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Yasmine Hafza
June 8, 2024
Getting Started with ERC-20 Tokens
Unlock the Power of Ethereum's Digital Assets

Ever since Bitcoin’s launch in 2009, cryptocurrencies have revolutionized the finance sector like never before. This shift has democratized access to financial services, spurred innovation in decentralized applications (dApps), and challenged traditional banking systems.

ERC-20 is crucial for the cryptocurrency landscape because it provides a standardized set of rules for creating and managing tokens on the Ethereum blockchain. Analogically, ERC-20 is like a recipe that helps people create their own digital coins (tokens) on the Ethereum platform. Basically, ERC-20 is a standard that ensures all these digital coins follow the same basic guidelines, which makes it easier for tokens to be used, traded, and stored in the same way across different applications and platforms. 

This article will cover everything you need to know about ERC-20 tokens, from the basics, benefits, creation, comparison with other tokens, security measures, to learning tips on how to invest with them.

What is ERC-20 and How Does it Work?

Overview of ERC-20 Tokens

ERC-20 Tokens are a set of rules that allow for the creation and deployment of tokens on the Ethereum blockchain, ensuring these tokens can interact with each other and the network seamlessly. 


Fungibility

ERC-20 tokens are fungible, meaning each token is identical in value and function to any other token within the same smart contract. This property makes them interchangeable and useful as currency, shares, or points where uniformity is essential.


Uses
 

ERC-20 tokens can serve various purposes such as representing assets, voting rights, or as a currency within a decentralized application (dApp). They can be used in fundraising through Initial Coin Offerings (ICOs), where new projects sell tokens to raise capital​.


Smart Contracts

ERC-20 tokens operate through smart contracts, which are self-executing programs on the Ethereum blockchain. These smart contracts define the rules for token transactions, manage balances, and enforce ownership, all without the need for a central authority. 


Core Functions

The ERC-20 standard mandates several functions and events to ensure consistent behavior across all tokens, such as:

  • transfer: Moves tokens between addresses, crucial for facilitating transactions.
  • approve: Allows an owner to authorize another address to spend tokens on their behalf.
  • transferFrom: Enables approved addresses to transfer tokens on behalf of the owner.
  • balanceOf: Queries the balance of an address.
  • totalSupply: Indicates the total token supply.
  • allowance: Shows the number of tokens that an approved spender can transfer from the owner’s balance​

How ERC-20 Tokens Work

Creating ERC-20 Tokens

ERC-20 stands for "Ethereum Request for Comments 20." It is a standard protocol that outlines the technical requirements for creating new tokens, rather than being a software or program. It ensures tokens meet specific criteria to be recognized as ERC-20 tokens and be issued on the Ethereum network. 

These tokens are created as smart contracts on the Ethereum blockchain, using the Solidity programming language. An ERC-20 smart contract typically includes essential functions and optional metadata attributes to define and manage the token.

ERC-20 Token Transactions

The process of transferring tokens between wallets is really simple, here’s how it goes:

1- Initiate transfer: Open your crypto wallet app, enter the wallet address of the person you want to send ERC-20 tokens to, and specify how much you want to send.

2- Verification: The smart contract will verify that you have the said amount to transfer in your account, after which it deducts it from your balance and adds it to the recipient’s balance.

3- Transfer Fees: Just like mailing a package requires postage, sending ERC-20 tokens requires a small fee paid in Ether (ETH), called "gas fees." This fee goes to the Ethereum network to process the transaction.

4- Recorded Transaction: Once the transfer is successful, the contract emits a transfer event, which is recorded on the blockchain. This is like getting a receipt that is eternally marked for everyone to see.

Interoperability of ERC-20 Tokens

ERC-20 tokens follow a standardized set of rules, making them compatible with all decentralized applications (dApps) on the Ethereum blockchain. Think about it like a "common language" which includes basic functions like transfer (sending tokens), balance of (checking balance), and approve (authorizing spending). Smart contracts automate these transactions, ensuring they are handled seamlessly and securely. This standardization allows ERC-20 tokens to be interoperable across various platforms that support the ERC-20 protocol​

You can learn more about the technical details of how ERC-20 tokens work in their official document

Benefits of Using the ERC-20 Standard 

Standardization and Compatibility:
The ERC-20 standard ensures that all tokens created using this protocol can work seamlessly across the Ethereum network. This common set of rules and functions enables tokens to integrate effortlessly with various wallets, exchanges, and decentralized applications (dApps).

