Building on Ethereum: Why ERC-20 Became the Standard for Token Creation

When Ethereum first emerged as an open-source platform for decentralized applications, developers faced a critical problem: there was no unified way to create tokens. Every project rolled their own solution, leading to compatibility nightmares. Wallets couldn’t recognize tokens consistently, exchanges struggled to list new assets, and the whole ecosystem fragmented. That’s where ERC-20 came in—not as a revolutionary technology, but as a practical agreement on how tokens should behave.

The Problem That ERC-20 Solved

Before the ERC-20 standard, developers building on Ethereum encountered serious friction. Transaction congestion meant skyrocketing gas fees, and without standardized token mechanics, integrating new assets into existing protocols was painfully manual. Projects couldn’t easily interact with one another because there was no shared language for token transfers and approvals.

The solution wasn’t rocket science—it was standardization. Fabian Vogelsteller proposed a simple set of rules that every token would follow. His proposal was submitted to Ethereum’s GitHub as an “Ethereum Request for Comment,” which received the designation ERC-20 (it happened to be the 20th comment). The Ethereum developer community approved it, and by 2015, it became official as an Ethereum Improvement Proposal (EIP-20).

How ERC-20 Tokens Actually Work

ERC-20 tokens are built on smart contracts—self-executing code that runs on the Ethereum Virtual Machine (EVM). Think of it like a vending machine: you insert money, the machine verifies the payment, and automatically dispenses your item. Similarly, once conditions are met, smart contracts execute predetermined actions.

All ERC-20 tokens are fungible, meaning each token is identical and interchangeable. When you send 1 UNI to someone, they receive exactly the same value as anyone else receiving 1 UNI. This uniformity is what makes the standard so powerful—it guarantees that any wallet, exchange, or application knows exactly how to handle these tokens.

The token creation process is straightforward: developers define parameters (total supply, decimal places, symbol, name), deploy the smart contract, and tokens are generated automatically when conditions are triggered. Token holders don’t just get tradable assets—they often receive governance rights, staking opportunities for passive returns, or access to specific protocols.

Why ERC-20 Became Essential Infrastructure

The introduction of the ERC-20 standard transformed Ethereum from a fragmented experiment into a cohesive ecosystem. Several factors explain why it remains dominant:

Seamless Interoperability: Before ERC-20, moving tokens between projects was complex and unreliable. The standard allows tokens to move across any compatible wallet, DEX, or application without friction. If you own tokens for one project, you can instantly exchange them for tokens from another project following the same standard.

Built-In Security Features: Because ERC-20 tokens live on Ethereum, they inherit the network’s security architecture—decentralization, immutability, and cryptographic verification. This prevents unauthorized token creation, theft, or manipulation of supplies. Every transaction is recorded on the blockchain, creating an auditable trail that deters bad actors.

Radical Transparency: All token movements are permanently recorded on the public ledger. Developers and users can instantly verify token authenticity, track holdings, and confirm transactions. This transparency extends beyond just transactions; it applies to the code itself, which anyone can audit.

Exceptional Liquidity: ERC-20 tokens can be traded on hundreds of centralized and decentralized exchanges. This availability makes them highly liquid, allowing investors to enter and exit positions quickly in the volatile crypto markets. Higher liquidity directly translates to better price discovery and tighter spreads.

Developer-Friendly Customization: Token creators have flexibility within the standard’s constraints. They can set maximum supplies, adjust decimal precision, add custom functions, or layer additional logic on top. Tools like MetaMask and MyETherWallet make deployment and management accessible even to less technical creators, driving innovation.

The Real Limitations Developers Face

However, ERC-20 isn’t perfect, and understanding its constraints matters for serious builders:

Inflexibility for Complex Use Cases: The standard prioritizes compatibility over functionality. Tokens can’t perform certain sophisticated operations—like batch transfers with conditional logic or advanced atomic swaps. Developers needing these features must either work around the standard or adopt alternative token types.

