Ethereum (ETH) Blockchain includes interchangeable ERC-20 tokens and non-interchangeable ERC-721 tokens (NFTs). The experimental and unofficial new token standard ERC-404 stands out by aiming to combine the elements of ERC-20 and ERC-721 into a single “semi-interchangeable” digital asset.
What is ERC-404?
ERC-404 is a new token standard developed for digital assets on the Ethereum Blockchain by developers nicknamed “Ctrl” and “Acme”. Token standards are the official rules and protocols that determine the behavior of tokens on Blockchain networks like Ethereum.
The ERC-404 token standard allows for the creation of “semi-interchangeable” tokens that utilize the features of both interchangeable and non-interchangeable tokens by merging the properties of ERC-20 and ERC-721.
How Does ERC-404 Work?
NFTs are non-interchangeable, meaning they are unique and indivisible. It is not possible to own a part of an NFT. ERC-404 overcomes this limitation by using the token mint and burn mechanism to allow ownership and transfer of specific parts of an NFT.
Tokens minted are directly linked to an NFT. When a full token is purchased, the associated NFT is minted in the buyer’s wallet address. If a portion of a token is bought, the associated NFT is burned. A wallet address holding a part of a token can automatically mint a new NFT if it acquires enough shares to hold a full token.
The ERC-404 token standard introduces new principles and mechanics built upon them, enabling the native fractionalization of NFTs. This allows for experimentation and trading of new types of NFTs.
The developers of the token standard argue that the main goal of ERC-404 is to create an NFT that encourages certain aspects of trade/participation to cultivate native fractionalization, liquidity, and unique feature sets.
The team behind the ERC-404-using project Pandora claims that NFTs built using the standard effectively have a token price that reflects a real-time base price due to “true native liquidity”. ERC-404 token holders can sell their NFTs at any time if there is a liquidity pool, instead of needing a single counterparty to purchase the NFTs. Moreover, the fractionalization of NFTs can be done natively without the need to lock or wrap NFTs and issue shares against them, avoiding reliance on third-party protocols and solutions.
Leading ERC-404 Projects
- Pandora: Pandora is one of the first projects to use the ERC-404 token standard. It consists of 10,000 PANDORA ERC-20 tokens and 10,000 associated “Replicant” NFTs. When you buy a PANDORA token from an exchange, a Replicant NFT is minted to your wallet.
- DeFrogs: DeFrogs is a collection of 10,000 Pepe the Frog-themed NFTs that use a variant of the ERC-404 token standard, touted as the first deflationary ERC-404 PFP collection by its creators.
- Monkees: Another PFP collection using the ERC-404 token standard, Monkees consists of 100 NFTs with ten attributes and six traits.
The Future of ERC-404
Unlike the popular ERC-20 and ERC-721 token standards, ERC-404 is in the experimental phase and has not gained official status. This means it has not been submitted for review as an Ethereum Improvement Proposal (EIP) or undergone a full external audit. Therefore, there may be undiscovered issues or security vulnerabilities with the standard, which could pose significant risks to token holders.
While the team acknowledges that ERC-404 is an “off-standard” implementation of ERC-721, they argue that even though the two standards were not designed to be merged, they tried to balance the factors that could not be provided while doing so as robustly as possible. Since ERC-404 is an unofficial token standard, many NFT platforms and marketplaces do not currently support this token standard by default.
The team behind the token standard plans to submit it as an official EIP, which could potentially be a lengthy process. However, their attitude of bypassing the standard approval process for token standards could encourage other projects to do the same. As a result, more unregulated projects using the ERC-404 standard could be launched into the market.