Understanding the ERC-20 Token Standard

Introduction to Tokens and the ERC-20 Standard

Tokens on the Ethereum blockchain can represent virtually anything of value. They can serve as reputation points in online platforms, in-game character skills, financial instruments like company shares, or even representations of traditional assets such as fiat currencies or commodities like gold.

The power of this flexibility demanded a robust technical standard to ensure interoperability across different applications and services. This is where ERC-20 comes into play. The ERC-20 standard provides a common set of rules that allows developers to create token applications that work seamlessly with various Ethereum-based products and services.

What Exactly Is ERC-20?

ERC-20 establishes a technical standard for fungible tokens on the Ethereum blockchain. Fungibility means that each token is identical to every other token in type and value. Much like traditional currency where one dollar bill holds the same value as any other dollar bill, one ERC-20 token maintains equal value and properties to all other tokens of the same type.

This standardization ensures that all ERC-20 tokens behave predictably, making them easy to exchange and integrate across different platforms and applications within the Ethereum ecosystem.

Prerequisites for Understanding ERC-20

Before diving deeper into the ERC-20 standard, it's helpful to have basic knowledge of:

Ethereum accounts and how they function
Smart contracts and their role on the blockchain
The concept of token standards and their importance

These foundational elements provide context for how ERC-20 operates within the broader Ethereum network.

Technical Framework of ERC-20

ERC-20 (Ethereum Request for Comments 20) was proposed by Fabian Vogelsteller in November 2015. It defines a common interface for token implementations in smart contracts, creating a standardized API that ensures tokens follow consistent patterns.

Core Functionality

The standard specifies several functions that enable:

Transferring tokens between accounts
Checking the current token balance of any account
Determining the total token supply available on the network
Approving third-party spending of tokens from a specific account

When a smart contract implements the required methods and events specified by the standard, it qualifies as an ERC-20 token contract. Once deployed, this contract becomes responsible for tracking all created tokens on the Ethereum blockchain.

Required Methods

According to the official EIP-20 specification, ERC-20 compliant contracts must implement these methods:

function name() public view returns (string)
function symbol() public view returns (string)
function decimals() public view returns (uint8)
function totalSupply() public view returns (uint256)
function balanceOf(address _owner) public view returns (uint256 balance)
function transfer(address _to, uint256 _value) public returns (bool success)
function transferFrom(address _from, address _to, uint256 _value) public returns (bool success)
function approve(address _spender, uint256 _value) public returns (bool success)
function allowance(address _owner, address _spender) public view returns (uint256 remaining)

Required Events

The standard also mandates these two events:

event Transfer(address indexed _from, address indexed _to, uint256 _value)
event Approval(address indexed _owner, address indexed _spender, uint256 _value)

Practical Implementation Examples

The power of standardization becomes evident when examining how easy it is to interact with any ERC-20 token. With just the Contract Application Binary Interface (ABI), developers can create interfaces for any compliant token.

Web3.py Implementation Example

The following Python example demonstrates how to interact with ERC-20 tokens using the Web3.py library:

from web3 import Web3

w3 = Web3(Web3.HTTPProvider("https://cloudflare-eth.com"))

dai_token_addr = "0x6B175474E89094C44Da98b954EedeAC495271d0F"
weth_token_addr = "0xC02aaA39b223FE8D0A0e5C4F27eAD9083C756Cc2"
acc_address = "0xA478c2975Ab1Ea89e8196811F51A7B7Ade33eB11"

simplified_abi = [
    {
        'inputs': [{'internalType': 'address', 'name': 'account', 'type': 'address'}],
        'name': 'balanceOf',
        'outputs': [{'internalType': 'uint256', 'name': '', 'type': 'uint256'}],
        'stateMutability': 'view', 'type': 'function', 'constant': True
    },
    {
        'inputs': [],
        'name': 'decimals',
        'outputs': [{'internalType': 'uint8', 'name': '', 'type': 'uint8'}],
        'stateMutability': 'view', 'type': 'function', 'constant': True
    },
    {
        'inputs': [],
        'name': 'symbol',
        'outputs': [{'internalType': 'string', 'name': '', 'type': 'string'}],
        'stateMutability': 'view', 'type': 'function', 'constant': True
    },
    {
        'inputs': [],
        'name': 'totalSupply',
        'outputs': [{'internalType': 'uint256', 'name': '', 'type': 'uint256'}],
        'stateMutability': 'view', 'type': 'function', 'constant': True
    }
]

