How ERC-20 works
ERC-20 is the standard for fungible tokens on Ethereum and compatible chains. It defines a common set of functions every token must implement, such as transfer, balance, and approve, so that any wallet, exchange, or smart contract can handle any ERC-20 token without custom code. Fungible means each unit is interchangeable with every other, the same way one dollar equals any other dollar.
Worked example
A new project launches its token as an ERC-20 contract. Because it follows the standard, it instantly works in MetaMask, lists on decentralised exchanges, and plugs into lending protocols, with no integration work. The stablecoins USDT and USDC are ERC-20 tokens on Ethereum, which is part of why they move so freely across the ecosystem.
ERC-20 versus the native coin
ETH itself is not an ERC-20 token; it is the chain’s native asset used to pay gas. ERC-20 tokens live on top of Ethereum and still need ETH to move, which is why you keep a little ETH for fees even when transacting other tokens. The same standard has been copied across other EVM chains, so an ERC-20 skill transfers directly to most of the smart-contract world.
Why it matters
The standard is why crypto interoperates at all: thousands of tokens behave predictably because they share one interface. It also flattens risk assessment, since the contract still has to be audited; following ERC-20 guarantees compatibility, not safety. Related: tokenomics and DeFi.
Read the full breakdown in our crypto trading guide.
