Exploring Networks

Native Tokens vs ERC-20 Tokens

1. Native Tokens

A native token is the primary cryptocurrency of a blockchain network. These tokens are integral to the blockchain and serve multiple purposes, such as network security, transaction fees, and governance.

Characteristics of Native Tokens:

  • Blockchain’s Core Currency: Native tokens are built into the base layer of the blockchain protocol, essential for paying transaction fees and incentivizing miners/validators.
  • Block Reward: Miners or validators earn native tokens as rewards for securing the network and validating transactions.
  • Security and Decentralization: These tokens often secure the blockchain through consensus mechanisms like Proof of Stake (PoS) or Proof of Work (PoW).

Examples of Native Tokens:

  • Bitcoin (BTC) on the Bitcoin network
  • Ether (ETH) on the Ethereum network
  • SOL on the Solana network
  • DOT on the Polkadot network

Use Cases:

  • Transaction Fees: Transaction fees are paid in the native token (e.g., ETH for gas fees on Ethereum).
  • Staking and Consensus: Native tokens are used for staking in Proof of Stake systems, contributing to network security.
  • Governance: In some blockchains, native tokens give holders voting power in governance decisions.

2. ERC-20 Tokens

An ERC-20 token is built using smart contracts on the Ethereum blockchain (or an equivalent token on other smart contract platforms like Solana or Binance Smart Chain). These tokens adhere to a standard defining their usage, transfer, and storage.

Characteristics of ERC-20 Tokens:

  • Built on Existing Blockchain: ERC-20 tokens are created using Ethereum’s smart contracts and aren’t native to the blockchain.
  • Smart Contract-Based: Governed by smart contracts ensuring the rules (e.g., transferability, supply) are enforced.
  • Interoperability: Easily integrated into wallets and exchanges that support Ethereum.

Examples of ERC-20 Tokens:

  • USDT (Tether): A stablecoin pegged to the U.S. dollar
  • UNI (Uniswap): Governance token of Uniswap DEX
  • LINK (Chainlink): Token for decentralized oracles

Use Cases:

  • dApp Usage: Used within decentralized applications, like DeFi protocols, representing assets or governance rights.
  • Fundraising and ICOs: Many projects launch ERC-20 tokens in ICOs to raise funds.
  • Liquidity Provision: Used to provide liquidity in DeFi exchanges or lending protocols.

3. Native Tokens and Gas Fees

When using an ERC-20 token (or other tokens like BEP-20 on Binance Smart Chain), you still need to use the native token of the blockchain to pay for transaction fees. For example:

  • To send USDT (an ERC-20 token), you need ETH to cover gas fees on the Ethereum network.

This means that while you can hold and use ERC-20 tokens, you’ll always need a small balance of the native token (e.g., ETH) to process transactions.