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What Are ERC-20 Tokens: A Complete Overview

Updated on :  

08 min read.

The popular crypto and blockchain system Ethereum is based on the usage of tokens which users can trade, buy or sell. Tokens represent a diverse range of digital assets in this system. These assets include IOUs, vouchers, or tangible, real-world objects. 

Ethereum tokens are essentially smart contract which uses the Ethereum blockchain. Notably, Ethereum features multiple token standards. Among all the Ethereum tokens, ERC-20 is one of the most significant.

As of 24 March 2022, about 508,074 ERC-20-compatible tokens exist on the leading network of Ethereum. 

Here’s more about ERC-20.

ERC-20: Definition

Implemented in 2015, ERC-20 is a token standard that the world’s biggest programmable blockchain, Ethereum, uses. The full form of ERC is “Ethereum request for comment”. Every smart contract on the Ethereum blockchain uses ERC-20 to implement the token and offers a set of rules that every Ethereum-based token should follow.

In simpler terms, ERC-20 is a list of basic functions and guidelines that any new token developed on the Ethereum network should follow.

Properties of ERC-20 tokens

  • Transferable: It is possible to send these tokens from one particular address to another.
  • Fixed supply: It is necessary to create a set of several tokens so that developers cannot issue more tokens and increase the supply.
  • Fungible: The code of every individual token is the same as any other. However, the tokens involved can be identified and separated with the help of transaction histories.

Working of ERC-20

ERC-20 offers a list of coding functions. These functions can be categorised into three types: getters, functions, and events.

Getters return information and do not modify anything. Following are the three getters:

  • Balance of: Returns the amount of tokens an account or address owns.
  • Allowance: Allowances allow an account to spend some tokens which belong to a different owner. For instance, if address A offers address B an allowance of 50 tokens, the latter can spend up to 50 tokens on behalf of the former.
  • Total supply: Returns the amount of existing tokens.

Functions perform an action. Listed below are the three functions:

  • Transfer from: Moves the amount of tokens to a recipient from a sender using an allowance mechanism.
  • Transfer: Moves tokens to a recipient address from a sender address.
  • Approve: Sets an allowance amount which a spender can use.

Events are emitted when an action takes place. Given below are the two events:

  • Approval: Emitted when the owner approves the amount of tokens the spender will use.
  • Transfer: Emitted when the amount of tokens is sent to a recipient address from the sender.

Top ERC-20 tokens

  • Shiba Inu (SHIB) 

One of the most popular meme tokens, Shiba Inu, is an Ethereum-based altcoin. Its mascot is the Japanese breed of hunting dog – Shiba Inu.

  • Wrapped Bitcoin (WBTC)

This is a version of Bitcoin that is tokenised to be used on the Ethereum blockchain. Wrapped Bitcoin is backed 1:1 by BTC reserves.

  • Polygon (MATIC) 

Polygon is a Layer 2 blockchain. This implies it is a separate blockchain which extends Ethereum. This is capable of running alongside Ethereum and offers cheaper and faster transactions.

  • Aave (AAVE)

It is the native token of Aave, a DeFi lending platform.

  • Uniswap (UNI) 

Uniswap is a decentralised crypto exchange that operates without any central authority and uses smart contracts. It enables users to swap cryptos.

  • ApeCoin (APE)

It is a governance and utility token for the Bored Ape Yacht Club NFTs, one of the most successful NFT projects.

  • Decentraland (MANA) 

Decentraland (MANA) is an Ethereum token that powers the Decentraland virtual reality metaverse platform. You can use MANA to pay for in-world services, goods, and virtual plots of land in Decentraland.

Buying and storing ERC-20 tokens: A brief overview

ERC-20 tokens are tradable on crypto exchanges like Binance and Coinbase.

To store Ethereum tokens, you will require a crypto wallet which can store Ethereum tokens – either a hardware wallet or a software wallet like MetaMask.

Investment in ERC-20 tokens

As crypto investments, ERC-20 tokens come with unique risks and benefits compared to other kinds of tokens.

ERC-20 tokens are based on Ethereum. Hence they provide the same degree of security. Also, they are compatible with the remaining Ethereum ecosystem. That is a significant advantage as Ethereum is the most popular blockchain for DeFi services and dApps.

Again, since they are tied to Ethereum, ERC-20 tokens somewhat rely on their success. In addition, they are subject to the heavy network congestion of Ethereum. This congestion is a common issue which results in expensive gas fees and slow transactions.

There exists a low barrier to entry to developing an ERC-20 token. Now, this can be both good and bad. While it allows many individuals to launch their projects, it leads to more scams.

Disadvantages of ERC-20 tokens

  • Slow transactions

As the block time is roughly 14 seconds, it can take up to a minute for transactions to process. This can be adequate for some or extremely slow for others.

  • Requirement of a second crypto

When transactions occur with ERC-20 tokens, a requirement for the second crypto for transaction fee payment arises. This can add cost and time, leading to dust on various platforms.

  • Low throughput 

High demand for dApps can clog up the Ethereum network. That leads to slowing down the network, and transactions become more costly.

Bottom line

ERC-20 tokens are broadly used, and as long as Ethereum maintains its status, their traction will continue. Also, if there is any threat, it is from new Ethereum standards. They will have to be the fittest to survive in natural selection.

Also, potential investors must note that ERC-20 tokens can witness rapid increases or decreases in value, similar to other cryptos. So, if you are willing to invest, be ready for such volatility.