name of the token (optional).

Symbol: A function to define the symbol or ticker associated with the token (optional).

Decimal Points: An optional function to determine the number of decimal points to be used, allowing for fractional token amounts.

Tokens on the Ethereum blockchain can represent a wide range of assets or concepts, including:

  • Reputation points on an online platform.
  • Skills and attributes of a character in a game.
  • Lottery tickets 
  • Financial assets like shares in a company.
  • Fiat currencies like USD.
  • Precious metals like an ounce of gold and much more. 

Assets represented by tokens on Ethereum

These tokens serve as digital representations of these assets, enabling them to be transacted and interacted with on the Ethereum network.

How To Create ERC20 Token?

To create an ERC20 token, you need to:

  • Write a smart contract using the Solidity programming language.
  • Define the token’s name, symbol, decimal places, and total supply.
  • Implement the required ERC20 functions: balanceOf, transfer, transferFrom, approve, and allowance.
  • Include event definitions for Transfer and Approval.
  • Compile the contract and deploy it onto the Ethereum network using tools like Remix, Truffle, or Hardhat.
  • Test the token’s functionality using test accounts on a test network.
  • Optionally, verify the contract’s source code on platforms like Etherscan.
  • Distribute the token to users through sales, airdrops, or other distribution methods.
  • Consider security best practices and seek the assistance of a token development company if required.

Advantages Of ERC20 Tokens

The importance of ERC20 tokens lies in their standardized format, which ensures compatibility and interoperability across various Ethereum-based applications. This standardization makes it easier for developers and users to create, manage, and exchange tokens on the Ethereum network, fostering a vibrant ecosystem of decentralized applications, decentralized exchanges, and token-based projects.

The advantages of ERC20 tokens include:

Standardization: ERC20 tokens follow a standardized format, ensuring compatibility and easy integration with existing Ethereum infrastructure and applications.

Interoperability: ERC20 tokens can be seamlessly exchanged and interacted with on decentralized exchanges and other Ethereum-based platforms.

Widely Supported: ERC20 tokens are widely supported by wallets, exchanges, and other Ethereum tools, making them easily accessible to users.

Crowdfunding: These tokens have facilitated crowdfunding through Initial Coin Offerings (ICOs), allowing projects to raise funds and gain community support.

Tokenization: ERC20 tokens enable the tokenization of real-world assets, such as real estate or commodities, unlocking new possibilities for fractional ownership and efficient transfer of value.

Smart Contract Capabilities: ERC20 tokens leverage the power of smart contracts, enabling programmable functionality and automation of token-related actions.

Regulatory Compliance: ERC20 tokens can incorporate features for regulatory compliance, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures.

Liquidity: ERC20 tokens benefit from the liquidity of the Ethereum ecosystem, with a wide range of decentralized exchanges and trading pairs available for token holders.

Transparency: Transactions involving ERC20 tokens are transparent and recorded on the public Ethereum blockchain, providing auditability and accountability.

Innovation and Flexibility: ERC20 tokens have fostered innovation by allowing developers to create unique token ecosystems, incentivizing participation and rewarding contributions.

Examples Of ERC20 Tokens – The Top ERC20 Tokens

There are numerous examples of ERC20 token lists that have been created on the Ethereum network. Here are a few well-known top ERC20 tokens:

Examples of ERC20 tokens
  1. Ethereum (ETH) – The native cryptocurrency of the Ethereum blockchain is an ERC20 token.
  2. Binance Coin (BNB) – A popular utility token used for trading fees, transactions and other uses in the Binance ecosystem.
  3. USD Coin (USDC) – A stablecoin that is pegged to the US dollar, allowing for stable value transfer and use in decentralized finance (DeFi) applications.
  1. Chainlink (LINK) – A decentralized oracle network that connects smart contracts to real-world data sources.
  1. Uniswap (UNI) – A governance token used to vote on proposals for the Uniswap decentralized exchange.
  1. Tether (USDT) – Another popular stablecoin pegged to the US dollar, widely used for trading and transfers.
  1. Maker (MKR) – A governance token for the MakerDAO platform, which allows users to generate the stablecoin DAI by collateralizing other cryptocurrencies.
  1. Aave (AAVE) – A DeFi platform that offers lending and borrowing services using various cryptocurrencies, with the AAVE token used for governance and incentives.
  1. Compound (COMP) – Another DeFi lending and borrowing platform that uses the COMP token for governance and distribution of rewards.
  1. Dai (DAI) – A stablecoin that is generated through a decentralized process by locking up collateral in MakerDAO, using the MKR token for governance.

