The new ERC-404 token standard offers promise and uncertainty for traders and digital art enthusiasts. But is it a reliable solution?
The experimental ERC-404 standard aims to solve the liquidity problem of NFT collections. It combines the features of ERC-20 fungible tokens with ERC-721 non-fungible tokens.
ERC-20 serves as a protocol standard for the issuance of tokens on the Ethereum network and facilitates the exchange of tokens based on predefined rules. Conversely, ERC-721 works as a standard for non-fungible tokens, allowing developers to tokenize ownership of various data on the Ethereum blockchain using the Solidity language.
Typically, the ERC-20 and ERC-721 standards focus on fungible assets such as currency and unique collectibles, including digital art. However, this categorical division makes it difficult to share and quickly exchange specialized digital assets.
Understanding the ERC-404 standard: what we know so far
Developers are introducing the ERC-404 standard as a new protocol aimed at merging the desirable properties of ERC-20 fungible tokens and ERC-721 non-fungible tokens (NFTs). The primary goal is to address the liquidity issues faced by NFT collections and increase their utility within the defi ecosystem.
How does ERC-404 work? ERC-404 represents a contract template designed to facilitate transactions with both ERC-721 and ERC-20 tokens. This contract does not change the parameters of existing standards, but rather facilitates transactions between different types of assets. It is important to recognize that recognition of ERC-404 by the Ethereum Foundation or the broader community is still pending.
ERC-404 projects
Pandora
In early February 2024, Pandora debuted as the inaugural ERC-404 coin. It works with two assets: an ERC-20 fungible token (PANDORA) and a non-fungible ERC-721 token, known as the Replicants Collection.
The Pandora Project has issued a total of 10,000 ERC-404 tokens, each tied to a unique NFT within the Replicants collection. These NFTs, represented as colored boxes called Replicants, come in five different colors, each representing a certain level of rarity. For example, common boxes are green, while rare boxes are red. When purchasing a PANDORA ERC-404 token, buyers will receive a random NFT box tied to the token.
When a user acquires a PANDORA token, the coin contract essentially automatically generates a corresponding NFT Replicant, which is then transferred to their wallet. When a token is then sold or transferred to another wallet, the associated NFT is burned.
Among the many features planned after the Replicants reveal, there’s one that we’ve shipped a little early for your convenience.
Soon you’ll be able to visit https://t.co/QcZs7UVo9l and save replicants you don’t want to regenerate or burn when you transfer PANDORA 💎 pic.twitter.com/uE1TD5XpWr
— Pandora (@Pandora_ERC404) February 3, 2024
However, the process does not apply in reverse. When transferring or selling an NFT, the PANDORA token remains unaffected; instead, the fungible token is transferred to the new owner’s wallet along with a Replicants instance.
With each PANDORA purchase, the coin contract generates an NFT with random parameters that vary in rarity. Consequently, buyers of the fungible token cannot anticipate the rarity of the NFT in advance. This approach guarantees equal opportunities for all users and introduces an element of unpredictability and speculation into trading.
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DeFrogs
DEFROGS is a meme coin inspired by the PEPE crypto project. The DeFrogs collection consists of 10,000 NFTs, each featuring a frog with unique features and accessories. Each DeFrog is built on the Ethereum blockchain, guaranteeing proof of token ownership and distinctive individuality.
The project was launched in July 2022 and quickly gained significant attention from the NFT community.
Why is ERC-404 gaining popularity?
ERC-404 has become a central point of discussion within the X-crypto community. However, the increase in interest in these new tokens is more evident in metrics such as trading volume, PANDORA market value, and replicant prices.
Since its launch on February 5, the PANDORA token has seen a remarkable 290% increase in value, to $16, according to CoinMarketCap. Notably, the token experienced explosive growth between February 5 and 9, from $4,018.12 to $32,854.52, with the current market capitalization being $166 million.
Source: CoinMarketCap
Several factors contribute to this rapid success. First, ERC-404 introduces a new token standard with a unique transaction format. The price difference between the NFT value and the PANDORA token also creates lucrative opportunities for investors.
The hype surrounding ERC-404 has led to a surge in gas rates on the second cryptocurrency’s blockchain, which has reached an eight-month high. Regular transactions required users to pay $60, with fees peaking at 377 Gwei – the highest since May 2023.
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ERC-404 standard encourages competitor
In the wake of ERC-404’s meteoric rise, the Cryptocurrency Development Group has unveiled an alternative implementation of the experimental ERC-404 token standard.
Introducing DN404: a solution to the critical issues arising from the new popular “ERC404” tokens.
Big shoutout to the all-star team who worked around the clock for days to make this happen:@0xQuit@0xCygaar@optimizoor@0xjustadev@PopPunkOnChain@AmadiMichaels
And…
— quit.q00t.eth (👀,🦄) (@0xQuit) February 12, 2024
To address concerns about costs, the developers came up with a new solution. On February 12, programmers introduced the Divisible NFT standard (DN-404). Like ERC-404, this standard is also a hybrid of ERC-20/721, allowing non-fungible tokens to be split into pieces and exchanged between users.
However, unlike ERC-404, the DN-404 standard uses two contracts: the “base” ERC-20 and the “mirror” ERC-721. Developers claim that this segregation minimizes potential problems.
The decentralized exchange (DEX) Trader Joe was the first platform to adopt the DN-404 standard and launched the token called SHOE. These tokens were distributed exclusively to 22,140 wallets of active users of the Joepegs marketplace and holders of NFT projects affiliated with the Joe Studios accelerator.
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What is the future of ERC-404 tokens?
Critics have raised concerns about the usability and effectiveness of the standard. Developer Quit has highlighted potential vulnerabilities in lending pools not configured on ERC-404, which could allow users to exploit the system and withdraw high-value NFTs instead of their interchangeable fractions.
16/ I love seeing new experiments, but I’m not convinced that it makes immediate sense to include fractionalization in NFT contracts rather than simply allowing fractionalization platforms to enable this and the concerns to separate, especially given the gas bloat (countless mappings).
— quit.q00t.eth (👀,🦄) (@0xQuit) February 6, 2024
Such criticism underlines the experimental nature of ERC-404 and the unforeseen challenges it may face in real-world applications.
Despite these hurdles, the ERC-404 standard has attracted interest because of its unique approach to NFT fractionation. The ability to trade token shares on decentralized exchanges has increased the liquidity of NFTs.
This concept was new to NFTs, treating them like regular ERC-20 tokens. However, the drop in the price of Pandora and other ERC-404 tokens raises doubts. This raises questions about the long-term success and acceptance of this standard within the crypto community.
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