ERC20 tokens exist in the Ethereum Network that consists of a blockchain capable of storing transactions and a virtual machine capable of running smart contracts. Ethereum token lives in ethereum blockchain. The native currency of Ethereum is called “Ether” but other than ether it can also support other “tokens” that can represent a currency, shares, or anything of value.
Origin of the tokens
Tokens came into existence through a smart contract. Smart contracts not only create the tokens, but it also handles its transactions. To create each token, it needs to be completely unique or different from each other. As a result, developers need to invent a completely new code for each exchange or wallet to host a new token. Hosting a token pertains to the ability of tokens to be available in exchange for buying, selling, and transferring functions. Increasing list of tokens then become problematic because hosting or creating customized codes can be complex and time-consuming. Additionally, if a smart contract is employed and a developer made a mistake, modifying the mistake or “updating” the contract can take a lot of time as well.
Why ERC20 is created
The ERC20 protocol has brought in the much-needed standardization of the creation of Ethereum tokens. The ‘ERC’ in ‘ERC20’ stands for "Ethereum Request for Comments” and the number ‘20’ signifies the unique proposal ID. It provides a guideline for the creation of tokens. It defines 6 mandatory functions that a smart contract should implement and 3 optional ones. So instead of reinventing the whole code for the smart contract to be created, developers now just needed to follow the 6 mandatory functions.