ERC-404 is a novel token standard that combines features of ERC-20 and ERC-721, allowing tokens to be both divisible and unique. It enables the creation of tokens with native liquidity and fractionalization, opening up new possibilities for asset representation and interoperability within the Ethereum ecosystem.
What is ERC-404?
ERC-404 is an experimental token standard built on the Ethereum blockchain, aiming to integrate the functionalities of ERC-20 tokens (fungible tokens) and ERC-721 tokens (non-fungible tokens or NFTs) into a single standard. This means that ERC-404 tokens can be both fungible and non-fungible, depending on the specific implementation. For example, a token can start as an FT, tradable with other tokens of its kind without losing any value, but once used or redeemed, it can transform into an NFT with unique traits and value. Alternatively, a token can start as an NFT and then be divided into smaller units tradable as FTs, but once these units are recombined, the token can regain its NFT identity. However, this concept is relatively new and still an experimental standard, not formally proposed for inclusion in Ethereum Improvement Proposals (EIPs) yet. Nevertheless, it amalgamates elements of ERC-20 and ERC-721, offering new functionalities for NFTs.
How ERC-404 Works
ERC-404 tokens utilize smart contracts to manage the partitioning and ownership of underlying NFTs. Each ERC-404 token represents a specific portion of an NFT, and the total supply reflects the quantity of available portions. Users can acquire individual tokens or accumulate enough tokens to "burn" them in exchange for the complete NFT as a reward. Participants can own a fraction of ERC-404 tokens rather than the entirety. For instance, a participant can possess 0.5 tokens instead of one whole token. When a participant transfers a fractional portion of a token (e.g., 0.5), the entire token is deducted from the participant's account, ensuring consistency in token supply. When an entire token is deducted from a participant's account due to small transfers, it enters a special available ID pool. This pool ensures there are always enough unique IDs available for new tokens, even if some tokens are divided into fractional parts. ERC-404 utilizes a technique called "paths" to efficiently handle token transfers. Paths allow token quantity data and ID sharing space, facilitating smoother transfers and reducing unnecessary complexity. By integrating with existing protocols, ERC-404 seamlessly complements existing token standards such as ERC-20 and ERC-721. It segregates different functionalities and simplifies integration using paths.
Features of ERC-404
Combination of ERC-20 and ERC-721: ERC-404 tokens are designed to be both fungible and non-fungible. They achieve this by linking each issued token (fungible) to an NFT (non-fungible), blending the characteristics of both token types.
Partial Ownership of NFTs: One of the primary features of ERC-404 tokens is their ability to realize partial ownership of NFTs. This is achieved by associating fungible tokens with NFTs, allowing NFTs to be partitioned into smaller tradable portions. This mechanism enhances liquidity and accessibility in the NFT market.
Dynamic Minting and Burning: When fractional tokens representing a portion of an NFT are traded, the associated NFT can be dynamically minted or burned. If a fraction of a token is sold, the linked NFT is burned, and if more portions are added to form a whole token, new NFTs are automatically minted. This process enables seamless exchange and modification of NFT ownership and attributes based on underlying fungible tokens.
Advantages Brought by ERC-404's Creativity
The introduction of ERC-404 marks a significant leap in the NFT space. It addresses many key challenges that have hindered wider adoption of NFTs, such as interoperability, security, and sustainability concerns. For creators, collectors, and developers, ERC-404 offers new avenues to explore the creation, exchange, and management of digital assets, making it a cornerstone of the next generation of NFT innovations. ERC-404 addresses some of the limitations faced by early NFT standards, making it a game-changer in how we interact with digital ownership and authenticity; its main transformative aspects include the following:
Enhanced Interoperability: ERC-404 NFTs are designed to seamlessly function across various platforms and ecosystems, breaking down barriers between different digital worlds.
Upgraded Security Measures: With advanced security protocols, ERC-404 reduces fraud risks, ensuring your digital assets are safer than ever before.
Flexible Ownership Options: The standard introduces more nuanced ownership possibilities, including partial ownership, to cater to a broader range of use cases.
Focus on Sustainability: ERC-404 incorporates mechanisms aimed at reducing the environmental impact of NFT transactions, aligning with growing concerns about blockchain sustainability.
Potential Use Cases of ERC-404 Tokens
By allowing partial ownership, ERC-404 tokens can significantly enhance the liquidity of NFTs. This enables buyers and sellers to trade fractional NFTs more easily without the need for ready-made counterparties to purchase entire assets, addressing common limitations of traditional NFT markets. The unique combination of fungibility and non-fungibility opens up new possibilities for NFT projects and applications, including but not limited to:
Art and Collectibles: Partial ownership democratizes access to high-value artwork or rare collectibles.
Real Estate: Tokenization of real estate assets can enable partial ownership and easier access to investment opportunities.
Gaming & Metaverse: In-game assets or virtual land can be divided and traded more efficiently.
Decentralized Financing: Partial ownership of shares in startups or projects can be utilized for community investment.
Risks of ERC-404
The ERC-404 standard is currently unaudited and has not undergone traditional Ethereum Improvement Proposals (EIPs) and Ethereum Request for Comments (ERCs) processes. The lack of formal review raises concerns about potential vulnerabilities, inefficiencies, and risks of integrating unaudited and potentially flawed systems into the Ethereum ecosystem.
Additionally, integrating fungible and non-fungible features into a single token standard poses unique technical challenges that require careful implementation and testing to ensure security and functionality. Other challenges to be mindful of regarding ERC-404 tokens include:
Liquidity Issues: While one of ERC-404's goals is to enhance NFT liquidity by enabling partial ownership, the actual liquidity of these tokens in the market will depend on various factors, including user adoption, platform support, and overall market conditions. Early projects may face liquidity challenges until the standard gains wider adoption.
