What Is ERC-20? A Beginner’s Guide to Ethereum Tokens

Most token descriptions in wallets or on exchanges have signs like “ERC‑20”. But what does it mean and why exactly should you care? ERC‑20 is the standard for Ethereum-based fungible tokens. Think of it as a common language that defines how balances move, how apps integrate assets, and how you avoid costly mistakes.

This guide explains what ERC‑20 means, how transfers and approvals work, what gas you pay, real examples, key risks, and practical tips for beginners. We start by clarifying the ERC‑20 concept and then walk through core functions, events, and everyday flows you’ll encounter.

What Is ERC-20?

ERC‑20 is Ethereum’s canonical interface for fungible tokens—interchangeable units like dollars, for example. In Ethereum, changes and new ideas are introduced through documents called EIPs (Ethereum Improvement Proposals). These are official proposals that explain how something in the network could be improved or standardized. When a proposal focuses on app or token standards, it is often called an ERC (Ethereum Request for Comments). For example, people commonly say ERC-20 when talking about the popular token standard, even though the official finalized proposal is named EIP-20.

A token standard specifies functions and events a contract must expose, while a token is a contract that implements this standard. EIP‑20 prescribes methods such as totalSupply, balanceOf, transfer, approve, transferFrom and the events Transfer and Approval. That model lets dApps move tokens on your behalf without ever needing your private key.

Tokens that follow the same rules can work smoothly across wallets, exchanges, and apps. This is different from non-fungible token (NFT) standards like ERC-721, where each token is unique. Because ERC-20 tokens all behave in the same way, they are easier to support and use across the crypto ecosystem.

Why ERC-20 Became the Most Popular Ethereum Token Standard

ERC‑20 became the most popular standard because it made tokens plug-and-play. When wallets, exchanges, and dApps implement the same standards, they can list, store, and move any compliant token without custom code. For issuers, that means a new asset can work with MetaMask, hardware wallets, centralized exchange deposit systems, and DeFi routers by default.

Easier integration means listings become faster and cheaper, which deepens liquidity. Network effects then lock in dominance: more ERC‑20 tokens create more tooling, custody solutions, and liquidity, which in turn encourages new projects to choose ERC‑20. Trusted libraries like OpenZeppelin and common audit patterns further reduce risk and time-to-market.

Competing standards such as ERC‑777 saw adoption frictions and trade‑offs that prevented wide replacement.

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Why ERC-20 Tokens Matter (For Beginners)

You’ll encounter ERC‑20 tokens in many everyday crypto activities. Here’s why this is one of the the most relevant standards out there:

Stablecoins. USDC, USDT, DAI: ERC‑20 stablecoins park volatility, settle payments, and move funds across the Ethereum ecosystem with wide wallet and exchange support.
DeFi access. Uniswap, Aave: ERC‑20 tokens plug into swaps, lending, and liquidity pools. The interface unlocks yields, collateral, and composability without bespoke integrations.
Governance. UNI, COMP, MKR: Governance tokens grant DAO voting. Connect your wallet to influence proposals and protocol parameters without ceding custody.
Exchange listings. Deposit/withdraw flows: The standard lets tokens gain deposit and withdrawal support on venues, deepening order books while reducing integration risk.
Wallet transfers: Move ERC‑20s between self‑custody and custodial services by using the correct Ethereum address, paying gas in ETH, and confirming the network to avoid misdirected funds. Portfolio tracking and auditing: Explorers and apps read balances and token transfers uniformly, enabling auditing, tax reporting, and performance tracking across addresses.

Key Aspects of the ERC-20 Standard

To understand how ERC-20 tokens work, it helps to break the standard down into a few simple building blocks. Before exploring these details, let’s start with one key idea: what does “fungible” mean in ERC-20 tokens?

Fungible Tokens: What ‘Fungible’ Means in ERC-20

“Fungible” means that every unit of a token is exactly the same and can be swapped one-for-one with any other unit of that token. For example, 1 USDC in your wallet is no different from 1 USDC in someone else’s wallet. ERC-20 tokens don’t track individual token “serial numbers.” Instead, the smart contract simply records how many tokens each wallet holds. Most tokens can also be divided into smaller parts using decimals (often 6 or 18 decimal places), which allows users to send and receive very small amounts for precise payments.

ERC-20 Tokens Are Smart Contracts (Not “Coins”)

An ERC-20 token is a smart contract on Ethereum or the EVM that keeps track of how many tokens exist and who owns them. Your wallet actually stores your address, while the token’s smart contract records how many tokens belong to that address.

ETH is Ethereum’s main currency, and is used for gas fees. Other token creators can add features like creating new tokens (minting), removing tokens (burning), or temporarily stopping transfers. However, the ERC-20 standard only defines how tokens work and interact with apps.

