What Is an ERC-20 Token, and How Is It Different From Ether?

The short answer

Ether is the currency built into the Ethereum network itself. An ERC-20 token is different: it's a smart contract — a program running on Ethereum — whose job is to keep a ledger of who owns how many units of that token. When you "hold" an ERC-20 token, what you really hold is an entry in that contract's internal ledger, tied to your address. Your wallet doesn't contain the tokens; it contains the key that lets you tell the contract to update its ledger.

The "ERC-20" part refers to a published standard, EIP-20, which defines the common interface every conforming token contract exposes. Thousands of different tokens follow it, which is why one wallet app can display and send all of them without custom code for each.

What the standard actually requires

The EIP-20 specification defines a small set of functions a token contract must implement, including:

• totalSupply — reports how many units of the token exist.
• balanceOf — reports the balance held by any given address.
• transfer — moves tokens from the caller's address to another address.
• approve and allowance — let an owner authorize another address (often a contract, like an exchange) to spend tokens on their behalf, up to a stated limit.
• transferFrom — lets an approved spender actually move those authorized tokens.

The standard also describes optional metadata a token can expose — a human-readable name, a ticker-style symbol, and a decimals value that tells wallets how to display the token's smallest units as a readable number. These are conveniences for interfaces; the spec notes that other contracts shouldn't depend on them being present.

Why a standard interface matters

Before standardization, every token project could invent its own contract functions, and every wallet or exchange had to integrate each one by hand. A shared interface means the ecosystem composes: a wallet that knows how to call balanceOf and transfer works with any conforming token, and a decentralized application can accept tokens it has never specifically heard of. This is the same logic behind any technical standard — the value is in everyone agreeing.

It's worth understanding the approve mechanism in particular, because it's a common source of confusion. Approving a contract to spend your tokens doesn't move anything immediately; it grants a standing permission. That design is what lets decentralized exchanges and other applications work, but it also means an approval is something you granted and can later reduce or revoke through the same interface.

What a token is not

A token following ERC-20 is a technical format, nothing more. The standard says nothing about what a token is for, what it's worth, or whether the project behind it is legitimate. U.S. regulators make this point directly: the SEC's investor page on crypto assets explains that crypto assets carry significant risks and that fraudulent offerings exist alongside legitimate technology. The fact that a token conforms to a well-written standard tells you it will work in your wallet — not that it's a sound thing to own.

If you want the deeper technical background on how contracts, addresses, and transactions fit together underneath all of this, the NIST blockchain technology overview is a careful, non-promotional government reference, and our guide on how a blockchain transaction works walks through the transaction lifecycle step by step. For how the keys that control token balances are stored and backed up, see how crypto wallets work.