ERC-20 Tokens: Understanding Their Role and Functionality in Ethereum

ERC-20 tokens are the foundation of the Ethereum ecosystem. They allow for the creation of cryptocurrencies and decentralized applications that operate under a unified set of rules. This standard simplifies life for developers and users alike. In this article, we will thoroughly examine how these tokens work, their history, advantages, and limitations.

What are ERC-20 tokens?

ERC-20 tokens are a standard created for the Ethereum network that functions as a universal language for interacting with all applications within the blockchain. Thanks to this standard, developers can easily create tokens, and users can utilize them in various applications, such as DeFi or NFTs.

How do ERC-20 tokens work?

ERC-20 defines a set of rules for creating and operating tokens. This simplifies their use in any applications compatible with Ethereum. For example, DeFi platforms accept tokens from different developers, as they all follow the same standard.

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Usage example: you can send a token, and the smart contract automatically checks your balance and transfers the asset to the new owner.

Where is the ERC-20 standard used?

ICOs (Initial Coin Offerings): most tokens created to attract investments follow this standard.

NFTs (non-fungible tokens): although NFTs use a different standard (for instance, ERC-721), many auxiliary tokens for managing NFTs are built on the ERC-20.

Wallets: ERC-20 tokens are supported by popular wallets like MetaMask, Trust Wallet, and others, making them convenient for users.

Why is ERC-20 popular?

1. Developers know how to create tokens, and users can easily manage them.
2. The standard is based on smart contracts that operate automatically, reducing errors and minimizing human influence.
3. ERC-20 tokens are applicable in various fields—from decentralized finance to blockchain gaming.

History and Development of the ERC-20 Standard

ERC-20 was proposed in 2015 by Vitalik Buterin and the Ethereum team. The main goal of creating the standard was to simplify the process of token development and their integration into the Ethereum ecosystem.

Why did ERC-20 become important? Before its introduction, each token was created with unique rules, leading to confusion and difficulties in usage. ERC-20 addressed this problem by providing a unified set of rules that simplifies interaction between tokens and applications.

Today’s role of ERC-20:

• The standard is used by millions of users.
• Most crypto projects, including DeFi, ICOs, and auxiliary tokens for NFTs, are based on ERC-20.
• This standard has become the foundation of the Ethereum ecosystem.

Technical Features of ERC-20 Tokens

The ERC-20 standard is a set of rules that define how tokens interact with each other and with applications on the Ethereum blockchain. Tokens are created using mandatory and optional methods, which makes them versatile and easily integrable into the ecosystem.

Example Methods of the ERC-20 Standard

Why is Testing Contracts Important?

Smart contracts on which ERC-20 tokens operate require thorough verification before launch, as errors can lead to financial losses.

Example of an error: if the transfer method is incorrectly configured, tokens can be locked in the contract or sent to the wrong address.

Benefits of Testing:

• Reduction of token loss risks.
• Increased user trust.
• Protection against vulnerabilities and hacker attacks.

Core Functions of the ERC-20 Standard

Mandatory and Optional Methods

• Mandatory Methods: these are minimum requirements without which the token will not function. For instance, transfer and approve are necessary for basic operations.
• Optional Methods: they improve user experience. For example, name allows displaying the token’s name in applications. Symbol simplifies token identification. Decimals indicates how many digits are used for fractional parts of the token.

Example Interaction with ERC-20 Tokens

1. A user sends a token to a friend using the transfer method.
2. The smart contract checks the balance of the sender using the balanceOf method.
3. After successful verification, the token is credited to the recipient.

Advantages of Using ERC-20 Tokens

ERC-20 standard tokens have several advantages that make them the foundation of the Ethereum ecosystem. Let’s explore them in detail.

Details and Examples

1. Compatibility: ERC-20 tokens can be used on any Ethereum platforms. This is particularly important for decentralized applications (dApps) that require interaction with different tokens.
2. Simplicity: Creating tokens takes minimal time. For instance, startups launch their tokens to attract investments through ICOs or for loyalty programs.
3. Integration: ERC-20 tokens are used in DeFi protocols for lending and trading, as well as in the NFT ecosystem for auxiliary operations.
4. Transparency: Blockchain allows for tracking token transactions, ensuring trust for users and investors.

Limitations and Issues of ERC-20 Tokens

Despite the popularity and versatility of the ERC-20 standard, it has its drawbacks, which affect the use of tokens in various projects.

Details and Explanations

1. High Fees. Ethereum uses a “gas fee” model that depends on the current load on the network. During periods of high activity, fees for simple ERC-20 transactions can be too expensive, especially for small transfers.
2. Vulnerabilities. ERC-20 smart contracts require thorough testing. Errors in the code can render tokens inaccessible or vulnerable to hackers. Projects that do not undergo audits often become targets for attacks, leading to loss of funds.
3. Scalability. The Ethereum network has a limited transaction processing speed (~30 TPS). With a high number of users, this leads to delays and increased fees.

Conclusion

ERC-20 is a key standard that has played an important role in the development of the crypto industry. It has significantly simplified the creation of tokens and their integration into the blockchain ecosystem. However, despite its popularity, the standard has its limitations, such as a lack of support for complex functions and interactions between tokens. These limitations encourage the emergence of new standards capable of expanding the capabilities of blockchains and tokens.