Check out our ETH price prediction.

Standard Interface vs. Token Design: What ERC-20 Does (and Doesn’t) Guarantee

ERC‑20 standardizes interaction, not value or safety. You must still verify each token’s design before trusting it with any funds.

The standard does not guarantee legitimacy, price, or supply caps. Check whether the token can be minted, who controls permissions, and whether caps or emission schedules exist.
Some contracts are pausable or enforce blacklists. Review upgradeability, proxy patterns, and who can pause or freeze addresses.
Transfer fees (“tax tokens”) deduct percentages on transfers and affect DEX pricing and allowances. Confirm fee rates and exemptions before supplying liquidity or bridging.
Rebasing tokens change per‑address balances and can break assumptions in lending or trackers. Verify compatibility with the dApps you plan to use.
Legacy tokens sometimes deviate from EIP‑20 edge cases. Use safe wrappers (OpenZeppelin) and verify required functions/events are present.

Compliance: The Required Functions and Events Wallets/dApps Rely On

“ERC‑20‑compliant” means the token’s smart contract exposes the EIP‑20 function signatures and events so wallets, exchanges, and dApps can interact predictably. Applications use the contract’s interface to encode calls and decode responses.

In practice, compliance includes implementing totalSupply, balanceOf, allowance, transfer, approve, and transferFrom, and emitting Transfer and Approval events. EIP‑20 also specifies that transfer and approve return a boolean success flag. Omitting these behaviors breaks integrations and can cause silent failures.

Transaction Fees: Why ERC-20 Transfers Cost ETH (Gas)

ERC‑20 transfers and approvals are Ethereum transactions executed by the EVM. They require fees in ETH. Each call consumes gas units multiplied by the prevailing gas price to produce the total fee.

ERC-20 Core Functions and Events (Explained Simply)

Here’s a concise map of the ERC‑20 interface: six core functions and two canonical events, plus optional metadata (name, symbol, decimals) that wallets display. Below are plain‑English descriptions and when you’ll trigger each call.

The Six Core ERC-20 Functions + Two Events

totalSupply: Returns the number of token units that currently exist. Use it to track mints and burns.
balanceOf: Returns the balance for an address. Wallets call it to display holdings.
transfer: Sends tokens from your address to a recipient. It changes balances on-chain and costs ETH gas.
approve: Authorizes a spender to use up to a specified amount from your balance. It creates an allowance, and no tokens move yet.
allowance: Shows how much a spender can still pull from an owner’s balance.
transferFrom: Moves tokens from an owner to a recipient using an existing allowance. dApps use it to settle trades or collect fees without your keys.
Transfer (event): Logged whenever tokens move, including mints and burns via the zero address. Indexers use it to track transfers.
Approval (event): Logged when an allowance changes. Wallets and dApps use it to reflect permissions.

Who Uses ERC-20 Tokens?

A broad set of participants relies on ERC‑20 tokens.

Everyday users and payment apps move stablecoins, settle invoices, and rely on Transfer events for receipts and refunds.
Developers target one token interface for many assets. ABIs and events simplify coding and audits.
DeFi protocols pull deposits and settle swaps using allowance and transferFrom.
DAOs use tokens to allocate voting weight and record governance on-chain.
Exchanges list ERC‑20 assets with standardized deposit and withdrawal flows.
Wallets and trackers read events to display balances and flag approvals.

How ERC-20 Token Transactions Work on the Ethereum Network

An ERC‑20 transfer follows a clear lifecycle: your wallet builds an ABI‑encoded call, you sign with your private key, you pay ETH gas, and miners/validators include the transaction in a block. The token contract updates balances and emits events that indexers read.

Step-by-Step: Sending ERC-20 Tokens (from Wallet to Wallet)

Select the correct network and token contract. Confirm the contract address matches the official explorer page, avoid look‑alikes and spoofed metadata.
Verify the recipient’s address carefully. Paste and compare characters or use a trusted ENS name. Send a tiny test if uncertain—wrong‑address transactions are irreversible.
Ensure you hold enough ETH for gas. Check the wallet’s fee estimate and current congestion.
Enter the amount and confirm decimals and units. Wallets render pretty numbers, so confirm you mean “1.10”, not “1e10” base units.
Review the summary—contract, network, recipient, amount—then confirm and sign, ideally with a hardware wallet.
Monitor the transaction hash on an explorer and verify the Transfer event and recipient balance.

