ERC-20: The Technical Standard That Accidentally Built a Financial System

In November 2015, German developer Fabian Vogelsteller drafted a simple standard: the ERC-20. While writing the standard, he never desired to change anything, but he did. The German developer accidentally laid the groundwork for what would become a multi-billion-dollar parallel financial system. Fabian didn’t set out to be a hero. He was just trying to stop Ethereum tokens from being such a mess to work with. 

The problem was simple. Every new token coming on Ethereum was being operated by its own rules. Wallet developers were going crazy trying to support them all. Exchanges needed weeks of custom coding work to list anything new. For developers, it was a constant headache. Every time they created a new token, they were left guessing: would it work with other apps? Would it break something? This lack of compatibility was tearing the ecosystem apart instead of building it. It was clear that the entire system was needing a common standard.

Vogelsteller’s answer—the “Ethereum Request for Comments 20”—did something unusual for a technical document. It revolutionalized the whole system. Today, more than 350,000 digital assets follow its specification, everything from Tether’s dollar-pegged stablecoin to governance tokens for decentralized organizations. Not bad at all for what started as an attempt to standardize some basic functions.

Think about early Ethereum like a city where every building used incompatible electrical outlets. Your appliances would not work in different buildings. You would need special adapters everywhere. Basic tasks became complicated. That’s what token development looked like before standardization took hold. Checking an account balance required a different code for each token type. Transferring value meant custom implementations every time. Projects existed in isolation.

The ERC-20 specification changed this dynamic by mandating six core functions every compliant token had to include. This wasn’t optional guidance—follow the rules, or your token would not work with the existing infrastructure. Wallets, exchanges, and decentralized applications all assumed that tokens followed the standard. 

Vogelsteller (with Vitalik Buterin helping as co-author) posted a simple idea on Ethereum’s public GitHub page: a standard way to create tokens so they all work the same. That post was just pull request number 20, and people right away started calling it ERC-20.

It was formally finalized in September 2017, but that was just paperwork. By 2016–early 2017, during the Initial Coin Offering explosion, the entire ecosystem — exchanges, wallets, and projects — had already converged on ERC-20. The standard had won long before it was official.

ERC-20 didn’t magically make every token perfect, but it gave developers a simple blueprint so their tokens could act just like cash: one unit exactly equal to any other unit, no special serial numbers, no different rules.

When someone followed the ERC-20 recipe properly, every single token in that project became interchangeable — exactly like dollar bills or poker chips. That made them perfect for things like stablecoins (USDT, USDC), loyalty points, in-game money, voting rights, or anything else where you want clean, divisible, identical units.

The Technical Features 

Six mandatory functions form the skeleton of every ERC-20 token. 

The first three are straightforward: TotalSupply reveals the total number of tokens in existence, balanceOf shows is about how many are held in any given wallet, and transfer handles the simple act of sending tokens from one address to another.

The real genius, however, lies in the remaining trio that quietly enabled the entire DeFi revolution. Approve lets a user grant permission to a smart contract — say, Uniswap or Aave — to spend a specific amount of their tokens. TransferFrom is the mechanism those contracts then use to actually move the funds when executing a trade or loan. Finally, allowance acts as the public ledger of how much spending power remains for any approved party.

Security checks happen before every transaction. Does the sender have sufficient balance? Do the proper approvals exist? Do permissions align with what’s being requested? These safeguards are directly included in the smart contract code, as without them, the system would be a hacker’s paradise. 

Beyond the required functions, developers can add optional extras. The name function assigns readable identity to the tokens. Symbol provides the ticker you see on exchanges—USDT, LINK, UNI, all those three and four-letter combinations. Decimals determines how finely you can divide a token, similar to how dollars break into cents. These are not mandatory but they prevent expensive mistakes, like buying the wrong token because a user mixed up similar names.

Smart contracts automate the whole process. No banks involved, and no manual approvals required from anyone. The Ethereum blockchain records everything permanently, creating a clear transaction history. Anyone can trace any token backward through every wallet that it has ever touched, every exchange it has passed through, and every liquidity pool it has been in. 

The Tokens That Matter

Because of their high utility, ERC-20 tokens rule the crypto charts even in 2025.

