Jeff Cangialosi

You’ve likely heard of the ERC-20 token standard. The standard is essentially a set of rules that lay out how to create a fungible token on the Ethereum blockchain. These rules define the set of functions and events a that the token needs to support in order to be used on Ethereum.

The purpose of having a standard is to create interoperability within the ecosystem. If you’re building a product or application, you want to ensure that tokens can interact with it. If all tokens follow the same standard, you can build your application with the assurance that it does not need to be customized per token. A physical world analogy would be building a vending machine that only accepts quarters (at least in the United States). If your vending machine had to accept pennies, dimes, or international coins like a twenty-pence coin from Great Britain, you would need a lot of custom coin slots, which is a lot more work and complexity. The same idea applies in the blockchain world.

Of course, if you have a standard, you need users and developers to follow it to truly give that standard value. We’re seeing this play out in the automobile industry as car manufacturers race to develop electric cars and must now adopt a standard for electric vehicle chargers. Tesla had an early start, so their charging standards have tended to be adopted by others, for now at least. An upstart car manufacturer would have a hard time pushing for a brand new standard today given so many vehicles already adhere to the Tesla charging setup.

Vehicle charging stations and blockchain may seem to be remote topics, but the network effects are similar. Originally created in 2015, the ERC-20 standard was formally adopted in 2017. With the ICO craze and the bull run of 2017, the standard ended up being used to create thousands of tokens, and its place was solidified. While there are now several competing token standards in 2023, the ERC-20 standard remains fairly dominant. Some of the more popular ERC-20 tokens include widely used stablecoins like USDT, USDC, and DAI. Chainalysis offers a full list of the top 15 ERC-20 tokens by market capitalization here.

It may be surprising that Ether (ETH) is not the most popular ERC-20 token. The reason is that ETH is actually not an ERC-20 token; it was around before the ERC-20 standard came about. Each ERC-20 token has its own smart contract, and this contract must enable six standard functions and emit two types of events. ETH is not technically a token. It is a native currency that was built into the Ethereum protocol itself. Since ETH is not based on a smart contract, it cannot be used in the same way that ERC-20 tokens can. While on the surface this seems problematic for using ETH to interact with dApps, there is a solution: a wrapped token. In the case of ETH, the token is known as WETH, wrapped Ether. The WETH contract is a tokenized version of ETH. When a user wraps ETH, they are depositing ETH into the WETH smart contract and then receiving WETH in return. That WETH can then be used to interact with dApps like any other ERC-20 token in the Ethereum ecosystem.

Wrapping a token is not unique to ETH. Many tokens use wrapping contracts as it allows tokens to be used on non-native blockchains. Wrapped Bitcoin (WBTC) is a perfect example of this. Bitcoin is not native to Ethereum, but you can move your Bitcoin over to the Ethereum blockchain (i.e., bridging) and use it there by wrapping it. The following excerpt from Robinhood Learn is a good summary of the process and offers a helpful analogy:

“Wrapped tokens solve for this incompatibility. Wrapping a coin allows it to be used on a non-native blockchain. Wrapping a token is essentially swapping one token for another token in an equal amount via a smart contract, or code on the blockchain that can store and send funds. Think of it like exchanging a dollar bill for four quarters. While they both represent the same value, quarters are compatible with a pinball machine, whereas the dollar bill isn’t.” 

What does this all mean for companies and projects looking to get paid or make payments in crypto, particularly ETH? At Loop Crypto, we make use of the ERC-20 standard to facilitate the scheduling of crypto payments and autopay functionality. This means Loop works seamlessly with any ERC-20 token and can also support payments in ETH, BTC, and other tokens that may not meet the standard as long as there is a wrapped version, like WETH or WBTC.