If you are new to the blockchain world, you might have heard of ERC-20, but you might not know what it is or why it matters. In this article, we will explain the basics of ERC-20, the most widely used token standard on Ethereum, and how it enables interoperability and innovation in the decentralized ecosystem.
What is a token?
A token is a digital representation of something on a blockchain, such as a currency, an asset, a right, a service, or anything else that has value or utility. Tokens can be transferred, exchanged, or used in various ways by smart contracts, which are self-executing programs that run on the blockchain.
What is ERC-20?
ERC-20 stands for Ethereum Request for Comment 20, which is a technical standard for creating and implementing tokens on the Ethereum blockchain. It was proposed by developer Fabian Vogelsteller in 20151 and became the official standard in 20172. ERC-20 defines a set of rules and functions that a token must follow in order to be compatible with other ERC-20 tokens and applications.
What are the benefits of ERC-20?
The main benefit of ERC-20 is that it allows for interoperability and compatibility among different tokens and applications on Ethereum. This means that any ERC-20 token can be easily exchanged, transferred, or used by any other ERC-20 token or application, without requiring custom integration or adaptation. For example, you can use the same wallet to store and manage different ERC-20 tokens, or you can use the same exchange platform to trade different ERC-20 tokens.
Another benefit of ERC-20 is that it fosters innovation and experimentation in the decentralized space. By providing a common and simple standard for creating tokens, ERC-20 lowers the barriers to entry and encourages developers to create new and diverse tokens for various purposes and use cases. Some examples of ERC-20 tokens are:
Stablecoins: tokens that are pegged to a fiat currency or a commodity, such as USDT, DAI, or PAX
Utility tokens: tokens that provide access to a service or a network, such as BAT, LINK, or BNB
Governance tokens: tokens that grant voting rights or influence over a protocol or a platform, such as COMP, UNI, or YFI
Asset tokens: tokens that represent ownership or claim over a real-world or digital asset, such as WBTC, WETH, or NFTs
What are the challenges of ERC-20?
Despite its popularity and usefulness, ERC-20 is not without its challenges and limitations. Some of the common issues or drawbacks of ERC-20 are:
Lack of security: ERC-20 does not have a built-in mechanism to prevent or recover from accidental or malicious loss of tokens. For instance, if you send ERC-20 tokens to a wrong address or a contract that does not support them, you might lose them forever.
Lack of functionality: ERC-20 only defines the basic functions and events for a token, but it does not provide any additional or advanced features that might be useful or desirable for some tokens or applications. For example, ERC-20 does not support token burning, token minting, token pausing, or token metadata.
Lack of upgradability: ERC-20 is a fixed and rigid standard that cannot be easily modified or improved over time. If a new feature or a bug fix is needed, it might require creating a new standard or a new token, which might cause confusion or fragmentation in the ecosystem.
What are the alternatives to ERC-20?
Due to the limitations of ERC-20, several alternative or complementary token standards have been proposed or developed over the years, aiming to address some of the challenges or to provide some of the features that ERC-20 lacks. Some of the notable token standards are:
ERC-223: a token standard that prevents the loss of tokens when transferring to incompatible contracts, by adding a fallback function that checks the recipient’s ability to receive tokens3.
ERC-721: a token standard for non-fungible tokens (NFTs), which are unique and indivisible tokens that can represent digital or physical collectibles, such as art, music, or gaming items4.
ERC-777: a token standard that extends the functionality of ERC-20, by adding features such as token operators, token hooks, token metadata, and token granularity5.
ERC-1155: a token standard that allows for the creation and management of multiple fungible and non-fungible tokens within a single contract, reducing the complexity and cost of deploying and interacting with tokens6.
Conclusion
ERC-20 is the most widely used token standard on Ethereum, enabling interoperability and compatibility among different tokens and applications. It also fosters innovation and experimentation in the decentralized space, by providing a common and simple standard for creating tokens. However, ERC-20 also has some challenges and limitations, such as lack of security, functionality, and upgradability. Therefore, several alternative or complementary token standards have been proposed or developed, aiming to address some of the issues or to provide some of the features that ERC-20 lacks.