Step-by-Step: Connecting a dApp and Approving a Token Spend

Open the dApp and verify the domain. Use a bookmarked URL and valid TLS. Click “Connect Wallet” and confirm the request.
Select the correct network in both the wallet and dApp. Confirm chain ID and token contract address.
Inspect the spender address your wallet shows. Verify it on an explorer and confirm it’s the router, vault, or controller contract.
Choose an approval amount. Prefer exact or tight limits, and avoid unlimited approvals unless necessary.
Review the permission summary, set gas, sign the approval, and broadcast. Verify the Approval log on an explorer.
Execute the intended action so the dApp calls transferFrom within your allowance, then revoke or reduce the allowance when finished.

Real-World Examples of ERC-20 Tokens

Stablecoins (USDC, DAI, USDT): These tokens are designed to stay close to the value of a dollar. They can be sent, traded, and used in apps like any other token. The same stablecoin can exist on different blockchains, and each version has its own contract address.

Governance tokens (UNI, COMP, MKR): These tokens let holders vote on changes in crypto projects. Users can vote on upgrades, budgets, or new features in decentralized organizations.

Utility and rewards tokens: Some apps give tokens as loyalty points, discounts, or premium access. Users can earn tokens and spend them inside the relevant app, while wallets help track balances and approvals.

ICOs and token launches: Many projects used ERC-20 tokens to distribute assets during early fundraising campaigns. The standard made tokens easy to support on wallets and exchanges, but users still needed to check if projects were trustworthy.

ERC-20 Use Cases in DeFi

DeFi composes ERC‑20s into protocols that pull deposits and settle trades without custodial access. Common patterns include DEX trading, lending/borrowing, and liquidity provision.

Trading on Decentralized Exchanges (DEXs)

Verify token contracts and markets on a trusted explorer. Beware spoofed symbols.
Approve the input token for the router before swapping. Prefer exact allowances.
Set swap amount, route, slippage tolerance, and deadline. Routers may split orders across pools to optimize execution.
Account for AMM fees and gas. Monitor the explorer for confirmation and Transfer logs.

Using ERC-20 Tokens for Lending and Borrowing

You can approve and deposit tokens into lending protocols to earn interest and receive special tokens that represent your deposit. These deposits can also be used as collateral to borrow other assets. Every step—approving, depositing, or repaying—happens on the blockchain and requires gas fees.

Liquidity Pools and Yield Farming

You can deposit two tokens of similar value into a liquidity pool after approving them. In return, you receive LP tokens that show your share of the pool. These LP tokens earn trading fees and can sometimes be staked for extra rewards.

The main risk is impermanent loss, which happens when token prices change and may reduce profits compared to simply holding the tokens. Yield farming may include lockups and other rules, so it’s important to understand the risks before joining.

Storing and Managing ERC-20 Tokens in Wallets and Apps

Choose a wallet based on how much security you need. Software wallets are easy to use and store encrypted keys on your device, but they are more exposed to hacking or phishing. Hardware wallets store keys offline and require physical confirmation, making them safer for large balances, but slower.

Many users keep small amounts in software wallets for daily DeFi use and store larger holdings in hardware or multi-signature wallets. Always check token contract addresses, review who you’re approving to spend your tokens, and keep some ETH ready to pay gas fees.

Gas Fees: Sending ERC-20 Tokens to Another Wallet

Gas fluctuates with network demand, but you can manage costs.

Under EIP‑1559, base fees rise as blocks fill. Set a max fee and small priority tip or wait for quieter periods.
Contract complexity increases gas. Plain ERC‑20 transfers cost less than tokens with on‑transfer hooks, rebases, or snapshots.
Use Layer 2 options like Optimism or Arbitrum to cut fees: bridge funds, then approve or swap on L2.
Approvals and transfers are separate transactions. Use Permit (EIP‑2612) where available to avoid an on‑chain approve.
Batch operations or use multicall to lower overhead costs. Avoid many tiny transfers and prefer reputable tools.

ERC-20 Risks and Vulnerabilities (Beginner Checklist)

The main rule to follow is avoiding common pitfalls that turn convenience into exposure. But there are a few more recommendations worth keeping in mind.

Allowance Risk: Why Token Approvals Can Be Dangerous

Unlimited approvals are convenient but risky: a compromised or malicious spender can pull the full allowance at any time.
Approvals persist on-chain even if you disconnect a dApp. Regularly review and revoke unused allowances.
Changing a non-zero allowance can be exploited if someone spends the old allowance before your update is confirmed. Set the allowance to zero first, wait for confirmation, then set the new value.
Phishing dApps request approvals to attacker contracts. Verify spender addresses on an explorer and test with small limits.
Permits replace on‑chain approvals with signatures but carry the same authority—use time‑boxed or exact limits.