dai_contract = w3.eth.contract(address=w3.to_checksum_address(dai_token_addr), abi=simplified_abi)
symbol = dai_contract.functions.symbol().call()
decimals = dai_contract.functions.decimals().call()
totalSupply = dai_contract.functions.totalSupply().call() / 10**decimals
addr_balance = dai_contract.functions.balanceOf(acc_address).call() / 10**decimals

print("===== %s =====" % symbol)
print("Total Supply:", totalSupply)
print("Addr Balance:", addr_balance)

weth_contract = w3.eth.contract(address=w3.to_checksum_address(weth_token_addr), abi=simplified_abi)
symbol = weth_contract.functions.symbol().call()
decimals = weth_contract.functions.decimals().call()
totalSupply = weth_contract.functions.totalSupply().call() / 10**decimals
addr_balance = weth_contract.functions.balanceOf(acc_address).call() / 10**decimals

print("===== %s =====" % symbol)
print("Total Supply:", totalSupply)
print("Addr Balance:", addr_balance)

This example demonstrates how the standardized interface allows developers to interact with different tokens using the same code structure, simply by changing the contract address.

Known Limitations and Issues

Despite its widespread adoption, the ERC-20 standard has some recognized limitations that developers should understand.

The Token Reception Problem

One significant issue arises when ERC-20 tokens are sent to smart contracts not designed to handle them. These tokens can become permanently lost because:

Transfer Mechanism Limitations: ERC-20 tokens use transfer and transferFrom functions that execute regardless of whether the receiving contract can process them
Lack of Notification: The receiving contract doesn't receive any notification or callback when tokens arrive
No Built-in Handling: The standard doesn't include mandatory functions that receiving contracts must implement to handle incoming tokens

When tokens are sent to a contract that lacks the functionality to recognize or manage them, they effectively become stuck in the contract's address with no way to recover them.

Several alternative standards have emerged to address this limitation, including ERC-223 and ERC-777, which implement notification mechanisms to prevent token loss.

👉 Explore more strategies for secure token implementation

Frequently Asked Questions

What makes ERC-20 tokens different from Ethereum itself?

ERC-20 tokens are created on top of the Ethereum blockchain using smart contracts, while ETH is the native cryptocurrency of the Ethereum network. ERC-20 tokens benefit from Ethereum's security and infrastructure but operate as separate assets with their own rules and properties defined by their smart contracts.

Can ERC-20 tokens be converted to other cryptocurrencies?

Yes, ERC-20 tokens can be exchanged for other cryptocurrencies including Ethereum through decentralized exchanges and trading platforms. The process typically involves connecting a Web3 wallet to a exchange platform and executing a swap transaction between the desired assets.

How do I create my own ERC-20 token?

Creating an ERC-20 token involves writing a smart contract that implements all required functions of the standard, testing it thoroughly on a test network, and then deploying it to the Ethereum mainnet. Many developers use established frameworks like OpenZeppelin's contract templates to ensure compliance and security.

What are gas fees in relation to ERC-20 tokens?

Gas fees are transaction costs paid in ETH for executing operations on the Ethereum network, including ERC-20 token transfers. These fees compensate network validators for processing transactions and vary based on network congestion and transaction complexity.

Are ERC-20 tokens secure?

The security of ERC-20 tokens depends on the implementation of their smart contracts. Well-audited contracts from reputable sources generally provide high security, but poorly written contracts can contain vulnerabilities. Always research token contracts before interacting with them.

How can I avoid losing ERC-20 tokens?

To prevent loss, only send tokens to addresses that explicitly support them, double-check addresses before transferring, and never send tokens to contract addresses unless you're certain they can handle them. Using wallets with built-in token detection can also help avoid mistakes.

Additional Fungible Token Standards

While ERC-20 remains the most widely adopted standard, several alternatives offer different features and improvements:

ERC-223: Addresses the token reception problem by implementing a notification mechanism
ERC-777: Provides more advanced features including hooks for receiving contracts and improved transaction handling
ERC-4626: Standardizes tokenized vaults for yield-bearing tokens

These standards build upon ERC-20's foundation while addressing specific use cases and limitations.