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ERC-20

ERC-20 is a technical standard for tokens on the Ethereum blockchain, introduced in November 2015 by Fabian Vogelsteller and Vitalik Buterin via Ethereum Improvement Proposal (EIP) 20. It defines a set of rules and functions that allow tokens to be created, transferred, and managed consistently within Ethereum’s ecosystem. As of March 2025, ERC-20 tokens dominate decentralized finance (DeFi), with over 500,000 unique token contracts tracked, powering assets like stablecoins (USDT, USDC), governance tokens (UNI), and utility tokens.

How ERC-20 Works

  1. Standard Functions – Includes six mandatory functions: transfer, approve, transferFrom, totalSupply, balanceOf, and allowance, ensuring interoperability with wallets and exchanges.
  2. Smart Contracts – Tokens are deployed as smart contracts on Ethereum, adhering to the ERC-20 interface for seamless integration.
  3. Token Creation – Developers specify a name, symbol, supply, and decimals (e.g., 18 for divisibility) when launching a token.
  4. Transactions – Users send tokens via Ethereum transactions, with gas fees paid in ETH to process them on the network.
  5. Compatibility – Works natively with Ethereum-based dApps, DEXs like Uniswap, and layer-2 solutions like zkSync.

Key Features

  • Interoperability – Uniform standard enables tokens to interact with countless Ethereum platforms.
  • Mass Adoption – Over 500,000 token contracts exist, per Etherscan data from March 2025.
  • Flexibility – Supports diverse use cases, from stablecoins to NFTs with extensions.
  • Decentralized – Runs on Ethereum’s trustless, permissionless blockchain.

Benefits of ERC-20

  • Ecosystem Integration – Easily plugs into wallets (e.g., MetaMask), exchanges, and DeFi protocols.
  • Liquidity Boost – Fuels trading on platforms like Uniswap, with billions in daily volume.
  • Developer Simplicity – Standardized template speeds up token creation and deployment.
  • User Access – Enables global participation in tokenized economies without intermediaries.

Risks and Challenges

  • High Gas Fees – Transactions on Ethereum mainnet can cost $5-$50, limiting small-scale use.
  • Smart Contract Bugs – Flaws in token contracts have led to losses, like the $55 million Parity hack in 2017.
  • Scam Proliferation – Ease of creation has spawned thousands of fraudulent tokens, draining millions from investors.
  • Scalability Limits – Ethereum’s 15 TPS cap bottlenecks ERC-20 transactions during peak demand.

Use Cases of ERC-20

  1. Stablecoin Trading – Users swap USDC for ETH on Uniswap with predictable pricing.
  2. Crowdfunding – Projects raise funds by selling ERC-20 tokens, as seen in 2017 ICOs.
  3. Governance – UNI holders vote on Uniswap protocol changes using their tokens.
  4. Rewards – Platforms distribute ERC-20 tokens like LINK to incentivize user actions.

Examples or Case Studies

  1. Tether (USDT) – Launched in 2014, it became the largest ERC-20 token by market cap, hitting $100 billion by March 2025.
  2. 2017 ICO Boom – ERC-20 tokens fueled $5.6 billion in crowdfunding, including successes like EOS.
  3. Uniswap UNI – Introduced in September 2020, UNI’s airdrop of 400 tokens per user spurred DeFi adoption.

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