Why ERC-20 fungible token standard in Blockchain / Solidity? - Purpose & Use Cases

The Big Idea

What if all digital coins spoke the same language, making trading and using them effortless?

The Scenario

Imagine you want to create your own digital coins for a game or a community. Without a common rulebook, every coin works differently. You have to write special code for each coin to send, receive, or check balances.

The Problem

This manual way is slow and confusing. Different coins don't talk the same language, so wallets and exchanges can't handle them easily. Mistakes happen often, and users get frustrated because their coins don't work as expected.

The Solution

The ERC-20 standard is like a universal rulebook for digital coins on Ethereum. It defines simple, clear rules that every token follows. This makes tokens easy to create, use, and trade because everyone understands how they behave.

Before vs After

✗ Before

function sendCoin(address to, uint amount) { /* custom code for each token */ }

✓ After

function transfer(address to, uint256 amount) external returns (bool);

What It Enables

With ERC-20, anyone can create tokens that work seamlessly with wallets, exchanges, and apps worldwide.

Real Life Example

Many popular cryptocurrencies like USDT (Tether) and LINK (Chainlink) use ERC-20, so you can store and trade them easily in the same wallet.

Key Takeaways

Manual token creation is inconsistent and error-prone.

ERC-20 provides a simple, shared set of rules for tokens.

This standard makes tokens interoperable and easy to use everywhere.

Practice

1. What is the main purpose of the ERC-20 standard in Ethereum?

easy

A. To ensure tokens have a common set of functions for compatibility

B. To create unique non-fungible tokens

C. To define the Ethereum network consensus rules

D. To manage smart contract deployment costs

Solution

1. Step 1: Understand ERC-20 purpose

   ERC-20 defines a common interface for fungible tokens to work uniformly.

2. Step 2: Identify the correct purpose

   This standard allows wallets and apps to interact with tokens easily by using the same functions.

3. Final Answer:

   To ensure tokens have a common set of functions for compatibility -> Option A

4. Quick Check:

   ERC-20 = Common token interface [OK]

Hint: ERC-20 standardizes token functions for easy use [OK]

Common Mistakes:

• Confusing ERC-20 with NFT standards
• Thinking ERC-20 controls Ethereum network rules
• Assuming ERC-20 manages deployment costs

2. Which of the following is the correct function signature to check a token balance in ERC-20?

easy

A. function balanceOf(address owner) external view returns (uint256);

B. function getBalance(address owner) public returns (uint256);

C. function balance(address owner) external returns (bool);

D. function checkBalance(address owner) public view returns (bool);

Solution

1. Step 1: Recall ERC-20 balance function

   The standard defines balanceOf as a view function returning a uint256 balance.

2. Step 2: Match function signature

   function balanceOf(address owner) external view returns (uint256); matches the exact signature: external view returns (uint256).

3. Final Answer:

   function balanceOf(address owner) external view returns (uint256); -> Option A

4. Quick Check:

   balanceOf = correct signature [OK]

Hint: balanceOf returns uint256 and is a view function [OK]

Common Mistakes:

• Using wrong function name like getBalance
• Missing view keyword for read-only function
• Returning bool instead of uint256

3. Given this Solidity snippet from an ERC-20 token contract:

function transfer(address to, uint256 amount) public returns (bool) {
    if (balances[msg.sender] < amount) {
        return false;
    }
    balances[msg.sender] -= amount;
    balances[to] += amount;
    emit Transfer(msg.sender, to, amount);
    return true;
}

What will transfer return if the sender has 50 tokens and tries to send 60 tokens?

medium

A. true

B. false

C. It will throw an error

D. It will return zero

Solution

1. Step 1: Check sender balance condition

   The function checks if sender's balance is less than amount; if yes, returns false.

2. Step 2: Apply given values

   Sender has 50 tokens but tries to send 60, so condition is true and function returns false.

3. Final Answer:

   false -> Option B

4. Quick Check:

   Insufficient balance returns false [OK]

Hint: Transfer returns false if balance is insufficient [OK]

Common Mistakes:

• Assuming it throws error instead of returning false
• Thinking it returns true regardless
• Confusing return value with event emission

4. Identify the error in this ERC-20 approve function snippet:

function approve(address spender, uint256 amount) public returns (bool) {
    allowances[msg.sender][spender] = amount;
    emit Approval(msg.sender, spender, amount);
    return true;
}

What is the common security issue with this implementation?

medium

A. It does not emit the Approval event

B. It does not check if spender is zero address

C. It allows race condition by directly setting allowance

D. It returns false instead of true

Solution

1. Step 1: Understand approve race condition

   Directly setting allowance can cause race conditions if spender uses old and new allowance simultaneously.

2. Step 2: Identify missing mitigation

   Safe implementations require resetting allowance to zero before changing it to new value to avoid this issue.

3. Final Answer:

   It allows race condition by directly setting allowance -> Option C

4. Quick Check:

   approve race condition = direct allowance set [OK]

Hint: Always reset allowance to zero before changing it [OK]

Common Mistakes:

• Thinking missing zero address check is main issue
• Assuming Approval event is missing
• Believing return value is incorrect

5. You want to create an ERC-20 token that charges a 1% fee on every transfer and sends it to a fee collector address. Which modification to the transfer function correctly implements this?

hard

A. Send full amount to recipient, then send 1% from sender to collector

B. Add 1% to amount, send full amount to recipient, send fee separately

C. Send full amount to recipient and fee collector equally

D. Deduct 1% from amount, send fee to collector, send rest to recipient

Solution

1. Step 1: Calculate fee and net transfer

   Calculate 1% fee from amount, subtract it to get net amount to recipient.

2. Step 2: Transfer fee and net amount correctly

   Send fee to fee collector address and net amount to recipient to implement fee deduction.

3. Final Answer:

   Deduct 1% from amount, send fee to collector, send rest to recipient -> Option D

4. Quick Check:

   Fee deducted and sent correctly = Deduct 1% from amount, send fee to collector, send rest to recipient [OK]

Hint: Subtract fee from amount before sending tokens [OK]

Common Mistakes:

• Adding fee on top of amount instead of deducting
• Sending full amount to recipient and fee separately from sender
• Splitting amount equally between recipient and fee collector