For instance, popular stablecoins like USD Coin (USDC) and Tether (USDT) are ERC-20 tokens. This standardization allows these tokens to be easily traded and used across multiple platforms and dApps without compatibility issues.

Ease of Development:
ERC-20 simplifies the token creation process for developers by providing a clear and well-defined set of rules. This reduces the complexity and time required to develop new tokens, allowing developers to focus on their specific use cases rather than building from scratch​

For example, Chainlink (LINK), a decentralized oracle network, used the ERC-20 standard to create its utility token, enabling it to integrate seamlessly with various DeFi platforms. This ease of development has spurred rapid innovation and the creation of many new projects.

Liquidity and Accessibility:
ERC-20 tokens benefit from increased liquidity due to their widespread adoption. They are supported by numerous exchanges and platforms, making them easily tradable and accessible. This broad availability enhances their marketability and allows for greater fluidity in trading​.

For instance, Uniswap (UNI) is an ERC-20 token that powers the Uniswap DEX. The token’s broad availability on multiple exchanges makes it highly liquid and easily tradable, facilitating its use in various DeFi applications.

Community and Adoption:
The ERC-20 standard has a large and active developer community, which offers extensive resources, tools, and documentation. This strong community support fosters innovation and collaboration, driving the widespread adoption of ERC-20 tokens across various sectors within the Ethereum ecosystem.

For example, the Basic Attention Token (BAT), used in the Brave browser ecosystem, benefits from extensive community support and development resources. This support has helped BAT achieve significant adoption and integration into numerous platforms​.

Creation of ERC-20 Tokens

Deployment of Smart Contracts

1- Smart Contract Development:

The creation of ERC-20 tokens begins with developing a smart contract, primarily using the Solidity programming language. Developers use tools like Remix, an online integrated development environment (IDE), for coding, testing, and deploying smart contracts. Truffle is another comprehensive framework used for Ethereum development. If you are interested in more details, check out this extensive guide on getting started with smart contract development.


2-Testing and Auditing:

These are crucial steps to ensure the security and reliability of the smart contract. Developers deploy their contracts to Ethereum testnets such as Rinkeby, Kovan, or Ropsten, where they can conduct tests without the need for real Ether. Automated testing frameworks within tools like Truffle and Hardhat are used to write and execute test scripts. 

Once the initial testing is complete, it is imperative to conduct thorough code reviews and engage third-party security firms, such as ConsenSys Diligence or CertiK, to perform comprehensive audits. This thorough process helps to identify and fix potential vulnerabilities, protecting against security breaches.


3- Deployment on Ethereum Mainnet:

This involves deploying the smart contract using deployment scripts provided by development tools. Developers need to pay gas fees in Ether (ETH) to cover the computational costs of adding the contract to the blockchain. Post-deployment, verifying the contract on platforms like Etherscan enhances transparency and trust. 

Popular ERC-20 Token Creation Platforms 

If you are not that into the technical aspects of creating a token or you feel that you lack the developmental expertise needed, don’t you worry! There are platforms out there ready to do all the work for you, so all you have to do is bring the great idea. Check these out: 

1.CoinFactory offers a user-friendly platform that allows you to create ERC-20 tokens without any coding knowledge. 

2.ERC20 Generator is a platform that allows you to create ERC-20 tokens quickly and easily through a simple web interface. 

3. Developcoins  is a token development company that offers comprehensive services for creating ERC-20 tokens. They handle everything from smart contract development to deployment and auditing.

4. Create My Token offers a straightforward interface for generating ERC-20 tokens without needing to write any code.


ERC-20 vs. Other Token Standards: A Comparison

Differences Between ERC-20 and ERC-721

ERC-20 and ERC-721 are two distinct token standards on the Ethereum blockchain.

ERC-20 tokens are fungible, meaning each token is identical and can be exchanged on a one-to-one basis. This makes them suitable for use as cryptocurrencies, voting tokens, or rewards points. 


ERC-721 tokens
are non-fungible, meaning each token is unique and cannot be exchanged on a one-to-one basis. This uniqueness makes ERC-721 tokens ideal for representing ownership of unique items such as digital art, collectibles, and real estate.

