What is ERC20 and What is its Use in 2025?

Ethereum is a decentralised platform that uses blockchain technology to replace traditional third-party internet vendors responsible for data storage and management of complex financial instruments.

It has become a giant network in the blockchain space,  with numerous nodes—computing power provided by dedicated volunteers—collaborating to function as a decentralised ‘world computer’. This design empowers users globally to control their data through a distributed computing platform, enabling new projects to build services atop the Ethereum infrastructure.

The Role of Ether in the Ethereum Network

To interact with the Ethereum network, users pay for computational services using Ether, the platform’s native cryptocurrency. Ether serves as the medium of exchange within the Ethereum ecosystem, facilitating transactions and compensating participants who contribute computational resources. Beyond its primary function, Ether can represent various assets or tokens on the platform, allowing for the buying, selling, or trading of digital assets that may correspond to real-world items like property, vouchers, or IOUs.

What is the Difference Between Ethereum and Bitcoin?

Ethereum and Bitcoin are the two most well-known blockchain networks, but they serve different purposes.

Bitcoin was designed as a peer-to-peer digital currency, enabling users to send and receive payments without a central authority. It operates on a decentralised ledger known as the Bitcoin blockchain, where transactions are recorded and verified using the Proof-of-Work (PoW) consensus mechanism. The network’s primary function is to provide a secure and censorship-resistant means of transferring value.

Ethereum functions as a decentralised platform for smart contracts and dApps. While it also uses blockchain technology, Ethereum expands on Bitcoin’s model by allowing developers to deploy self-executing contracts and create their own tokenised assets. Instead of only facilitating transactions, Ethereum enables programmable agreements that execute automatically when specific conditions are met.

One of the key differences is Ethereum’s ability to support tokens. Bitcoin operates solely as a cryptocurrency, whereas Ethereum provides a framework for creating and managing digital assets, such as ERC-20 tokens, ERC-721 (NFTs), and ERC-1155 (multi-purpose tokens). This flexibility has made Ethereum the backbone of decentralised finance (DeFi) and the wider blockchain ecosystem.

What is an ERC-20 Token?

ERC-20 is the most widely adopted token standard on the Ethereum blockchain. The term ERC-20 stands for Ethereum Request for Comment 20, which refers to the technical specification that defines a set of rules for fungible tokens.

These rules ensure that all ERC-20 tokens share a common framework, allowing them to be compatible with Ethereum-based applications, wallets, and decentralised exchanges (DEXs). The introduction of ERC-20 has standardised token creation, enabling developers to launch new digital assets without needing to build unique blockchain protocols from scratch.

The ERC-20 standard specifies essential functions such as:

• Determining the total supply of a token
• Checking the balance of wallet addresses
• Enabling token transfers between users
• Approving smart contracts to spend tokens on behalf of users

How are ERC-20 Tokens Used in Decentralised Finance (DeFi)?

Decentralised Finance (DeFi) has emerged as one of the most impactful use cases for Ethereum and ERC-20 tokens. DeFi refers to a financial ecosystem that operates without intermediaries, offering services like lending, borrowing, trading, and yield farming through smart contracts. ERC-20 tokens play a crucial role in DeFi applications, serving as:

Stablecoins

Tokens pegged to real-world assets, such as US dollars or gold, provide a stable medium of exchange within the DeFi space. Examples include USDT (Tether), USDC (USD Coin), and DAI (MakerDAO).

Governance Tokens

Many DeFi platforms use ERC-20 governance tokens to give users voting rights on protocol changes. Holders of these tokens can influence decisions such as interest rates, liquidity pool incentives, and protocol upgrades. Examples include UNI (Uniswap) and COMP (Compound).

Lending and Borrowing

Platforms like Aave and Compound allow users to deposit ERC-20 tokens into liquidity pools, earning interest or borrowing assets without needing a central authority.

Liquidity Provision

Decentralised exchanges (DEXs) such as Uniswap, SushiSwap, and Curve enable peer-to-peer trading of ERC-20 tokens without intermediaries. Users can provide liquidity by locking their tokens into smart contracts and earning a portion of trading fees in return.

