What is an ERC-20 token? A standard explained

8 days ago

What is an ERC-20 token? A standard explained

Many cryptos available on the market aren’t real cryptocurrencies. Most of them are in fact tokens and have different use-cases than Bitcoin or any other cryptocurreny for that matter. Tokens and token standards are not often discussed, because most investors are rather interested in the token economy than in the technical aspects of the tokes they are buying. With this article we like to give you a brief introduction to ERC-20 tokens and their specifications.

What are the basic features of ERC-20?

The ERC-20 standard applies to tokens on the Ethereum blockchain and is widely spread throughout the industry. If you ever participated in an ICO, IDO or even STO it is most likely that you bought an ERC-20 token during that sale without even knowing it. An ERC-20 token has a very similar functionality to cryptocurrencies that you might already know.

The token can hold value and be sent and received just like any other crypto. The major difference is that the ERC-20 token is hosted on the Ethereum blockchain instead. And so the token is always dependent on a blockchain. This is also the case with other cryptocurrencies than Ethereum. They might have their own token standards, but these tokens are running on top of the blockchain and lack their own chain for that matter.

The ERC-20 tokens are stored using standard Ethereum addresses and since smart contracts are the major use case for Ethereum most wallets that can store Ether are also capable of sending and receiving ERC-20 tokens. In order to send them you have to spent gas as with normal transactions on the Ethereum blockchain.

Why became ERC-20 so important?

Before the standard was implemented exchanges had to build bridges in order to transfer tokens. ERC-20 unifies a standard with a certain set of rules with six different functions for smart contracts. One set of functions is to control the total token supply, the circulating supply and the token balance. Furthermore, it ensures:

  • Consistent and fast transactions
  • More efficient transaction confirmations
  • Reduces the risk of breach of contract
  • Quicker interactions with other tokens and the blockchain

ERC stands for Ethereum request for comment and was a very early improvement for Ethereum, hence the number 20.

It also provides interoperability between smart contracts and APIs that allow exchanges and other services to interact with each ERC-20 smart contract, without having to know every detail of each contract and token. It became the most important standard to write a smart contract that has a token as its output.

It is estimated that more than 200.000 different ERC-20 tokens exist and the number is growing each year. Some of the most important projects in the crypto space rely on ERC-20. Among them the stablecoin USDT, Basic Attention Token, Maker DAO and hundreds more.

Are there any other standards?

Yes, there are in fact other standards. ERC20 was designed for fungible tokens and as you might already know there are also non-fungible tokens. Each represents a unique token that cannot be replaced. They serve a special purpose on NFT marketplaces and are tied to digital art work or collectible like digital trading card games or even in-game items.

The most important standards in that regard are ERC-721 and ERC-1155. Both are creating non-fungible tokens and became the most important standards on the Ethereum blockchain after ERC-20. Therefore, ERC-20 is not suitable for NFTs.

When it comes down to issuing a smart contract with tokens, ERC-20 became the industry standard, but there are also alternatives. ERC-20 was introduced in the year 2015 and some developers believe that it has some flaws. One of them is ERC-621 which has the same set of functions as ERC-20, but also has a function to increase or decrease the capacity of a token. Another noteworthy example is ERC-827. It has a function that allows a third party to spent the token. One of the reasons why ERC-20 is still the most established token standard is the fact that most alternatives offer the same set of basic functions. Thus, they are only expanding its functionality, but rely on the same set of rules. Those basic functions are:

  • TotalSupply: This function provides information about the total token supply
  • BalanceOf: This will provide the account balance of the owner's account
  • Transfer: Going to execute transfers of a specified number of tokens to a specified address
  • TransferFrom: Will execute transfers of a specified number of tokens from a specified address
  • Approve: This function will allow a spender to withdraw a set number of tokens from a specified account
  • Allowance: This returns a set number of tokens from a spender to the owner

Which wallet supports ERC-20 tokens?

As mentioned before almost all Ethereum wallets are supporting ERC-20, but not necessarily show the correct token balance. If a token is relatively new it will take some time until it is recognized by wallet providers. Another option is to simply add the token manually, meaning that you have to add the smart contract address to your wallet.

Metamask is one of the most common wallets, because it is available as a plugin for most browsers. It allows users to directly interact with services using a web interface. Other wallets that also support ERC20 tokens:

  • Trust wallet
  • Parity
  • Mist
  • Trezor
  • Ledger

Some of these wallets will even work in combination with each other. Since you can use software wallets in combination with hardware wallets. This is even recommended with the use of Metamask since the wallet operates in your browser and basically every malicious website could try to hack your wallet. With a hardware wallet storing your keys, you achieve better security.

Please note that LiteBit supports different ERC-20 tokens for trading, sending and receiving. However, it is not possible to receive any other ERC-20 token with your LiteBit wallet other than the one that the address in question has been assigned to. If you send any cryptocurrency that is not supported to an Ethereum address in your LiteBit wallet, it is lost due to technical reasons and cannot be recovered.

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