Comparing ERC-20 and BEP-20 Tokens

SIMILARITIES


Functionality
: Both ERC-20 and BEP-20 tokens support token transfers, balance inquiries, and approvals, enabling similar use cases like ICOs and DeFi applications.

Standards: Both standards have a set of predefined rules that ensure tokens can be managed and transferred consistently across compatible platforms.

Interoperability: Both are compatible with major wallets and exchanges, making them widely accepted for trading and storage.


DIFFERENCES

1-Network:

ERC-20: Runs on the Ethereum blockchain, which is decentralized.

BEP-20: Runs on the Binance Smart Chain (BSC), which is more centralized under Binance’s control.


2-Transaction Speed and Costs
:

ERC-20: Typically experiences slower transaction speeds and higher gas fees due to network congestion.

BEP-20: Offers faster transaction speeds and lower fees, making it more cost-effective.


3-Adoption and Ecosystem
:

ERC-20: Has a larger ecosystem with extensive support from a wide range of wallets, exchanges, and decentralized applications (dApps).

BEP-20: Growing rapidly within Binance’s ecosystem, with increasing support but not as extensive as ERC-20.


4- Use Cases
:

ERC-20: Preferred for projects needing high security and decentralization, such as in many DeFi projects.

BEP-20: Favored for applications needing fast and low-cost transactions, like decentralized exchanges (DEXs) and yield farming.


5- Security and Risks
:

ERC-20: Generally considered more secure due to Ethereum’s decentralized network.

BEP-20: May carry higher risks due to the centralization of Binance’s control over the BSC network.

Unique Features of ERC-20 Compared to Other Tokens

1. Wide Adoption and Ecosystem Support

ERC-20 is the most widely adopted token standard, supported by numerous wallets, exchanges, and decentralized applications (dApps)​. Also, the large and active developer community ensures continuous improvement, support, and resources for new developers​.


2. Interoperability

ERC-20 tokens adhere to a common set of functions and events, ensuring compatibility across different platforms and applications. This standardization simplifies integration with various dApps, wallets, and exchanges​.


3. Flexibility and Customization

Developers can easily extend ERC-20 contracts to include additional features like minting, burning, pausing, and blacklisting. This flexibility allows for a wide range of use cases, from simple cryptocurrencies to complex financial instruments​.


4. Proven Security and Reliability

The ERC-20 standard has been extensively tested and audited, making it a reliable choice for developers. The robust security features and proven track record help minimize the risk of vulnerabilities and exploits​.


5. Strong Infrastructure and Tooling

There are major development tools and frameworks such as Remix, Truffle, and Hardhat which make the process of creating and managing ERC-20 tokens more efficient​. Moreover, numerous audit firms specialize in ERC-20 smart contracts, ensuring that tokens can be deployed with confidence in their security​.


6. Versatility in Use Cases

ERC-20 tokens can be used for a variety of purposes including utility tokens, governance tokens, stablecoins, and asset-backed tokens. This versatility makes them suitable for a wide range of projects and industries​

ERC-20 Wallets and Security Measures 

Top ERC-20 Compatible Wallets

First thing you need to do when buying any kind of token is to get yourself a good wallet. These options offer a range of features that cater to different needs, from simple mobile wallets to highly secure hardware solutions. 

1. MetaMask

A widely used browser extension and mobile wallet that allows users to interact with the Ethereum blockchain. It supports ERC-20 tokens and provides a user-friendly interface for managing tokens and connecting to decentralized applications (dApps).

Features: Easy setup, integration with dApps, hardware wallet support, and secure key management.

2. Trust Wallet

 A mobile wallet that supports a wide range of cryptocurrencies, including ERC-20 tokens. It is the official wallet of Binance, offering users a simple and secure way to store and manage their tokens.

Features: Multi-asset support, dApp browser, staking capabilities, and a built-in exchange.

3. Ledger

 A hardware wallet providing robust security for storing ERC-20 tokens offline. Ledger devices (Nano S and Nano X) are known for their high security and support for multiple cryptocurrencies.

Features: Secure offline storage, compatibility with MetaMask and other interfaces, and support for over 1,500 cryptocurrencies.

4. MyEtherWallet (MEW)

A web-based wallet that allows users to create and manage Ethereum wallets, store ERC-20 tokens, and interact with the Ethereum blockchain.

Features: User-friendly interface, hardware wallet support, and comprehensive access to Ethereum dApps.

