ERC-20 Token Standard

The ERC-20 token standard is a technical specification for fungible tokens created on the Ethereum blockchain. Introduced in November 2015 by Fabian Vogelsteller through EIP-20, it has become the most widely adopted token standard in the blockchain ecosystem, enabling interoperability between different applications and exchanges.

Core Functions and Events

The ERC-20 standard defines a common interface that all compliant tokens must implement:

Required Functions

function totalSupply() public view returns (uint256)
function balanceOf(address account) public view returns (uint256)
function transfer(address recipient, uint256 amount) public returns (bool)
function allowance(address owner, address spender) public view returns (uint256)
function approve(address spender, uint256 amount) public returns (bool)
function transferFrom(address sender, address recipient, uint256 amount) public returns (bool)

Required Events

event Transfer(address indexed from, address indexed to, uint256 value)
event Approval(address indexed owner, address indexed spender, uint256 value)

Optional Metadata Functions

function name() public view returns (string)
function symbol() public view returns (string)
function decimals() public view returns (uint8)

How ERC-20 Tokens Work

Token Ownership and Balances

  • Each token holder's balance is tracked in a mapping of addresses to amounts
  • The sum of all balances equals the total supply
  • Tokens are transferred between addresses using the transfer and transferFrom functions

Delegation Model

ERC-20 implements a delegation model allowing third parties to transfer tokens on a user's behalf:

  1. The token owner approves a spender address to spend a specific amount with approve()
  2. The approval is recorded in an allowance mapping
  3. The approved spender can transfer tokens from the owner's address using transferFrom()
  4. Each transfer reduces the allowance until it reaches zero

Technical Implementation

A basic ERC-20 token implementation in Solidity looks like this:

contract ERC20Token {
    string public name;
    string public symbol;
    uint8 public decimals;
    uint256 public totalSupply;
    
    mapping(address => uint256) private _balances;
    mapping(address => mapping(address => uint256)) private _allowances;
    
    constructor(string memory _name, string memory _symbol, uint8 _decimals, uint256 _initialSupply) {
        name = _name;
        symbol = _symbol;
        decimals = _decimals;
        totalSupply = _initialSupply;
        _balances[msg.sender] = _initialSupply;
    }
    
    function balanceOf(address account) public view returns (uint256) {
        return _balances[account];
    }
    
    function transfer(address recipient, uint256 amount) public returns (bool) {
        require(_balances[msg.sender] >= amount, "Insufficient balance");
        
        _balances[msg.sender] -= amount;
        _balances[recipient] += amount;
        
        emit Transfer(msg.sender, recipient, amount);
        return true;
    }
    
    // Additional functions for approve, transferFrom, allowance, etc.
}

Common Extensions and Improvements

Several extensions to the ERC-20 standard address various limitations:

  • ERC-223: Prevents tokens from being lost when sent to contracts not designed to handle them
  • ERC-777: Adds hooks allowing contracts to react to token transfers while remaining compatible with ERC-20
  • ERC-1363: Enables callback functions after token transfers or approvals
  • ERC-2612: Adds permit function for gasless approvals using off-chain signatures
  • ERC-4626: Standard for tokenized vaults, building on ERC-20 for yield-bearing tokens

Applications in DeFi

ERC-20 tokens serve as foundational building blocks for decentralized finance:

  • Stablecoins: Tokens pegged to external assets (USDC, DAI, USDT)
  • Governance Tokens: Voting rights in decentralized protocols (UNI, COMP, AAVE)
  • Utility Tokens: Used to access protocol services or pay fees (LINK, GRT)
  • Wrapped Assets: Tokenized versions of assets from other blockchains (WBTC, WETH)
  • Liquidity Pool Tokens: Representing ownership of assets in decentralized exchanges

Limitations and Challenges

Despite its widespread adoption, ERC-20 has several known limitations:

  • Lost Tokens: Tokens sent to contracts not implementing token retrieval functions may be permanently lost
  • Approval Frontrunning: Vulnerable to frontrunning attacks when changing allowances
  • Limited Metadata: No standard mechanism for rich metadata or associated resources
  • Inefficient Approvals: Requires two transactions for delegated transfers (approve and transferFrom)
  • Gas Costs: Transfer costs remain significant during periods of network congestion

Security Considerations

Common security issues with ERC-20 implementations include:

  • Integer Overflow/Underflow: Without proper checks, arithmetic operations can wrap around
  • Reentrancy Vulnerabilities: External calls during transfers can lead to reentrancy attacks
  • Frontrunning: Transaction ordering manipulation can be exploited by miners/validators
  • Double-Entry Point Attacks: Multiple functions affecting the same state can lead to inconsistencies
  • Fee-on-Transfer Tokens: Non-standard implementations that take fees can break composability

Impact and Significance

The ERC-20 standard has had a profound impact on the blockchain ecosystem:

  • Enabled the 2017-2018 ICO boom and subsequent token economy
  • Created a foundation for interoperable financial applications
  • Established patterns for cross-platform token support
  • Enabled standardized exchange listings and wallet integrations
  • Inspired token standards on other blockchains (BEP-20, TRC-20)

The ERC-20 standard remains the most widely used token interface in the Ethereum ecosystem, with thousands of tokens deployed and trillions of dollars in cumulative transaction volume.