What Are ERC-20 Tokens? How Ethereum Tokens Work

ERC-20 is a technical standard for fungible tokens on Ethereum. It defines a common set of functions and events that a token contract can use, so wallets, exchanges and other smart contracts can interact with many different tokens in a similar way.

“Fungible” means that one unit of a token is interchangeable with another unit of the same token. If you hold 10 units of a particular ERC-20 token, those units are generally equivalent to any other 10 units of that same token. This differs from a non-fungible token, where each item is distinct.

ERC-20 is not the name of one cryptocurrency. It is more like a shared technical blueprint. A project deploys a token contract that follows the standard, chooses details such as the token’s name and supply, and may add other features. USDC, USDT, LINK, UNI and WETH are examples of assets issued as ERC-20 tokens on Ethereum.

The standard is commonly called ERC-20, while its Ethereum Improvement Proposal is EIP-20. You may see both terms used. In ordinary conversation, “ERC-20 token” usually means a fungible token contract on Ethereum that supports the standard’s core interface.

The ERC-20 interface gives applications a predictable way to ask a token contract about balances or request transfers. A standard implementation includes functions such as:

• totalSupply, which reports the token’s current total supply.
• balanceOf, which reports the balance associated with an address.
• transfer, which lets a holder send tokens to another address.
• approve and allowance, which manage how much another address may spend on a holder’s behalf.
• transferFrom, which lets an approved address carry out a transfer within that allowance.

The standard also defines events, including Transfer and Approval. Events make token activity easier for wallets and other software to track from the blockchain’s transaction history.

Some commonly seen details are not mandatory in the same way as the core transfer interface. A token may provide a name, a ticker symbol and a number of decimal places for displaying fractions. A wallet can show a token as “1.25” even though the contract stores its balance as an integer in the token’s smallest units. The decimals setting controls that display convention; it does not change the token’s underlying value or guarantee that a token can be divided in practice.

A shared interface improves compatibility, but it does not make every token identical. Contracts may have extra rules or behaviors, so check the particular token before interacting with it.

An ERC-20 token is a smart contract on the blockchain, not a separate file or balance stored inside a wallet. The contract keeps track of token balances and applies its rules when a transaction calls its functions. Your wallet displays the address and balance associated with your account; it does not itself issue or hold the token.

A basic transfer works like this:

1. You enter a recipient address and amount in a wallet or application.
2. The wallet prepares a transaction that calls the token contract’s transfer function.
3. You review and sign the transaction with your wallet.
4. Ethereum validators process it, and the contract updates the recorded balances if its rules allow the transfer.

On Ethereum mainnet, you generally pay the network transaction fee in ETH, not in the ERC-20 token being transferred. A token swap or other smart-contract action can require more transaction work and therefore a different fee from a simple transfer. Fees vary with network conditions, so check the estimate shown by your wallet before approving.

Once a transaction is confirmed, its outcome is recorded on-chain and is normally irreversible. Sending to a wrong address, choosing the wrong network or interacting with an unintended contract can result in a loss. Take time to verify the transaction details before signing.

The phrase “ERC-20” is most precisely used for tokens on Ethereum. Other networks may support Ethereum-compatible contracts and have tokens that follow the same interface, but those tokens are on their respective networks. A token’s name or ticker alone does not tell you which network it is on.

For example, a token may be available on Ethereum and on one or more layer-2 networks or other blockchains. These versions can have different contract addresses and may rely on different bridges, issuers or deployment arrangements. They are not automatically interchangeable just because they share a ticker or similar branding.

Before sending or receiving a token, check all three details:

• Network: Confirm that the sending and receiving sides support the same chain.
• Contract address: Compare the address with a trustworthy, project-controlled source. Names and symbols can be copied by unrelated contracts.
• Wallet support: Make sure the receiving wallet or exchange supports deposits of that asset on that network.

If a service provides a deposit network selector, choose the network that matches the transaction exactly. Sending an asset to a service over an unsupported network may make recovery difficult or impossible. A bridge can move assets between networks, but using one adds separate contract, liquidity and operational risks.

ETH and ERC-20 tokens both operate in the Ethereum ecosystem, but they are different kinds of assets. ETH is Ethereum’s native asset. It is used to pay for transactions on the Ethereum network and is not issued by an ERC-20 token contract. ERC-20 tokens are created and managed by individual smart contracts.

That distinction affects everyday use. If you transfer an ERC-20 token on Ethereum mainnet, you normally need ETH in your wallet to cover the network fee. Holding a large token balance without any ETH may leave you unable to move or use it until you obtain ETH for fees.

A token can represent many things: a stablecoin, a project’s governance or utility token, a wrapped version of another asset, or a claim governed by a particular issuer or protocol. The ERC-20 standard describes how a contract can be used; it does not define what the token represents.

Wrapped ETH, often called WETH, illustrates the difference. It is an ERC-20 token designed to represent ETH in a form that smart contracts can handle using the token interface. ETH and WETH are related, but they are not the same asset at the contract level. Converting between them requires a transaction, and using WETH does not eliminate network fees.

A common reason projects use ERC-20 is interoperability. Because many Ethereum applications understand the standard interface, a token can be integrated into wallets, decentralized exchanges and lending protocols without each application needing a unique way to read balances or request transfers.

