ERC20 simply explained

When transferring around tokens, users often think of “transferring tokens between wallets", which means that a wallet will “receive tokens”. However, the reality is a bit more grounded and revolves around smart contracts, particularly when we talk about ERC20 tokens. Today, we're diving into the simplest explanation of how the ERC20 contract works, especially for the average crypto user who might not have any technical background.

What is ERC20?

Before we get into the topic, let's briefly touch on what ERC20 actually means. ERC20 stands for Ethereum Request for Comment 20, and it's a standard that defines a set of rules for Ethereum tokens to follow. It ensures that different tokens on the Ethereum blockchain can interact with each other in a predictable way. Most tokens you encounter on the Ethereum network are based on this standard.

The Core of ERC20: The Smart Contract

At the heart of every ERC20 token is a smart contract. Unlike the physical money in your wallet, digital tokens don't move from one place to another. Instead, their movement is recorded and managed by a smart contract on the blockchain. Specifically, the ERC20 standard provides a blueprint for this smart contract, including a key piece of code that looks something like this:

This line of code creates a ledger or a record, mapping each user's address to the number of tokens they own. If you've never interacted with the token, your balance in this mapping would be zero.

How Does Token Transfer Work?

When you hear about transferring tokens, it's natural to envision something physical being sent. But in the ERC20 world, a transfer is more akin to adjusting numbers in a ledger. Here's a simplified breakdown of what happens during a token transfer:

Deduct the Balance from the Sender:
The smart contract subtracts the amount of tokens you're sending from your balance in the ledger.

Increase the Balance of the Recipient:
It then adds that amount to the recipient's balance in the ledger.

That's it—there's no mystical token flying through the digital ether. Your wallet, which interfaces with the blockchain, simply queries this function in the smart contract to display your balance.

When it sees the updated balance, it reflects that you've received or sent tokens.

What Does This Mean for You?

Understanding that token transfers are essentially updates to a smart contract demystifies a lot of the process. It highlights the power of smart contracts in managing digital assets in a transparent, secure, and automated way. For the average crypto user, this knowledge underscores the importance of the blockchain's integrity and the smart contracts that operate on it. Every transaction is recorded, verifiable, and, most importantly, irreversible—ensuring trust in a trustless environment.

In summary, ERC20 tokens and their transfers showcase the innovative use of smart contracts to facilitate digital transactions. While the process might lack the physicality of traditional money exchange, it opens up a world of possibilities in how we think about and handle digital assets. So, the next time you send or receive ERC20 tokens, remember the simple yet profound technology working behind the scenes to make it all happen.