In-Depth Analysis of ERC-20 | Starting from the Core Standard of the Ethereum Virtual Machine

As one of the earliest open-source projects supporting developers in creating decentralized applications (DApps), Ethereum initially faced network congestion and high transaction fees. In this context, the ERC-20 standard was born, becoming the most important token standard on the Ethereum blockchain and fundamentally transforming the ecosystem landscape of the blockchain industry.

What is ERC-20? Understanding Ethereum Token Standards

If you compare Ethereum to a global computer, then ERC-20 is the universal language that enables different applications to “talk” to each other. ERC-20 is a set of unified technical specifications that define the rules all tokens on Ethereum must follow, allowing any digital asset compliant with the standard to seamlessly interact with applications, wallets, and exchanges on the Ethereum network.

ERC-20 tokens are a set of interchangeable digital tokens residing on the Ethereum blockchain. These tokens adhere to strict development rules to ensure compatibility. Developers and users can thus actively participate in any service, application, or protocol on the Ethereum network.

Each ERC-20 token has its unique purpose within the ecosystem and can be exchanged with other tokens on the Ethereum network. The emergence of this standard greatly simplified development, helping token creators achieve smooth interaction between applications and tokens.

From Zero to Hero | The Birth of ERC-20 and Key Moments in 2015

The idea for the ERC-20 standard originated from developer Fabian Vogelsteller. In 2015, he submitted this proposal via Ethereum’s GitHub page, marking it as an “Ethereum Request for Comments” (ERC). Since it was the 20th comment on that page, the standard was named “ERC-20.”

After approval by the Ethereum developer community, Vogelsteller’s proposal was officially implemented as an “Ethereum Improvement Proposal (EIP-20).” Since then, all smart contract tokens designed on Ethereum have been required to follow this standard, marking a turning point from chaos to standardization in the Ethereum ecosystem.

How does ERC-20 work? Smart Contracts and Automated Execution

The collaboration between ERC-20 standards and smart contracts is similar to the operation of a vending machine—once certain conditions are met, predefined actions are automatically executed. Ethereum Virtual Machine (EVM)-enabled smart contracts are designed based on this logic.

By following the ERC-20 guidelines, developers can create and issue corresponding tokens. These tokens are interchangeable—one token’s value is exactly equal to another’s. ERC-20 tokens not only enable seamless asset exchange but also grant holders governance rights. Many ERC-20 tokens also support staking, allowing stakers to earn additional tokens as rewards for supporting network operations, thus providing passive income opportunities.

Five Core Advantages | How ERC-20 Changed the Ethereum Ecosystem

The launch of ERC-20 is considered a game-changer because it addressed several fundamental issues in the cryptocurrency industry.

Advantage 1: Cross-Application Compatibility

Before ERC-20, crypto assets were difficult to transfer across different blockchains or applications, significantly hindering global blockchain adoption. ERC-20 standard tokens can communicate and exchange assets easily if they follow the rules. If you hold an ERC-20 token from a certain project, you can conveniently swap it for tokens from another project, facilitating communication, speeding up transfers, and reducing costs.

Advantage 2: Multi-layer Security

Since ERC-20 tokens follow the same standards and are built on Ethereum, they inherently benefit from the network’s security features, including decentralization, immutability, and transparency. These mechanisms effectively prevent malicious users from manipulating token supply, transfers, withdrawals, or verification processes.

Advantage 3: Complete Transparency and Traceability

Like blockchain technology itself, ERC-20 tokens are fully transparent at the underlying logic level. All transaction details are permanently recorded on the Ethereum blockchain, making token movements easy to track. This transparency also helps verify the authenticity of transactions and tokens, providing higher security for holders and developers.

Advantage 4: High Liquidity and Market Activity

ERC-20 tokens can be freely traded on centralized exchanges and decentralized exchanges (DEXs). This high availability makes these tokens the preferred assets for investors seeking to profit from crypto market fluctuations.

Advantage 5: Customization and Ease of Use

Token creators can customize ERC-20 tokens to meet specific needs—such as setting total supply, adding unique features, defining decimal places, and choosing token symbols. Besides flexibility, ERC-20 tokens are very user-friendly. Users can easily create and manage tokens using tools like MetaMask, MyEtherWallet, and others.

