What is an ERC-20 Token and why is it important to the Ethereum ecosystem?

Ethereum has the largest ecosystem in the cryptocurrency market. There are thousands of tokens on Ethereum’s blockchain, most of which are ERC 20 tokens.

But what does ERC 20 mean?

It stands for Ethereum Request for Comments or, simply put, Ethereum-based tokens, operational since 2015.

But before, let’s go over some basics about Ethereum.

The Ethereum ecosystem consists of:

• A blockchain storing all transactions in continuous blocks
• EVM/Ethereum virtual machines running the smart contracts

The native currency in the network is Ether (ETH) token. Ether is usually used for paying for transactions via gas fees on the network, staking on Ethereum 2.0, purchasing NFTs or ERC20 tokens, providing liquidity to decentralized trading platforms, storing value, and more.

Unlike Bitcoin, Ethereum can support other tokens. Most tokens even live and thrive in the Ethereum ecosystem without having their own blockchains because they use the ERC-20 standard, like USDT/USDC, Uniswap (UNI), and thousands of others.

ERC-20 is a set of standards, rules, and regulations, so tokens are compatible, interactable, and hence interchangeable with each other within the Ethereum ecosystem. As well as all ERC-20 compatible services like MyEtherWallet and MetaMask.

It defines 6 mandatory and 3 optional functions to implement in a smart contract.

Some of the mandatory functions are:

• totalSupply: a function that outlines the total supply of a token.
• balanceOf: shows how many tokens a particular address has.
• transfer: transfers ownership of a token to another user.

The purpose is to make any transaction within Ethereum as smooth and seamless as possible, no matter the token used.

While ERC-20 is encrypted in smart contracts for the creation and distribution of fungible tokens, ERC-721 is the standard for NFTs, meaning that each token created is unique and non-interchangeable.

ERC-20: For money, services, and money-like tokens.

ERC-721: For NFT, a unique non-fungible digital asset-like tokens.

ERC-223: Improvement of ERC-20 (ERC-223 is only an expansion of ERC-20, many current wallets do not support it yet).

ERC-1155: Sort of a combination of ERC-20 and ERC 721, allowing the creation of fungible, semi-fungible, and non-fungible tokens within the same standard.

You got that right; there’s not only one standard but many within the Ethereum ecosystem, which explains why so many tokens, fungible or not, are being developed within the ecosystem.