The latest ERC-404 token standard brings both excitement and uncertainty to traders and digital art enthusiasts. But is it a trustworthy solution?
The innovative ERC-404 standard is an experimental protocol designed to tackle the liquidity issue faced by NFT collections. It combines the features of ERC-20 fungible tokens with ERC-721 non-fungible tokens.
ERC-20 acts as a protocol standard that governs token issuance on the Ethereum network, enabling the exchange of tokens based on predefined rules. On the other hand, ERC-721 serves as a standard for non-fungible tokens, allowing developers to tokenize ownership of various data on the Ethereum blockchain using the Solidity language.
Typically, ERC-20 and ERC-721 standards cater to fungible assets like currencies and unique collectibles, such as digital art. However, this division complicates the sharing and quick exchange of specialized digital assets.
Understanding the ERC-404 standard: what we currently know
The ERC-404 standard is introduced by developers as a new protocol aimed at combining the desirable characteristics of ERC-20 fungible tokens and ERC-721 non-fungible tokens (NFTs). Its primary objective is to address the liquidity challenges faced by NFT collections and enhance their usefulness within the defi ecosystem.
How does ERC-404 function? ERC-404 is a contract template created to facilitate transactions involving both ERC-721 and ERC-20 tokens. This contract does not modify the parameters of existing standards but instead enables transactions across different asset types. It is important to note that the recognition of ERC-404 by the Ethereum Foundation or the broader community is still pending.
ERC-404 projects
Pandora
In early February 2024, Pandora was introduced as the first ERC-404 coin. It operates with two assets: an ERC-20 fungible token (PANDORA) and a non-fungible ERC-721 token known as the Replicants collection.
The Pandora project issued a total of 10,000 ERC-404 tokens, each linked to a unique NFT within the Replicants collection. These NFTs, represented as colored boxes called Replicants, come in five different colors, each indicating a distinct level of rarity. For example, ordinary boxes are green, while rare ones are red. Upon purchasing a PANDORA ERC-404 token, buyers receive a random NFT box associated with the token.
Essentially, when a user acquires a PANDORA token, the mint contract automatically generates a corresponding NFT Replicant, which is then transferred to their wallet. Subsequently, when a token is sold or transferred to another wallet, the associated NFT is burned.
However, this 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 alongside a Replicants instance.
With each PANDORA purchase, the mint contract generates an NFT with random parameters varying in rarity. This ensures 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 comprises 10,000 NFTs, each depicting a frog with unique features and accessories. Built on the Ethereum blockchain, each DeFrog guarantees proof of token ownership and distinct individuality.
Launched in July 2022, the project quickly gained significant attention from the NFT community.
Why is ERC-404 gaining popularity?
ERC-404 has become a focal point of discussion within the X crypto community. The surge in interest in these new tokens is evident in metrics like trading volume, the market value of PANDORA, and the price of Replicants.
Since its launch on Feb. 5, the PANDORA token has experienced a remarkable 290% increase in value, reaching $16, as reported by CoinMarketCap. Between Feb. 5 and Feb. 9, the token saw explosive growth, soaring from $4,018.12 to $32,854.52, with the current market capitalization standing at $166 million.
Several factors contribute to this rapid success. Firstly, ERC-404 introduces a new token standard with a unique transaction format. The price discrepancy between the NFT value and the PANDORA token also creates profitable opportunities for investors.
The excitement surrounding ERC-404 has led to a rise in gas fees on the Ethereum blockchain, reaching an eight-month high. Regular transactions required users to pay $60, with costs peaking at 377 Gwei – the highest since May 2023.
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ERC-404 standard sparks competition
Following the rapid ascent of ERC-404, the Cryptocurrency Development Group has unveiled an alternative implementation of the experimental ERC-404 token standard.
To address concerns about fees, developers introduced a new solution. On February 12, programmers launched the Divisible NFT standard (DN-404). Like ERC-404, this standard is a hybrid of ERC-20/721, allowing non-fungible tokens to be divided into pieces and exchanged among users.
Unlike ERC-404, the DN-404 standard utilizes two contracts: the “base” ERC-20 and the “mirror” ERC-721. Developers assert that this segregation minimizes potential issues.
The decentralized exchange (DEX) Trader Joe was the first platform to adopt the DN-404 standard, introducing the token named SHOE. These tokens were exclusively distributed among 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 does the future hold for ERC-404 tokens?
Critics have raised concerns about the practicality and effectiveness of the standard. Developer Quit 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 exchangeable fractions.
This criticism underscores the experimental nature of ERC-404 and the unforeseen challenges it may encounter in real-world applications.
Despite these challenges, the ERC-404 standard has piqued interest due to its unique approach to NFT fractionation. The ability to trade token shares on decentralized exchanges has enhanced the liquidity of NFTs.
This concept was innovative for NFTs, treating them similarly to regular ERC-20 tokens. However, the decline in the price of Pandora and other ERC-404 tokens raises doubts and questions about the long-term success and acceptance of this standard within the crypto community.
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