Limited Adoption: ERC-404 is still nascent, with limited adoption compared to established standards like ERC-20 and ERC-721.
Technical Challenges: Technology faces complexities and potential security risks that require further development and refinement. As ERC-404 introduces a new approach to handling tokens that combines fungible and non-fungible features, integrating these tokens with existing platforms and wallets not yet adapted to handling such hybrid tokens may pose challenges.
Speculative Investment: Given the novelty and experimental nature of ERC-404 tokens, investments in such projects are highly speculative. The current market enthusiasm may be driven more by novelty and speculation than fundamental value, increasing the risk of bubbles and subsequent crashes.
Regulatory Uncertainty: The unique nature of ERC-404 tokens may attract regulatory scrutiny, especially at a time when authorities worldwide are still grappling with how to regulate cryptocurrencies and NFTs. Evolving regulatory environments could impact the adoption and functionality of ERC-404 tokens.
The First Project on ERC-404: Pandora
The Pandora project launched the first token under the ERC-404 standard on February 2, 2024, allocating 7% of the token supply to the team and early contributors.
Token Mechanics of Pandora
The total supply cap of Pandora (PANDORA) tokens is 10,000, emphasizing their scarcity in the market.
Pandora's token mechanics are carefully designed, where holding a specific quantity of fungible tokens can automatically mint new NFTs, while reducing the quantity of fungible tokens below a set threshold leads to the burning of NFTs.
Unlike traditional NFT standards, Pandora utilizes the ERC-404 token standard, enabling NFTs to achieve partial ownership through the minting and burning of tokens.
Rareness and Value in the World of Pandora
Pandora implements the ERC-404 standard, including an NFT rarity refresh mechanism activated during FT (fungible token) transactions. Each FT transfer results in the burning and reissuance of NFT tokens, effectively refreshing their rarity and impacting their market value. This incentivizes users to actively transfer FT tokens within the Pandora ecosystem to avoid the destruction of rare NFTs and benefit from the rarity refresh of new NFTs.
Trading FT Tokens on Decentralized Exchanges
Pandora tokens can be traded on decentralized exchanges that support FT tokens, utilizing mappings to update NFT ownership based on FT token transactions.
When FT tokens are sold on DEX, the corresponding NFTs are burned, raising the question of which specific NFT to burn when multiple NFTs are associated with FT tokens. Users can choose to programmatically select the NFT to burn, retaining valuable NFTs during FT token transactions, using tools like Smart Layer.
Integrating Pandora tokens into the DeFi space, especially decentralized exchanges like Uniswap, reduces sensitivity to market manipulation and benefits liquidity providers from ERC-404's trading activity.
Popular Projects on ERC-404
DeFrogs NFT
The DeFrogs series offers 10,000 carefully crafted non-fungible tokens (NFTs) artworks, each depicting a unique frog with distinct traits and accessories. Each DeFrog is built on the Ethereum blockchain, ensuring verifiable ownership and unparalleled individuality. Since its launch in July 2022, the project has garnered significant attention in the emerging NFT community.
The recent adoption of the ERC-404 standard reignited its popularity. This novel approach allows for the simultaneous acquisition of DEFROGS tokens and randomly generated Defrogs NFTs at the time of purchase. While owning the complete DEFROGS token guarantees the NFT, partial ownership does not trigger the automatic minting of NFTs.
DeFrogs tokens can be traded on decentralized exchanges like Uniswap and are automatically bundled with the corresponding NFTs to simplify transactions. Alternatively, individual DeFrog NFTs can be traded separately on mature NFT markets to cater to collectors seeking specific aesthetics.
Deez Nuts (NUTS)
Deez Nuts is the first project on the Solana network to incorporate tokenized graphics, with the token NUTS being the first token on Solana's new protocol, Tiny SPL.
Unlike Ethereum, Solana charges rent on accounts on its network for storing data states. If an account cannot afford the rent, the system will delete that account to reduce storage costs for data that is no longer maintained. With the rapid rise in SOL prices, rent costs are becoming increasingly expensive. The Tiny SPL protocol utilizes state compression on Solana, allowing users to own tokens without paying rent. Moreover, through the Tiny SPL protocol, the cost of deploying NFTs on Solana will be significantly reduced, even negligible, making NFT fractionalization perfectly achievable.
Through the Tiny SPL protocol, NUTS tokens and cNFTs (compressed non-fungible tokens) can be exchanged equivalently. For example, when you sell cNFTs on-chain via Swap, NUTS will be automatically minted into the pool and swapped for SOL. When you buy NUTS through Swap, the tokens in the pool are automatically burned, and an equal number of cNFTs are minted for you.
Conclusion
The release of ERC-404 marks a significant step forward for the Ethereum ecosystem, leading the transformation of token standards to be more flexible and innovative. As the standard continues to evolve and undergo formal review, it will usher in a new chapter for digital asset management and trading, offering superior functionality, liquidity, and utility for Ethereum-based tokens. The birth of ERC-404 will bring forth more possibilities and opportunities for the entire Ethereum community, driving the blockchain industry towards greater maturity and health.
For more analysis, please follow Aibit's media account for real-time updates! This article is for reference only, does not represent any position, and is not intended as investment advice. Investment is risky, caution should be exercised.
Facebook: https://www.facebook.com/aibitcom
X: https://twitter.com/aibitcom
Telegram (CN): https://t.me/aibitcom_cn
Telegram (EN): https://t.me/aibitcom
Telegram (Announcements): https://t.me/aibitcom_announcements
Discord: https://discord.com/invite/aibitcom
Medium: https://medium.com/@aibitcom
Youtube: https://www.youtube.com/@aibitcom