Introduction to ERC20
The Ethereum blockchain has revolutionized the way digital assets are created and traded through the introduction of the ERC20 standard. Short for "Ethereum Request for Comments #20," this protocol allows developers to issue and manage their own tokens atop the Ethereum network, ensuring seamless interoperability and compatibility with existing infrastructure.
ERC20 tokens can represent a wide range of digital assets—from currencies and shares to loyalty points and collectibles. Thanks to a standardized interface, these tokens work across various Ethereum-based wallets, exchanges, and applications, making them a core component of the DeFi (decentralized finance) ecosystem.
How Does the ERC20 Standard Work?
At its core, ERC20 defines a common set of rules that allow tokens to interact with the Ethereum network and other smart contracts. This is achieved through the implementation of mandatory and optional functions.
Mandatory Functions
For a token to be classified as ERC20, it must include three functions:
totalSupply()– Returns the total amount of tokens in circulation.balanceOf(address _owner)– Checks the token balance of a given Ethereum address.transfer(address _to, uint256 _value)– Transfers tokens to another address.
In addition, two events are required:
Transfer(address indexed from, address indexed to, uint256 value)– Triggered when tokens are moved.Approval(address indexed owner, address indexed spender, uint256 value)– Signals when an address approves another to spend its tokens.
Optional Functions
Beyond mandatory functions, ERC20 includes several optional ones that enhance token functionality. Key examples include:
transferFrom(address _from, address _to, uint256 _value)– Allows a user to transfer tokens from another user’s account (with their permission).allowance(address _owner, address _spender)– Checks how many tokens an address is authorized to spend.name(),symbol(),decimals()– Not strictly part of ERC20, but widely adopted for user-friendliness.
The Benefits of ERC20
ERC20’s uniformity has significant advantages:
- Interoperability – Tokens work smoothly with DeFi platforms, DApps, and exchanges like Uniswap, Compound, or MetaMask.
- Standardization – Developers know what to expect, improving development speed and reducing errors.
- Accessibility – Launching a token is easier than creating an entirely new blockchain.
Limitations and Future Evolution
While ERC20 remains dominant, some limitations have inspired newer standards, such as ERC721 (for NFTs) and ERC1155 (for semi-fungible tokens). Concerns like transaction congestion and high gas fees have also led to scaling solutions like ERC20 on Layer 2 protocols.
Despite these, ERC20 remains the backbone of Ethereum’s decentralized economy, validating its influence in shaping the future of digital finance.
