ERC-20

Key points

• ERC-20 is the most widely used technical standard for creating fungible tokens on networks compatible with the Ethereum virtual machine.
• It defines a set of common functions, such as transferring and checking balances, that every token following the standard must implement.
• This standardization ensures that wallets, exchanges, and applications can interact with any ERC-20 token without needing specific adaptation.

What is ERC-20?

ERC-20 is a specification that establishes how a fungible token should behave on Ethereum-compatible networks. Instead of each project inventing its own rules, the standard defines a common interface, which allows any tool that understands ERC-20 to handle all tokens of this type in the same way. It is one of the foundations of interoperability in the ecosystem.

How it works

The standard describes a set of functions that the token's smart contract must offer. Among them are transferring units between addresses, checking the balance of an address, verifying the total amount issued, and an authorization mechanism that allows one address to spend tokens on behalf of another, up to a limit. These are the functions that a wallet or application calls to operate the token.

Since all the logic lives in a smart contract, creating an ERC-20 token means publishing a contract that implements this interface. From there, the token inherits compatibility with all existing infrastructure: wallets display it, exchanges list it, and decentralized finance protocols accept it, without needing custom integration.

Most stablecoins and project tokens follow this standard, which explains why a single format concentrates so much value and activity.

Why it matters

For a company that issues or accepts tokens, ERC-20 is the format that guarantees immediate compatibility with the rest of the ecosystem. It is because of this standard that a stablecoin created by an issuer works in any compatible wallet and application, without each integration needing to be rebuilt from scratch.

Limitations

The standard defines behavior, but not the quality of the contract: a poorly written ERC-20 can contain flaws that expose holders. The original standard also has known limitations, which led to extensions and extra caution in certain interactions. In addition, following ERC-20 says nothing about the backing or usefulness of the token, which depend on the project behind it.