Top ones by market cap are as follows:

• Tether (USDT) – the king stablecoin, ~$120B
• USDC – the “clean” stablecoin, ~$50B
• BNB (started on Ethereum as ERC-20 before moving)
• Wrapped Bitcoin (WBTC)
• Chainlink (LINK)
• Uniswap (UNI)
• SHIB, PEPE, and every meme coin that ever mooned
• Old-school names like Maker (MKR), Aave, Compound

Basically every stablecoin that matters, every governance token, every DeFi blue-chip, and 90 % of the top 100 coins all began life as plain old ERC-20 contracts on Ethereum. One standard, ten years old, but it is still ruling the crypto industry. 

The standard works because it eliminates friction everywhere. Developers build once and their token immediately works with the entire Ethereum infrastructure. The standardized approach slashes development time and reduces bugs. Users get actual choice in wallets and platforms without worrying whether things will work together. Liquidity flows freely—tokens can move between exchanges, lending protocols, and trading pools without compatibility issues.

Ethereum’s underlying infrastructure provides security guarantees that individual projects could not achieve alone. Users complain about gas fees constantly, but those fees purchase computational security backed by billions of dollars in staked capital. ERC-20 tokens inherit that security automatically just by existing on the network.

The Part Where Everything Can Go Wrong

However, despite their advantages, ERC-20 tokens still face some regulatory hiccups. Regulators worldwide cannot agree on how to classify these tokens legally. Are they securities? Commodities? Novel digital assets requiring entirely new regulatory frameworks? For instance, the U.S. Securities and Exchange Commission (SEC) has initiated enforcement actions against multiple projects related to ERC-20 tokens, saying that they comprised unregistered securities offerings. 

The human element causes problems too for the ERC-20 ecosystem. Bugs escape even rigorous testing. Developers occasionally leave backdoors in code, sometimes through incompetence, sometimes deliberately. Some sellers launch pump-and-dump schemes constantly because creating tokens costs almost nothing. Phishing attacks also succeed because users do not understand what transaction approvals actually authorize. In other words, the low barrier to entry that makes ERC-20 valuable for legitimate innovation simultaneously enables massive fraud.

Other token standards have popped up to handle jobs ERC-20 cannot. ERC-721 started Non-Fungible Tokens (NFTs), where each token gets a unique ID—like one-of-a-kind art, music, or collectibles. ERC-1155 lets a user mix regular coins and rare items in one contract, which is very good for games needing both money and special items. ERC-404 is a new experiment that lets users own fractions of NFTs. Meanwhile, ERC-1400 (for regulated investments like stocks) and ERC-998 (for NFTs that can own other tokens or NFTs) keep filling gaps that ERC-20 could not fill. 

This evolution continues because the ecosystem’s needs keep changing. Solutions appropriate for 2015’s nascent Ethereum does not work for 2025’s mature but complex landscape. The crypto community is constantly innovating, building better tools. This adaptability has kept Ethereum competitive to date despite numerous rival blockchains launching with promises of better performance and much lower costs.

What Happens From Here

According to industry experts, ERC-20 tokens will continue to grow as decentralized finance expands. What began as a solution for token incompatibility has become foundational infrastructure for an alternative financial system. Vogelsteller’s specification enabled innovations he almost certainly never envisioned when writing that initial proposal—algorithmic stablecoins, yield farming mechanisms, decentralized autonomous organizations operating at meaningful scale. The framework proved flexible enough to accommodate radical experimentation while maintaining its core compatibility that enabled all tokens to function together.

ERC-20 has shown remarkable resilience, surviving many brutal market cycles and adapting to rapid challenges. As blockchain technology continues its march from being a niche experimentation to being a part of mainstream finance, ERC-20 still provides much of the underlying architecture on which this transition depends.

Whether this ultimately proves beneficial depends entirely on how the persistent problems get addressed. The core technology works, mostly. What remains uncertain is whether the ecosystem can mature past its adolescent problems—the constant hacks, the pervasive scams, the regulatory confusion, the user experience barriers that keep normal people away.

ERC-20 gave Ethereum a common “language” everyone could speak. What the community still builds with that vocabulary in the days to come will determine the value of this grand experiment in decentralized finance in the coming years.