Staking and Yield Farming

 Users can stake ERC-20 tokens in liquidity pools to earn rewards. Many DeFi protocols offer staking mechanisms that incentivise users to contribute liquidity and secure networks.

The interoperability of ERC-20 tokens within DeFi applications has driven exponential growth in the industry. Billions of dollars in assets are now locked in DeFi protocols, demonstrating the demand for Ethereum-based financial services.

What are the Most Popular ERC-20 Tokens?

Over the years, ERC-20 tokens have gained widespread adoption across various sectors, from stablecoins and DeFi to gaming and metaverse projects. Some of the most widely used ERC-20 tokens include:

1. Tether (USDT)

USDT is the largest stablecoin by market capitalisation. It is pegged to the US dollar and widely used for trading and payments within the cryptocurrency ecosystem.

2. USD Coin (USDC)

Similar to Tether, USDC is a regulated stablecoin backed by cash reserves and government bonds. It is used in DeFi lending, cross-border payments, and institutional trading.

3. DAI

DAI is a decentralised stablecoin issued by MakerDAO. Unlike USDT and USDC, which are backed by centralised reserves, DAI is collateralised by cryptocurrencies locked in Ethereum smart contracts.

4. Uniswap (UNI)

UNI is the governance token of Uniswap, the largest decentralised exchange on Ethereum. UNI holders can vote on protocol upgrades and governance decisions affecting the Uniswap ecosystem.

5. Chainlink (LINK)

Chainlink provides decentralised oracles that feed real-world data into smart contracts. LINK tokens are used to compensate node operators who supply data for DeFi applications and blockchain networks.

6. Aave (AAVE)

AAVE is the native token of Aave, one of the leading DeFi lending protocols. It allows users to borrow, lend, and earn interest on ERC-20 tokens in a decentralised manner.

7. Wrapped Bitcoin (WBTC)

WBTC is an ERC-20 token that represents Bitcoin on Ethereum. It enables BTC holders to use their Bitcoin in DeFi applications, providing liquidity and earning rewards on the Ethereum network.

8. The Sandbox (SAND) and Decentraland (MANA)

Both SAND and MANA are ERC-20 tokens used within blockchain-based metaverse projects. These tokens facilitate transactions within virtual worlds, allowing users to buy digital land, NFTs, and in-game assets.

Creation and Functionality of ERC-20 Tokens

ERC-20 tokens are generated through smart contracts—self-executing contracts where the terms are directly embedded in code. These smart contracts autonomously manage transactions between wallet addresses, maintaining records of each address’s token balance and overseeing the total token supply. The ERC-20 standard outlines six mandatory functions that every compliant token must implement:

1. totalSupply: Specifies the total number of tokens in existence.
2. balanceOf: Returns the token balance of a specific address.
3. transfer: Enables the transfer of tokens from the total supply to a user.
4. transferFrom: Facilitates the transfer of tokens between users.
5. approve: Authorises a smart contract to distribute tokens, ensuring the total supply is not exceeded.
6. allowance: Checks that an address has sufficient balance to transfer tokens to another address.

These functions provide a consistent framework, allowing developers to create tokens that can seamlessly integrate with existing applications and platforms within the Ethereum ecosystem.

Challenges and Considerations with ERC-20 Tokens

While the ERC-20 standard has been instrumental in the proliferation of Ethereum-based tokens, it is not without challenges. One notable issue is the potential for inconsistencies in how developers implement the standard, leading to interoperability problems among tokens. Additionally, the relative ease of creating ERC-20 tokens has led to an influx of tokens, some of which may lack substantial value or utility, raising concerns about the proliferation of trivial or risky assets within the network.

In summary, Ethereum’s ERC-20 standard has played a pivotal role in shaping the landscape of decentralised applications and digital assets. By providing a clear framework for token development, it has facilitated innovation and growth within the blockchain space, while also highlighting the need for careful consideration in token creation and implementation.