ERC-20

Overview

Why tokens need a common language

Ethereum's ERC-20 standard gives developers a common way to build and interact with interchangeable, or fungible, tokens. Instead of every token inventing new function names, common interfaces let wallets and other applications query balances, transfer tokens and ask whether one account has approved another to spend an allowance. ERC-20 is a technical specification, not a coin, a single token contract or a blockchain network. Thousands of different tokens can implement it.

How the underlying system works

An ERC-20 contract typically exposes standardized transfer, balance and allowance behavior. A transfer of a token changes state within the contract; it is not identical to an ETH transfer. Applications need the token's contract address and network to identify the asset correctly, and they must handle decimals as units of display rather than treating them as on-chain floating-point values.

Approval-based spending introduces a separate risk: granting an application allowance can authorize token movements up to the permitted amount. Merchants accepting tokens should verify contract addresses and the success of relevant events rather than only the transaction's top-level recipient field. ERC-20-compatible standards exist on several EVM chains, but that does not make those networks interchangeable.

What happens when someone sends an ERC-20 token

A user submits a transaction to a token smart contract on Ethereum. The contract executes code that checks the sender's token balance and updates token-account balances according to its rules. A compliant transfer normally emits a Transfer event indicating which token moved between which addresses and how much. The transaction itself also needs native ETH to pay gas; sending an ERC-20 asset does not eliminate Ethereum's network fees. A merchant monitor must inspect the token contract address, network, event destination and amount rather than matching any token with the right display symbol.

Allowances introduce another security concept

ERC-20 supports approvals that allow a designated spender to transfer tokens up to a permitted amount. This is different from a direct one-time transfer to a merchant. Approving a malicious contract can expose a wallet's tokens even if the user never shares a private key. Users should review approval destinations and amounts; merchants should not ask for broad token allowances unless their chosen payment workflow genuinely needs them. The standardized interface helps interoperability, but each token contract can still contain distinct rules, bugs or administrative controls.

Further reading and related concepts

Reference documents: Ethereum.org — ERC-20 Token Standard.

Related glossary topics: Ethereum, Gas Fee, Transaction Hash.