What Are ERC-20 Tokens and Why Do They Matter?

Authored by Makara


Published January 7, 20224 mins
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What is ERC-20?

ERC-20 is a set of rules followed by most tokens on the Ethereum blockchain. It makes sure that any token built to its specifications—whether it represents a lottery ticket, a share in a company, or your character’s strength rating in an online game—has exactly the same characteristics as any other. (Unlike actual living, barking Shiba Inus, each individual Shiba Inu token is an exact clone of all the others, because it’s built on the ERC-20 standard.)

What kind of rules does ERC-20 set?

It requires token creators to show how the token is transferred from one account to the other, how transactions are approved, how many tokens an account has, and the token’s overall supply. There are also optional features that developers can use, like the ability to mint more tokens or burn existing tokens—respectively increasing or decreasing the overall supply of the token. The result is that the entire Ethereum ecosystem knows what to do with a token built to the ERC-20 standard, making everything function smoothly.

Does every token on Ethereum follow ERC-20?

No. Most tokens follow a standard, but there are more options than just ERC-20. Still, ERC-20 is the most popular choice. 

Do all ERC-20 tokens do the same thing?

Definitely not. ERC-20 has been used to build everything from stablecoins like USDC to the coins of various metaverse realms like The Sandbox (as well as several more of our six most interesting cryptocurrencies of 2021). Etherscan, an analytics platform, currently tracks almost 1,000 tokens created with ERC-20.

Is Ether an ERC-20 token?

Tokens and cryptocurrencies are not the same. While tokens can be a lot of different things, a cryptocurrency is issued directly by, and used on, a specific blockchain. As the native coin of the Ethereum blockchain, Ether is a cryptocurrency—and you may actually need to use ETH to pay the gas fees that come with buying, selling, or trading ERC-20 tokens. All that said, there is something called Wrapped Ether, which is basically a tokenized form of ETH built to the ERC-20 standard, with a value pegged to ETH’s. There’s also Wrapped Bitcoin, which is built using the ERC-20 standard on the Ethereum network, effectively tokenizing Bitcoin. 

What about NFTs then? They’re often built on Ethereum. Are they ERC-20 tokens?

Nope. The key to ERC-20 tokens is that they are fungible, meaning they are all exactly the same as each other. If Joe has a virtual pile of them, it doesn’t matter which one he gives to you. With NFTs, it’s the opposite. The appeal is the token’s uniqueness. People don’t want just any bored ape; they want that one, which is bored in that particular way. (If you really want to know, NFTs built on Ethereum typically follow the ERC-721 standard.)

Do other networks have similar standards?

Some definitely do. The Binance Smart Chain has BEP-20 (its extension of ERC-20) and Solana has the SPL token standard. But beyond that, standards are common all over the Internet, and they date back to its earliest beginnings. (The RC in ERC stands for “Request for Comments”—a form of documentation that the Internet’s inventors created way back in the late 1960s.) Everything from email to crypto works thanks to standards, which assure developers that, if they follow the rules, what they create will work with everything else in the ecosystem. 

Wouldn’t having standards like this stifle creativity? 

We think technical standards make it far, far easier to build new things that can be easily welcomed into the world—whether it’s the crypto world or any other. Imagine if everyone who wanted to make a new token had to start from scratch. Every crypto wallet would have to code up a way to work with each unique token. It would take forever, and that’s a lot longer than we’re willing to wait.

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