Transaction Costs Remain Substantial: Gas fees continue to be a pain point. The cost to transfer an ERC-20 token fluctuates based on network congestion and your willingness to pay for priority. For small transactions or low-income users, these fees can exceed the token’s actual value, making casual transactions impractical.

Limited Exchange Support: Not every trading platform accepts ERC-20 tokens. While support is widespread, certain exchanges restrict listings or don’t integrate specific tokens, artificially limiting liquidity for newer or less popular projects.

Smart Contract Incompatibility: This is the silent killer. If you send ERC-20 tokens to a smart contract that wasn’t designed to receive them, those tokens can vanish permanently. The standard can’t prevent this because receiving contracts aren’t required to recognize incoming ERC-20 transfers. It’s a UX catastrophe that catches users off guard.

ERC-20 in the Real World

The standard’s success is evident in the tokens that dominate the market:

Tether (USDT): Originally built as an ERC-20 token on Ethereum, USDT is a stablecoin pegged 1:1 to the U.S. dollar. It’s become the most-traded asset pair on centralized exchanges, demonstrating massive demand for standardized, stable digital assets that follow the ERC-20 framework.

Uniswap (UNI): The Uniswap DEX’s governance token is an ERC-20 token. UNI holders vote on protocol changes through scientific governance mechanisms—pure democracy enforced by code. One UNI locked in a voting contract equals one vote, and this model has become the template for DAO governance across Ethereum.

Maker (MKR): The MakerDAO protocol issues MKR as its ERC-20 governance token. MKR holders collectively manage the protocol and vote on risk parameters for Dai, the protocol’s decentralized stablecoin. This model shows how ERC-20 tokens can power complex financial infrastructure.

Binance Coin (BNB): Initially launched as an ERC-20 token, BNB demonstrates how a centralized entity’s token can benefit from Ethereum’s infrastructure before migrating to its own blockchain. The token’s acceptance on multiple exchanges showcases the standard’s liquidity advantages.

The Evolution Beyond ERC-20

While ERC-20 dominates, the Ethereum ecosystem has developed complementary standards for specialized use cases:

• ERC-721: The NFT standard—tokens that are unique and non-interchangeable, perfect for digital collectibles and art.
• ERC-777: Enhanced token transfers with better privacy and recovery options for lost keys.
• ERC-1155: Multi-token standard allowing efficient transfers of both fungible and non-fungible assets in single transactions, saving hundreds in gas fees.
• ERC-165: Enables smart contracts to declare which interfaces they support, improving inter-contract communication.
• ERC-223: Attempts to solve accidental token loss by allowing receivers to reject transfers.

These standards coexist with ERC-20, each solving specific problems while maintaining interoperability with the broader ecosystem.

The Takeaway

The ERC-20 standard represents a watershed moment in blockchain development—the moment when Ethereum ecosystem participants agreed on basic rules. That agreement unlocked an explosion of applications, tokens, and financial primitives. It’s not technically sophisticated or cutting-edge anymore, but that’s exactly the point. The best standards are invisible—they just work.

For developers building on Ethereum, ERC-20 remains the default choice for fungible tokens. It balances flexibility, security, and simplicity in a way that’s difficult to replicate. Understanding how ERC-20 works isn’t just academic—it’s essential for anyone serious about participating in the Web3 economy.

Common Questions About ERC-20

What does ERC-20 actually stand for? Ethereum Request for Comment, number 20. It’s the formal technical standard governing how fungible tokens function on the Ethereum blockchain.

How is ERC-20 different from ETH itself? ETH (Ether) is Ethereum’s native token—the fuel that powers the network and compensates validators. ERC-20 is a blueprint for creating additional tokens on top of Ethereum. One is the base layer; the other is the standard for everything built above it.

Is ERC-20 synonymous with Ethereum? No. Ethereum is the network; ERC-20 is one standard among many for creating tokens on that network. They’re related but distinct concepts.

Which wallet is best for holding ERC-20 tokens? Many solid options exist—MetaMask, MyEtherWallet, hardware wallets with Ethereum support, and others. The best wallet depends on your security requirements and feature preferences. Research thoroughly before committing funds.