What are ERC-20 Tokens?

Ethereum stands out as a unique crypto software platform in the blockchain world, offering a diverse range of functionalities. Unlike other blockchains such as Bitcoin, which primarily handle peer-to-peer transactions, Ethereum operates through smart contracts and supports thousands of decentralized applications (dApps) on its network. Think of Ethereum as an app store for a phone, where users can download a variety of applications, each with different use cases.

What's unique about these applications running on Ethereum is that each contains tokens with different functionalities and interoperability within the network. These are referred to as "ERC-20" tokens, otherwise known as Ethereum Request for Comment. Interestingly, these tokens have experienced significant price spikes over the years, attracting considerable attention from investors and crypto enthusiasts. Let's take a closer look at ERC-20 tokens.

ERC-20 tokens are standards for creating fungible tokens within the Ethereum blockchain. They are designed to facilitate easy and consistent development of new tokens with interoperability across Ethereum. By adhering to the ERC-20 standard, developers ensure that their tokens can interact seamlessly with various dApps, exchanges, and wallets within the Ethereum ecosystem.

Still confused? Let's think of ERC-20 tokens differently: Think of ERC-20 tokens as USB devices of the blockchain world; just as USB devices can connect with a wide range of computers and gadgets due to a standardized interface, ERC-20 tokens can operate across various Ethereum-based applications because they share a common set of rules.

This standard addresses a need for functionality in tokens, which can range from representing digital currency to signifying ownership of assets, or even voting rights within decentralized organizations. ERC-20 tokens are fundamental to the functioning of numerous applications built on Ethereum.

The Technical Standards of ERC-20

The ERC-20 standard specifies a set of rules and functions that tokens must implement to achieve compliance, ensuring they operate seamlessly within the Ethereum ecosystem. Here are some key functions defined by the ERC-20 standard:

totalSupply: Provides the total number of tokens in circulation.
balanceOf: Returns the number of tokens held by a specific address.
transfer: Allows tokens to be transferred from one account to another.
approve and allowance: Enable a delegate approved by the token owner to spend a specified amount of tokens on their behalf.

Additionally, ERC-20 includes event notifications such as:

Transfer: Emitted when tokens are transferred, including when tokens are created or destroyed.
Approval: Emitted when one account authorizes another to manage its tokens.

These functions and events ensure that all ERC-20 tokens follow a common framework, making it easier for developers to predict how new tokens will function within the Ethereum ecosystem.

Common Uses and Functions of ERC-20 Tokens

ERC-20 tokens are versatile because they can support a broad range of functionalities on Ethereum.

Here are some of the most common uses of ERC-20 tokens:

Governance: Many decentralized platforms use ERC-20 tokens to grant voting rights, allowing token holders to participate in decision-making processes about the platform's future.
Staking: Holders of certain ERC-20 tokens can stake their tokens as a way to support network operations, earning rewards in return.
DeFi Applications: ERC-20 tokens are widely used in decentralized finance (DeFi) applications for activities such as lending, borrowing, and yield farming, enabling a host of financial services without the need for traditional financial intermediaries.
Utility: Tokens can also serve specific purposes within particular ecosystems, such as paying for services, accessing platform-specific features, or redeeming rewards.

Known ERC-20 Tokens

The Ethereum network hosts a diverse array of ERC-20 tokens, each designed with distinct functions and roles within the broader ecosystem. Here are some notable examples:

Aave (AAVE): Aave is a decentralized finance protocol that allows people to lend and borrow crypto. AAVE tokens are used for governance and staking, allowing token holders to vote on decisions affecting the platform and help secure the Aave protocol.
MakerDAO (MKR): Maker is a foundational DeFi protocol behind the stablecoin DAI, which is pegged to the US dollar. MKR tokens are used in the governance of the Maker protocol.
Chainlink (LINK): Chainlink is a decentralized oracle network that provides external data to Ethereum smart contracts. LINK tokens are used to pay for services on the network, such as data requests.
Uniswap (UNI): Uniswap is a popular decentralized trading protocol, known for facilitating automated trading of decentralized finance tokens. UNI allows token holders to vote on changes to the protocol.

The Future of ERC-20 Tokens

ERC-20 tokens have positively impacted the Ethereum network, allowing for a wide range of applications to operate and to be utilized within Ethereum. Historically, these tokens have attracted significant interest due to their relatively low prices for potentially high returns, providing investors with substantial profits. Whether for governance, decentralized finance, data verification, or trading, ERC-20 tokens equip users to actively participate in this expanding digital economy.

For those looking to explore the opportunities that ERC-20 tokens offer, platforms like iTrustCapital allow investors to buy and sell a variety of ERC-20 tokens through tax-advantaged retirement accounts. To learn more about why people are opening Crypto IRAs, take a look below.

Top 5 Reasons To Open A Crypto IRA

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