5. Trezor

A hardware wallet known for its security and ease of use. It supports ERC-20 tokens and provides a secure way to store cryptocurrency offline.

Features: High security, compatibility with multiple interfaces, and support for various cryptocurrencies.

Best Practices for Securing ERC-20 Tokens

When you trust a bank with your money, they take on the responsibility of keeping it safe. In the crypto world, however, the burden is on you to choose a secure wallet and be cautious about the links you click. Keep these 10 tips in your mind when dealing with securing ERC-20 tokens:

1- Use Strong Passwords: Create complex passwords with a mix of letters, numbers, and symbols. Don’t make it too guessable, like your birthday - everyone knows it!

2- Enable Two-Factor Authentication (2FA): Use 2FA on all accounts associated with your cryptocurrency wallets. Apps like Google Authenticator or Authy are recommended.

3- Use Hardware Wallets: Store ERC-20 tokens in hardware wallets like Ledger or Trezor for offline security. Hardware wallets keep your private keys secure and offline.

4- Regular Backups: Backup your wallet’s recovery phrases and store them securely offline. You can just go old school and write it on a piece of paper which you can hide under the mattress. YES! It is this important.

5- Update Software Regularly: Keep your wallet software and firmware up to date to protect against vulnerabilities, so enable automatic updates when possible.

6- Be Wary of Phishing Attacks: Always verify the authenticity of websites and emails. Avoid clicking on suspicious links or downloading unverified software.

7- Use Secure Connections: Ensure your internet connection is secure and avoid public Wi-Fi when accessing your wallet. Always use a VPN for added security.

8- Cold Storage for Large Holdings: Keep the bulk of your tokens in cold storage, offline and disconnected from the internet. Only keep a small amount in hot wallets for regular transactions.

9- Monitor Wallet Activity: Regularly check for any unauthorized transactions or activity in your wallet. Set up alerts for any significant transactions.

10- Educate Yourself: Stay informed about the latest security threats and best practices. Follow reputable sources and communities for updates.

Protecting Against Token Theft and Fraud

By staying informed and vigilant, you can protect your ERC-20 tokens from theft and fraud. Always conduct thorough research and verify the legitimacy of any platform or project before engaging with it. These are the type of scams you should actively avoid:

Phishing Scams: 

Fake websites or emails impersonating legitimate cryptocurrency services to steal private keys.

In April 2018, a DNS attack redirected MyEtherWallet users to a phishing site that mimicked the official MyEtherWallet interface. When users entered their private keys, the attackers were able to steal over $150,000 worth of Ether within a few hours.)

Protection: Always verify URLs and email addresses. Never click on links from unknown sources. Use bookmark links for accessing important sites.

Fake Airdrops: 

Scammers promise free tokens in exchange for private keys or sending a small amount of ETH.

In 2021, scammers conducted a fake airdrop of a cryptocurrency called "UNI," mimicking Uniswap's legitimate token. Victims were tricked into clicking phishing links that led them to fraudulent websites where they were asked to enter their private keys, resulting in the theft of their funds.

Protection: Legitimate airdrops will never ask for private keys or require sending funds. Verify through official channels before participating.

Ponzi and Pyramid Schemes: 

Scams that promise high returns with little risk by recruiting more investors.

Sam Bankman-Fried orchestrated a massive Ponzi scheme by misusing customer funds deposited on the FTX cryptocurrency exchange. These funds were used to cover losses at his trading firm, Alameda Research, and finance speculative investments and luxury purchases. Throughout this process, he misled investors and customers about the security and management of their funds, resulting in a massive financial collapse and significant losses for investors.

Protection: Be cautious of schemes that guarantee unrealistic returns. Conduct thorough research and verify the legitimacy of the project and the founder behind it.

Fake Initial Coin Offerings (ICOs):

Fraudulent projects that collect funds during an ICO and disappear without delivering a product.

In 2018, the Vietnamese company Modern Tech conducted ICOs for Pincoin and iFan, promising investors high returns. After raising $660 million from around 32,000 investors, the team behind the projects disappeared, and both ICOs were exposed as scams.

Protection: Research the team, whitepaper, and project history. Use trusted ICO listing platforms and forums for reviews.

Social Engineering Attacks: 

Attackers impersonate support staff or trusted individuals to trick you into revealing private information.

