ERC-20 is the common interface standard for fungible tokens on Ethereum. When users see an “ERC-20” label in a wallet or on an exchange, it does not refer to a single asset. It refers to a set of rules that tells token contracts how to expose balances, transfers, approvals, and event logs. That shared behavior is what lets wallets, exchanges, and dApps support a large number of tokens without building custom integrations for each one.
ERC-20 is a contract interface, not a coin
Within Ethereum, changes are proposed through EIPs. When a proposal focuses on application or token standards, people often refer to it as an ERC. In everyday usage, ERC-20 points to the finalized EIP-20 token standard. It requires contracts to implement core methods such as totalSupply, balanceOf, transfer, approve, transferFrom, along with the Transfer and Approval events. The token itself is a smart contract, not Ethereum’s native asset.
Why ERC-20 became the dominant token format
The appeal of ERC-20 is compatibility. If projects follow the same interface, wallets, hardware wallets, centralized exchange deposit and withdrawal systems, and DeFi protocols can support new assets much faster. Lower integration costs make listings easier and help liquidity build across the market. That created strong network effects: more ERC-20 assets led to more tooling, custody options, and deeper support, which pushed more projects toward the same format. The source also notes that common libraries such as OpenZeppelin and established audit patterns reduced development time and operational risk.
How transfers, approvals, and gas work
An ERC-20 transfer follows a clear chain of actions. A wallet creates an ABI-encoded call, the user signs it with a private key, and the transaction pays ETH for gas before validators include it in a block. The token contract updates balances and emits logs that explorers and indexers can read. One practical point stands out: even if the asset being moved is USDC, DAI, or USDT, the network fee is still paid in ETH.
Using tokens in a dApp often adds an approval step. The user first calls approve to set a spending allowance for a specific contract, then the protocol uses transferFrom to move tokens within that limit. The source stresses that users should avoid unlimited approvals when possible and reduce or revoke allowances after completing the intended action.
Where ERC-20 tokens are used in practice
ERC-20 covers a wide range of assets. Stablecoins such as USDC, DAI, and USDT, governance tokens like UNI, COMP, and MKR, and many utility or reward tokens all fit under the standard. They are widely used across DeFi, including DEX trading, lending, borrowing, liquidity pools, and yield farming. In a lending flow, a user approves and deposits tokens into a protocol. In a liquidity pool, a user deposits two tokens and receives LP tokens representing a share of the pool.
Key risks beginners need to watch
Standardization does not remove risk. The source highlights several recurring problems: users should verify token contract addresses to avoid spoofed assets, double-check recipient addresses because mistaken transfers are usually irreversible, and remember that not every token behaves perfectly across all integrations. Sending tokens to the wrong contract can also leave funds stuck. Approval risk matters as well, so spender addresses shown in a wallet should be checked on an explorer before signing.
For storage, software wallets are easier for routine DeFi activity but face greater exposure to phishing or device compromise. Hardware wallets keep keys offline and suit larger balances better. In either case, keeping some ETH for gas and checking the correct network and contract address remain basic steps when managing ERC-20 tokens.