ERC-20 is the technical standard that defines how fungible tokens behave on Ethereum, so any wallet, exchange or app can handle thousands of different tokens in the same way. If you hold a stablecoin, a governance token or a project token on Ethereum, it is very likely an ERC-20 token.
Understanding the standard helps you read your wallet screens, avoid dangerous approvals and see why some tokens work in one place but not another. This article explains what ERC-20 means, what functions it includes, how it compares to ETH itself, and how to stay safe when using tokens.
Key takeaways
- ERC-20 is a common set of rules for fungible tokens, published as Ethereum Improvement Proposal 20 in 2015.
- Each token is a smart contract that keeps a ledger of who owns how many units.
- Because every ERC-20 token has the same basic functions, wallets and exchanges can support them easily.
- Token approvals let apps spend your tokens, so they are a common risk. Approve carefully and review them regularly.
- Anyone can create an ERC-20 token cheaply, so a token existing says nothing about its quality or honesty.
What ERC-20 actually is
ERC stands for Ethereum Request for Comments, and 20 is the number of the proposal. It was proposed by developer Fabian Vogelsteller and became a widely accepted standard. It does not create any tokens itself. Instead, it is a template: a list of functions and events that a token contract should include.
Think of a standard like a plug shape. If every appliance uses the same plug, it fits in any wall socket. In the same way, if every token follows ERC-20, any wallet that understands the standard can show balances, send tokens and connect to exchanges without custom work for each token. Before this standard, each token needed its own integration, which slowed the whole ecosystem.
The tokens are fungible, meaning each unit is identical and interchangeable, like one dollar bill for another. Unique collectibles use a different standard, covered in what are NFTs.
The functions the standard defines
A typical ERC-20 contract contains a handful of required functions. You do not need to code to benefit from knowing what they do.
| Function | What it does |
|---|---|
| totalSupply | Reports how many tokens exist in total |
| balanceOf | Shows how many tokens a given address holds |
| transfer | Sends tokens from your address to another address |
| approve | Gives another address permission to spend a set amount of your tokens |
| allowance | Shows how much of your tokens a given spender is still allowed to use |
| transferFrom | Lets an approved address move tokens on your behalf, up to the allowance |
Many tokens also include optional details such as a name, a symbol (the ticker) and the number of decimals, which controls how finely a token can be divided. Contracts also emit events, such as a Transfer record, which wallets and block explorers read to display history.
Behind the scenes, an ERC-20 token is basically a table inside a smart contract: address A has 50 units, address B has 20. Sending tokens just edits the table. Your tokens never leave the blockchain or sit “in” your wallet app. The wallet only holds the private key that proves you control your row in the table. For more on that, see what is a crypto wallet.
ETH versus ERC-20 tokens
Ether (ETH) is the native currency of Ethereum, built into the protocol. It is used to pay network fees. ERC-20 tokens are different: they live inside contracts and are not part of the base protocol. This difference has practical consequences.
- You always need ETH for fees. Even if you hold only a stablecoin, sending it requires a small amount of ETH to pay gas. People who forget this get stuck with tokens they cannot move.
- Tokens have their own rules. A token’s contract may include extra features, such as the ability to freeze accounts or add transaction taxes.
- Tokens depend on their creators’ code. If the contract is flawed or controlled by a few people, that affects every holder.
If you want a wider comparison, see coin vs token. ERC-20 tokens also work across many other networks that are compatible with Ethereum, often with similar names for their standards, but always check which network a token address belongs to before sending.
What ERC-20 tokens are used for
The standard supports many kinds of assets:
- Stablecoins that aim to track a currency (see what are stablecoins).
- Governance tokens that give voting rights in a project.
- Utility tokens used for access or payments inside an app.
- Wrapped assets that represent other coins on Ethereum.
- Reward or loyalty points and fundraising tokens.
For example, a game studio might create a token with a total supply of 1,000,000 units, an illustration only. It keeps 200,000 for the team, sells 300,000 to the public and rewards players with the rest. All of those choices, called tokenomics, are written into code and public documents, and you should look at them before trusting a token.
How a token transfer works step by step
Sending an ERC-20 token looks simple in a wallet, but several things happen behind the scenes. Knowing them helps you understand fees and failed transactions.
- You choose the token, the recipient address and the amount in your wallet.
- The wallet builds a transaction that calls the token contract’s transfer function, rather than sending ETH directly to the recipient.
- You sign the transaction with your private key, and you pay a network fee in ETH.
- Validators include the transaction in a block, and the contract updates its internal table: your balance goes down and the recipient’s goes up.
- The recipient’s wallet reads the contract’s table and displays the new balance.
Notice that the tokens never physically move. Only the number stored in the contract changes. This is also why sending tokens to a wrong address or to a contract that cannot handle them can make them unrecoverable, so always double-check the address and try a small test amount first. As an example only, if you send 10 units of a token and the contract has a built-in tax, the recipient might receive fewer than 10. Always read what a token does before using it.
Approvals, fake tokens and other risks
Because ERC-20 makes token creation easy, scammers use it too. Keep these risks in mind:
- Unlimited approvals. Many apps ask for permission to spend as many tokens as they want. If that app or its contract is compromised, an attacker can drain your balance of that token. Approve exact amounts when possible and revoke old permissions using a trusted approvals tool.
- Fake or copycat tokens. Anyone can make a token with the same name and symbol as a famous one. Always verify the contract address from an official project source.
- Airdropped junk tokens. Unknown tokens appearing in your wallet may be bait. Do not click links or try to sell them on suspicious sites.
- Honeypots. Some tokens let you buy but block selling.
- Wrong-network or wrong-address sends. Tokens sent to the wrong address or incompatible network are often lost. Send a small test amount first.
See crypto scams for more red flags. Remember that being listed on a price tracker or having a chart does not prove a token is legitimate.
Is ERC-20 a cryptocurrency?
Not exactly. It is a standard, a set of rules. Tokens that follow it are what people usually call ERC-20 tokens.
Can I store ERC-20 tokens in any Ethereum wallet?
Yes, in most cases. Standard wallets can display and send ERC-20 tokens, though you may need to add a custom token by its contract address if it does not appear automatically.
What is the difference between ERC-20 and ERC-721?
ERC-20 tokens are interchangeable, while ERC-721 tokens are unique and used mainly for NFTs. Another standard, ERC-1155, can handle both kinds in one contract.
Why do I need ETH to send an ERC-20 token?
Each transfer is a transaction that the network must process, and fees are paid in ETH on Ethereum itself.
Next step: see how tokens differ from coins in coin vs token, and learn how to judge a project in tokenomics explained.
