Normally, Ethereum is the decentralized network of two functions, one is blockchain that can record transactions and other is the ability to produce smart contracts. Thus ERC20 is applied for the creation of smart contract tokens on ethereum blockchain.
ERC20 is the protocol standard that defines some set of rules which need to be met in order for a token to be accepted on the ethereum network. These rules includes how the tokens are transferred and how the data within each token can be accessed.
Whenever a new application of blockchain technology and smartcontract is developed on top of ethereum, a new ethereum token has been created. Thus ERC20 makes token creation easy and allows them to exist within one blockchain. Once the tokens are created on ethereum network, developers can create a system that allows all the tokens to interact with each other in a smart contract thus enables the trading process.
Most of the ICO’s are launched on ERC20 compliant because the use of ERC20 makes tokenization without any risk and reduced the complexity of token interaction which leads to increased liquidity of tokens.