What are Ethereum ERC20 tokens and why are they useful?

What are ERC-20 Tokens?

To put it in specialized terms, and in its simplest formulation, the ERC-20 is a protocol that consists of a set of individual guidelines . With ERC-20, tokens are created on the Ethereum blockchain and use its technology . Ether is the primary cryptocurrency based on the Ethereum network, however this does not preclude the existence of additional tokens.So, in simpler terms, ERC20 are token development that have been built on top of and use the Ethereum network.

For this, a smart contract is essential. It is not only used to create tokens but also to manage transactions or monitor them. To receive the tokens in question, you have to send a certain amount of ETH to Smart Contract , in exchange for which Smart Contract will send you these tokens. Thus, an ERC-20 token can be created by any of us without having to be a programmer. You don’t need specialized knowledge. Simply use a smart contract to become the creator of your own token.

It’s critical that you understand that tokens are far more common than cryptocurrencies. A token is not always a cryptocurrency. These represent some fact, value or quality . A token is often used, for example, in a casino as gift cards or vouchers. Why was such a unit of value created? because the creators desired to have control over the business model. As a result, users on a given network are directly connected to its products.

How do ERC-20 tokens work?

ERC-20 tokens operate within the Ethereum blockchain . The implementation of ERC-20 tokens is famous for the ability to independently create your own digital asset, as well as a smart contract. The process of bringing them to life is equipped with the ability to independently determine the maximum supply value, the possibility of divisibility of the new token and basic details regarding the newly produced token’s name or acronym.

ERC-20 is a protocol that allows you to authorize the execution and execution of token transactions based on these principles, with the participation of third parties . An ERC-20 based token must define several functions. These include:

  • Name.
  • Symbol.
  • Decimal positions that determine the divisibility of the token.
  • Total amount of tokens available.
  • The current state of the specified account and the feature that facilitates transactions.
  • The ability to transfer tokens to other accounts through third parties, being able to consult and set a maximum limit to the amount that a third party can manage.

Of course, it should be noted that create ERC20 token interface implementations may vary in detail. They can also be more elaborate, providing additional functionality (for example, such as freezing some funds, managing ETH transfers, or automatically granting tokens in exchange for cryptocurrencies). Depending on the creators’ goals, tokens created with the ERC-20 protocol can support security or put a strong emphasis on saving contract gas consumption.

Uses of Ethereum ERC20 :

ERC20 tokens provide consumers and issuers with multiple advantages:

  • Interoperability
  • Standardization
  • Flexibility
  • Security
  • Global Reach
  • Liquidity
  • Lower Costs

Advantages of ERC-20 tokens

Among the advantages of ERC-20 tokens is the saving of time and resources . ERC-20 tokens benefit from the existing Ethereum infrastructure rather than creating an entirely new blockchain for them. They also have additional security because the demand for Ether rises with the issuance of new tokens, making the network as a whole less vulnerable and even more safe.

Another of its advantages is interoperability with other compatible tokens and decentralized applications on Ethereum. If all tokens created on the Ethereum network use the same standard, these tokens will be easily exchangeable and can easily work with other applications in the same ecosystem. We cannot fail to mention among their advantages the great liquidity they provide, since ERC-20 tokens are used as a working basis for most projects on blockchains.

Disadvantages of ERC-20 tokens

The most important thing to remember about ERC-20 tokens is that they can be created very easily , but that doesn’t mean they are completely secure . The basic data of the smart contract does not guarantee that the token will function correctly. As a result of the ease of creating tokens with ERC-20 , the market is flooded with unnecessary and, worse , fraudulent ICOs and tokens . Furthermore, these ERC-20 tokens can be lost if someone tries to transmit them to a wallet address without a smart contract.

ERC-20 tokens are underperforming , as the Ethereum network has been bogged down when DApps have seen high demand, such as CryptoKitties (which has since moved to its own Flow blockchain). When this happens, the network becomes slower and transactions become more expensive . Also transactions are slow where the blocking time is around 14 seconds, so transactions can take up to a minute to process.


Tokens created for cryptocurrencies that follow the guidelines specified by the Ethereum network are known as ERC20 tokens. 

They offer businesses and organizations a means of raising capital for their initiatives, and they have grown in popularity as a means of allowing investors to take part in the bitcoin market. 

For many years to come, ERC20 tokens are expected to play a significant role in the cryptocurrency ecosystem due to the Ethereum network’s ongoing expansion and development.

Guest article written by: Ragunath.T is a Digital Marketing Executive at BlockchainX . He designs marketing strategies with the intention of using high-quality content to educate and engage audiences. His specialties include social media marketing specialist and SEO, and he works closely with B2B and B2C businesses, providing digital marketing strategies  that gain social media attention and increase your search engine visibility.