In 2020, Twitter experienced a high-profile social engineering attack where hackers gained access to internal systems by manipulating employees. The attackers used this access to take over prominent accounts, including those of Elon Musk, Bill Gates, and Barack Obama, to promote a Bitcoin scam. The tweets promised to double any Bitcoin sent to a specific address, leading to the theft of over $100,000 worth of Bitcoin from unsuspecting users.

Protection: Never share sensitive information through social media or email. Official support will never ask for private keys.

Investing in ERC-20 Tokens: Strategies and Risks

Factors to Consider Before Investing in ERC-20 Tokens


Project Fundamentals

Look into the backgrounds and experience of the project's founders and team members. Strong teams with a track record in blockchain or relevant industries are a good sign.

Technology: Evaluate the technology behind the token. Is it innovative and does it solve a real problem? Always ensure the token has a clear, practical use case.


Market Conditions

Assess the overall sentiment in the crypto market. Bullish markets can provide more opportunities for gains, while bearish markets can pose risks. For example, the 2017 crypto bull run saw significant price increases for many ERC-20 tokens.


Personal Risk Tolerance

What will your investment strategy be? Determine how much risk you are willing to take. Are you looking for high-risk, high-reward investments, or more stable, long-term opportunities?

 Pro tip? Whatever strategy you choose, only invest what you can afford to lose!

Risk Management Tips for ERC-20 Token Investments


Diversification

Don't invest all your money in one token. Spread your investments across multiple tokens to reduce risk. If one token loses value, others might not, this helps to balance out losses.

For example, instead of putting all your money in Bitcoin (BTC), also invest in Ethereum (ETH) and Uniswap (UNI). This way, if BTC drops, you won't lose everything.


Research

Do thorough research before investing in any token. Understanding the project's fundamentals, team, technology, and use case can help you make informed decisions. Read whitepapers, follow project updates, and check community feedback on platforms like Reddit, Twitter, and specialized crypto forums.


Stop-Loss Orders

Set a predetermined price at which your token will automatically be sold to prevent large losses. This helps protect your investment if the token's price drops suddenly. Most cryptocurrency exchanges (DEX) offer stop-loss order features.

For example, if you buy a token at $100, you might set a stop-loss order at $90. If the price falls to $90, the token is automatically sold, limiting your loss to 10%.

Regulatory Considerations for ERC-20 Token Investors

Before you get all excited about investing with ERC-20 tokens, do a lot of research about their regulations. Here’s a brief overview to get you started:


Legal Implications

Ensure the tokens you invest in comply with the regulations of your country. This involves verifying whether the token is classified as a security or a utility token.

Securities Regulation:
In some jurisdictions, like the United States, certain tokens are considered securities and must comply with the Securities and Exchange Commission (SEC) regulations. Non-compliance can lead to legal issues and financial losses .

Utility Tokens:
Tokens intended for accessing a service or product may have fewer regulatory requirements, but it's crucial to confirm their status to avoid potential penalties.

Tax Implications

Capital Gains Tax:
Profits from the sale of ERC-20 tokens are typically subject to capital gains tax. The rate and method of calculation can vary based on how long the tokens were held. If held for less than a year (short-term gains), profits are taxed at a higher rate, similar to ordinary income. If held for more than a year (long-term gains), profits may be taxed at a lower rate .

Reporting Requirements:
Many countries require detailed reporting of cryptocurrency transactions. Failure to report accurately can result in fines and penalties. For example, in the U.S., investors must report their crypto transactions on IRS Form 8949 and Schedule D.

Other Considerations

Know Your Customer (KYC) and Anti-Money Laundering (AML) Regulations:
Many exchanges and token projects require KYC verification to comply with AML laws. This process involves verifying your identity, which can include submitting identification documents. This ensures the legitimacy of participants and reduces the risk of fraud and money laundering​

Conclusion

ERC-20 tokens set a gold standard for cryptocurrency investments, offering a seamless and interoperable framework for creating and managing digital assets. With the rapidly evolving regulatory landscape, staying informed is essential to ensuring compliance and making smart investment choices. Engage regularly with updates and seek advice from legal and tax professionals who specialize in cryptocurrency regulations within your jurisdiction. By doing so, you can navigate this dynamic and innovative field confidently, leveraging the full potential of ERC-20 tokens while safeguarding your investments.

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