Real-World Cases | How Top ERC-20 Tokens Like USDT, UNI Are Used

Since the implementation of the ERC-20 standard, hundreds of tokens based on this standard have emerged. Here are some of the most representative applications:

Tether (USDT): A Benchmark Stablecoin

Tether’s USDT is a stablecoin operating on the Ethereum blockchain under the ERC-20 standard. It is pegged 1:1 to the US dollar, backed by holding an equivalent amount of USD in secure accounts. USDT has become the preferred tool for transferring funds between exchanges and is one of the most frequently traded pairs on centralized exchanges.

Uniswap (UNI): Governance Token for Decentralized Trading

Uniswap is an Ethereum-based decentralized exchange (DEX), and its native token UNI is an ERC-20 token. Uniswap uses an automated market maker (AMM) model, differing from traditional exchanges with order books and centralized price setting, instead relying on liquidity pools for trading.

Maker (MKR): Governance in Decentralized Finance

MKR is the native governance token of MakerDAO, an open-source protocol on Ethereum. MKR holders have management rights over MakerDAO, participating in scientific governance processes—including high-level proposal voting and governance votes—to determine the protocol’s development direction. The protocol allows users to create DAI—a stablecoin pegged to the US dollar. Currently, one MKR token locked in the voting contract equals one vote.

Binance Coin (BNB): Core Asset in Exchange Ecosystem

BNB is not only an ERC-20 token but also the native asset of Binance’s centralized exchange. BNB is used within the Binance ecosystem for trading fee discounts, participating in platform governance, and more.

Four Major Challenges of ERC-20 | Risks You Need to Know

Despite its revolutionary progress, ERC-20 also has limitations that developers and users must face.

Challenge 1: Limited Functionality

ERC-20 was designed to enhance compatibility and stability, but this also limits its functional scope. Some complex transaction logic cannot be fully implemented within ERC-20, posing challenges for developers needing higher flexibility.

Challenge 2: High Transaction Costs

Transacting ERC-20 tokens requires paying gas fees. Depending on network congestion, these costs can be prohibitive for ordinary users. The volatility of gas fees also makes it difficult to predict exact transaction costs, discouraging regular investors and low-income users from holding and trading these tokens.

Challenge 3: Uneven Exchange Support

Not all crypto exchanges support ERC-20 tokens. While the standard is widely adopted, some exchanges do not accept or list ERC-20 tokens, limiting their liquidity.

Challenge 4: Contract Reception Risks

A key risk for ERC-20 tokens relates to the design of recipient smart contracts. If users send tokens to a contract not designed to handle ERC-20 tokens, the tokens may be permanently lost. This is because some recipient contracts are not programmed to recognize or respond to ERC-20 tokens, and the ERC-20 standard itself cannot notify contracts of incoming tokens.

Beyond ERC-20 | Exploring the Ethereum Token Standard Family

Although ERC-20 is the most widely adopted token standard, the Ethereum ecosystem also includes other standards designed for specific scenarios:

• ERC-165: Used to verify whether a smart contract supports a particular interface, enabling interaction between different contracts.
• ERC-621: Allows authorized project members to adjust token supply after issuance, such as minting additional tokens or burning existing ones.
• ERC-777: Offers emergency recovery options (e.g., if a user’s private key is lost) and enhances transaction privacy and anonymity.
• ERC-721: Designed for non-fungible tokens (NFTs), as ERC-20’s fungibility cannot meet the uniqueness requirements of NFTs.
• ERC-223: Addresses issues with tokens sent to incorrect addresses that cannot be recovered, allowing retrieval of mistakenly sent tokens.
• ERC-1155: Enables developers to create and deploy more efficient token transfer mechanisms, saving transaction costs and supporting both NFTs and utility tokens.

The Significance of the ERC-20 Era | Milestone for Ethereum Blockchain

The launch of the ERC-20 standard marked a historic step forward for the Ethereum network. It was born out of the need to solve network bottlenecks and high transaction costs but ultimately brought about far-reaching changes beyond expectations.

ERC-20 not only simplified the development process but also opened new possibilities for Ethereum and the entire blockchain world. By standardizing tokens, it achieved true cross-application interoperability, allowing thousands of projects to operate collaboratively within a single ecosystem. This standard also laid the foundation for subsequent revolutionary applications like NFTs, DeFi, and GameFi.

From 2015 to today, ERC-20 has demonstrated enduring vitality. Despite challenges such as gas fees and functional limitations, it remains an indispensable infrastructure within the Ethereum ecosystem, continuously driving the blockchain industry forward.