Integration Edge Cases: Not Every Token Is Perfectly ERC-20-Compliant

Some legacy or custom tokens deviate from EIP‑20 expectations (e.g., missing boolean returns or nonstandard events). These differences can cause silent failures, reverts on swaps, or misread balances. Favor audited dApps that handle edge cases and test with small amounts.

Known Pitfall: Tokens Sent to the Wrong Contract Can Get Stuck

An ERC‑20 transfer doesn’t notify recipient contracts. If you send tokens directly to a contract that expects an approve + deposit flow, the contract may receive tokens but cannot credit you—those funds can become unrecoverable unless the contract provides a recovery mechanism. Use documented deposit flows and confirm targets before sending.

ERC-20 Upgrades, Extensions, and Alternatives

ERC‑20 remains the core interface, while extensions and sibling standards refine UX and capabilities.

Permit (EIP-2612): Approvals via Signatures (Less Friction)

Permit lets you authorize allowances with an off‑chain signature. A dApp submits that signature with a transaction that sets the allowance and executes the action in one step, reducing gas and UX friction. The signature includes a nonce and deadline to prevent reuse. Not all tokens support Permit. When available, still prefer exact or time‑boxed allowances.

ERC-721 vs. ERC-20: NFTs vs. Fungible Tokens

ERC‑20 models interchangeable balances, ERC‑721 models unique tokenIDs and per‑item ownership with safe transfer checks. Use ERC‑20 for currencies and utility tokens, and use ERC‑721 for collectibles, tickets, and unique items.

ERC-1155: Multi-Token Standard (Fungible + Non-Fungible in One Contract)

ERC‑1155 manages multiple IDs inside one contract so each ID can be fungible or non‑fungible. Its batching abilities let you mint, transfer, or burn many IDs in a single transaction, saving gas and simplifying coordinated airdrops or inventory updates.

Other Token Standards You May Hear About (Quick Glossary)

ERC‑777: Adds operator send/receive hooks for richer composability but introduces reentrancy considerations.
ERC‑1400: Designed for security tokens with partitions and compliance controls.
ERC‑998: Composable NFTs that can own other NFTs or ERC‑20 balances.
Wrapped tokens: Represent external assets or native coins as ERC‑20s via bridges or custodians.

The Future of ERC-20

ERC‑20’s widespread adoption makes replacement unlikely. Evolution will happen at the edges: L2s and signature-based flows to reduce cost and friction, as well as audited templates and middleware to normalize any quirks. Wallets will display spender details, session limits, and revocation prompts to constrain allowances. Expect incremental standards and extensions to coexist with ERC‑20 rather than replace it.

Final Thoughts

Treat ERC‑20 as Ethereum’s common language for fungible value. The core motions are straightforward: send tokens between wallets, grant allowances so dApps can call transferFrom, and use Permit to reduce approvals where available. Events and decimals keep balances auditable and readable.

Most mistakes stem from process, not code. Avoid overly broad approvals, confirm spender contracts, and use documented deposit flows to prevent stranded funds. If you prefer a safer on‑ramp, use reputable wallets or exchanges that show spender details and revocation tools.

FAQ

Why do I need ETH to send ERC-20 tokens?

Because ERC‑20 transfers are Ethereum transactions, you pay gas in ETH to compensate validators for executing them. On L2s, you still pay that network’s fee but often at lower rates. Wallets estimate base fee and priority tip. The token amount does not change gas.

What if I send a token to the wrong address?

Token transfers are irreversible. If you send to an EOA you don’t control, only that holder can return your funds. If you send to a contract that doesn’t credit deposits, recovery may be impossible. Reduce risk by copy/pasting addresses, checking checksums, and sending a small test first.

Are all stablecoins ERC-20?

No, but many major stablecoins have ERC‑20 versions on Ethereum. The same brand often appears on multiple chains or L2s at different contract addresses. Deployments are not interchangeable without bridging or redemption. Always verify chain and contract before sending.

Why do we need other standards like ERC-721?

ERC‑20 only models interchangeable balances. Unique items require per‑item identity and ownership semantics. ERC‑721 provides unique tokenIDs, per‑token metadata, and safe transfer checks for contracts.

Can ERC-20 tokens work on other blockchains?

Yes—ERC‑20 is native to Ethereum, but EVM‑compatible chains implement the same interface. Wrapped tokens represent assets on non‑EVM networks. On each chain, a token lives at a different address and is not natively fungible across chains without a bridge.

What’s the safest way to store ERC-20 tokens?

Control the private keys and keep significant balances on a hardware wallet with an offline seed backup. Use multisig for shared funds and separate daily spending from long‑term storage. Verify contract addresses, inspect spender prompts, and revoke unused allowances.

Disclaimer: Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.

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