The Risks Associated With ERC20 Tokens

While ERC20 tokens and ERC20 Wallets have gained significant popularity and adoption, there are certain risks associated with them. Here are some of the risks to be aware of:

Smart Contract Vulnerabilities: ERC20 tokens are implemented as smart contracts, and if the code contains vulnerabilities or bugs, it can be exploited, leading to potential security breaches or financial losses.

Phishing and Scams: ERC20 tokens can be targeted by phishing attacks or scams where malicious actors create fake token projects or websites to trick users into sending their tokens to fraudulent addresses.

Lack of Regulation: The regulatory environment surrounding ERC20 tokens is still evolving in many jurisdictions. This lack of clear regulations may lead to uncertainty in terms of legal compliance and potential regulatory actions.

Risks associated with ERC20 tokens

Liquidity Risks: Not all ERC20 tokens have sufficient liquidity in the market. Tokens with low trading volumes may face challenges in buying or selling at desired prices.

Centralization Risks: While ERC20 tokens are often associated with decentralization, the ownership and distribution of tokens can sometimes be concentrated in the hands of a few individuals or entities, posing centralization risks.

Regulatory Compliance: Depending on the nature of the token and its use case, compliance with applicable regulations, such as securities laws or anti-money laundering (AML) regulations, may be required. Failure to comply with regulatory requirements can result in legal consequences.

It is essential to conduct thorough research, exercise caution, and exercise best security practices when dealing with ERC20 tokens. Users should also be vigilant and stay informed about potential risks and scams in the cryptocurrency space.

The Future Of ERC-20 Tokens

The future of ERC-20 tokens is dynamic and evolving. While ERC20 has been widely adopted and serves as the foundation for many token projects, there are ongoing efforts to address its limitations and introduce alternative token standards. These proposed standards aim to enhance functionality, improve security, and provide additional features.

It is important to note that the Ethereum community and developers continue to explore and iterate on token standards to meet the evolving needs of the blockchain ecosystem. As such, the future of ERC-20 tokens will likely be shaped by ongoing innovation, advancements in technology, and the collective efforts of the community to improve tokenization on the Ethereum network.

ERC20 hardware wallet

Frequently Asked Questions On ERC20 Tokens

What Is An ERC20 Token Wallet?

An ERC20 token wallet is a digital wallet that is specifically designed to store and manage ERC-20 tokens, which are tokens based on the Ethereum blockchain. It allows users to securely hold, send, and receive ERC-20 tokens within the Ethereum ecosystem.

What Does ERC-20 Mean?

ERC-20 stands for Ethereum Request for Comment 20, which is a technical standard used for creating and implementing fungible tokens on the Ethereum blockchain. 

What’s The Difference Between Eth And Erc-20?

ETH (Ethereum) is the native cryptocurrency of the Ethereum blockchain and represents the base currency and fuel for transactions and smart contracts on the network. ERC-20, on the other hand, refers to a standard protocol for creating and implementing tokens on the Ethereum blockchain, which are separate digital assets with their own functionalities and use cases.

How Are Erc20 Tokens Minted?

ERC20 tokens are not typically minted but are generated during the deployment of a smart contract with a predetermined total supply specified in the code. The contract creator assigns the initial supply to a designated address, and the tokens can be distributed or transferred based on the token contract’s rules.

Which Cryptocurrencies Are Based On The ERC-20 Standard?

Some popular cryptocurrencies that are based on the ERC-20 standard include:

  • Tether (USDT)
  • Chainlink (LINK)
  • USD Coin (USDC)
  • Uniswap (UNI)
  • Compound (COMP)

Where To Buy And Swap Erc-20 Tokens?

ERC-20 tokens can be bought and swapped on various decentralized and centralized cryptocurrency exchanges, such as Binance, Coinbase, Uniswap, SushiSwap, and others. Additionally, DeFi platforms like MetaMask, MyEtherWallet, and Trust Wallet provide options for token swaps within their interfaces.

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