Understanding ERC20 Tokens and Their Function in the Ethereum Ecosystem

March 07, 2023

1 min read

Before we jump into what ERC20 was, let’s have a look back at where did it come from and why ERC20 has built. Note that ERC20 or Ethereum Request for Comments is designed and used only in the Ethereum platform.

Ethereum is an open-source platform that provides a smart contract feature and encourages developers to build Dapps on top of it. Users can exploit the SMART CONTRACT feature to build up their own tokens and exchange them for goods, services, or even Ethers. Those activities lead to the creation of Tokens to pay for a system or ICO events to raise funds.

Before there was the ERC20 standard, everyone who wants to create a token had to reinvent the code. It means that each token contract was slightly different and that exchanges and wallets had to write custom code to support their tokens.

That’s why the Ethereum community come up with creating ERC20 token standards.

ERC20 is a list of standards and rules that every developer has to apply to every ERC20 token they will make on the Ethereum network. They purposely set these standards so that all tokens have the same uses and functions in the Ethereum Platform. These standards consist of three optional rules and six mandatory functions.

OPTIONAL

Token Name
Symbol
Decimal

Create Token (Photo credits: http://thetokenfactory.com/#/factory)

This is an example of how to create a token. You fill out the information needed, the token name, symbol, decimal, and total supply to have your own token. It very easy to use you just have to fill it out and the website will create a token contract for you then add it through the Ethereum blockchain.

To be more familiarize please visit: http://thetokenfactory.com/#/factory.

MANDATORY

TotalSupply
BalanceOf
Transfer
TransferFrom
Approve
Allowance

Function

However, tokens can trade like Bitcoin, Ethereum, and other cryptocurrencies, but unlike these cryptocurrencies, tokens do not have their own blockchain. They are created through a SMART CONTRACT and run on Ethereum’s blockchain. SMART CONTRACT is used to facilitate the transactions of tokens, and record balances of tokens in an account.