What is ERC-20?

How can one wallet support many different tokens without being rebuilt from scratch for each one? Think of ERC-20 as a common standard for power outlets: every appliance does a different job, but the connection follows the same rules.

A smart contract that follows ERC-20 provides specific functions: it shows the total supply and the balance of an address, and it allows token transfers. It also includes an approval mechanism, so the holder can allow another address or app to transfer tokens on their behalf, up to a set limit.

These tokens are interchangeable with each other within the same token: one unit plays the same role as any other unit of that token. This sets them apart from NFTs, where each token can represent something unique. It doesn’t mean that two different ERC-20 tokens have the same value.

Why it matters

The common standard lets wallets, decentralized exchanges and decentralized finance (DeFi) apps use the same basic infrastructure for many tokens. We see this compatibility as ERC-20’s big advantage: developers don’t have to reinvent the wheel every time a new token is issued.

For you, the practical difference shows up in transfers. If you hold an ERC-20 token in your own wallet on Ethereum, you usually need ETH for the execution fee, i.e. gas. ETH is the network’s native coin and is not itself an ERC-20 token.

What to watch out for

The ERC-20 label isn’t a certificate of safety. A token can follow the standard and still have dangerous functions, transfer restrictions or admin privileges that let the issuer change critical parameters.

Before a transfer, check that the recipient supports that specific token on that specific network. The same name or ticker isn’t enough: you need to check the contract address. In apps, also watch out for spending approvals. An unlimited approval can allow your entire balance of that token to be transferred if the authorized party is malicious or gets hacked.