Typical uses include:

• Payments and stablecoins: Tokens may be used to transfer value or represent a stablecoin, subject to the token’s issuer, design and risks.
• Trading: A decentralized exchange such as Uniswap can use ERC-20 contracts as the assets in token swaps and liquidity pools.
• Lending: DeFi protocols such as Aave can accept supported tokens for deposits or borrowing. Support for one token does not mean every ERC-20 is accepted.
• Protocol participation: Some projects issue tokens that provide voting rights or other functions under their own rules.
• Tokenized assets: A contract may represent a claim or interest linked to an asset outside the blockchain, though the standard itself does not verify that claim.

Lido’s stETH is an example of a token used in Ethereum-based applications: it represents a staked-ETH position under Lido’s protocol design and can be used in some DeFi services. Availability and terms vary by application. A token being ERC-20-compatible does not guarantee that a particular wallet, exchange or protocol supports it.

A wallet that supports Ethereum can usually display and send many ERC-20 tokens, but it may not automatically show every token. Adding a token to a wallet interface generally means entering or selecting its contract address; it does not create the token or prove that the contract is legitimate.

To check a token before using it:

1. Find the contract address through the project’s official channels or another source you can independently verify. Do not rely on a search result, unsolicited message or ticker symbol alone.
2. Confirm that the address is for the network you intend to use. Similar-looking tokens may exist on multiple networks.
3. Review the contract and project details. Check what the token claims to represent, whether the supply or transfer rules can change, and whether the project has explained its control mechanisms.
4. If you are sending funds, verify the recipient and amount on your wallet’s confirmation screen. Consider a small test transfer when appropriate, while remembering that it also incurs a fee.
5. Keep enough of the network’s native asset for fees, and protect your wallet’s recovery phrase and signing device.

A token tracker or wallet balance is useful for viewing activity, but a displayed price or label is not proof of value, backing or safety. When in doubt, pause rather than signing a transaction you do not understand.

The ERC-20 label is not a safety certification. The standard does not assess a token’s issuer, financial backing, investment merits, contract security or likelihood of retaining value. Anyone with the technical ability to deploy a contract may create a token with a familiar name or symbol, so a token’s branding is not enough to establish authenticity.

Token contracts can also include features beyond basic transfers. Depending on their design and controls, a project may be able to change settings, pause transfers, restrict certain addresses, mint more tokens or apply transfer fees. Some contracts have administrator permissions; others may be designed without them. Read the project’s documentation and examine what controls exist rather than assuming all ERC-20 tokens behave alike.

Approvals deserve special care. When you approve a DeFi application to spend tokens, you grant a specific contract permission to transfer some or all of those tokens within the allowance. Review the spender address and amount, and avoid granting broad permissions when a smaller allowance will do. You can use a reputable wallet feature or contract-permission tool to review and revoke permissions you no longer need, but revoking may require a transaction fee.

Treat unexpected airdrops, unsolicited token links and requests to “claim” or “unlock” tokens cautiously. Never share a recovery phrase or sign a transaction just because a website or message says it is required.

ERC-20 is one of several Ethereum token standards. Each standard is designed for a different type of asset or interaction, so the right comparison is not that one is universally better, but that different applications need different interfaces.

Standard	Common purpose	Main distinction
ERC-20	Fungible tokens	Common balances, transfers and spending permissions
ERC-721	Non-fungible tokens	Each token is individually identifiable
ERC-1155	Multiple token types	One contract can manage fungible and non-fungible token types

ERC-20 works well when units of the same token are interchangeable, such as a stablecoin or a conventional project token. ERC-721 is often used where each item has its own identity, such as a collectible. ERC-1155 can support multiple token types within one contract, which can be useful for applications with mixed assets.

These categories do not describe a token’s economic or legal status. An ERC-20 contract can represent a wide range of claims or uses, and an ERC-721 contract does not automatically prove ownership of an off-chain item. The standard only provides technical conventions for interacting with a contract.

If an application says it supports ERC-20, confirm which specific tokens and networks it accepts. Compatibility with the standard is a starting point for integration, not a promise that every token will work in every application.

ERC-20 made it easier for Ethereum applications to work with fungible tokens through a shared interface. It explains why a wide range of assets can appear in the same wallet and be used across compatible exchanges and DeFi protocols. But the standard is only a technical convention: it does not guarantee a token’s legitimacy, value, backing, security or support on a particular network.

Before interacting with an ERC-20 token, keep the practical checks in mind:

• Verify the token contract address and the network.
• Confirm that the receiving wallet or service supports that exact asset and network.
• Keep the network’s native asset available for transaction fees.
• Understand what an approval permits before granting it.
• Review the project’s claims and contract controls instead of relying on a name, symbol or displayed price.

For token swaps, a decentralized exchange such as Uniswap may support selected ERC-20 assets. For lending, Aave supports specific markets and assets rather than every token that follows the standard. Always check the application’s current supported assets, network and transaction details before committing funds.

If you are new to tokens, start by learning how your wallet presents the network, contract address and transaction approval. A short pause to verify those details can help prevent mistakes that are difficult to undo.