What are ERC-404 Tokens | ERC-404 Projects To Watch

• Web3 enthusiasts show interest in ERC-404, an emerging token standard combining aspects of ERC-20 and ERC-721.
• ERC-404 tokens such as Pandora, DeFrogs, and Monkees gain traction, offering fractional ownership and enhanced liquidity in the NFT market despite being unofficial.
• Despite its potential benefits, ERC-404 is still an experimental and unofficial token standard.

In recent developments, as the blockchain industry continues to grow, web3 enthusiasts are showing interest in the new token standard ERC-404. Tokens such as Pandora, DeFrogs, and Monkees are currently gaining traction despite the standard being unofficial. 

What is ERC-404?

ERC-404 is a novel token standard for digital assets on Ethereum, combining aspects of ERC-20 and ERC-721 to enable fractionalized non-fungible token (NFT) collections. It was created by anonymous developers known as “ctrl” and “Acme.”

Unlike traditional NFTs, which are indivisible, ERC-404 allows for creating “semi-fungible” tokens that represent fractions of an NFT. This is achieved through token minting and burning mechanics, where owning fractions of a token corresponds to ownership of parts of the underlying NFT. 

This token standard provides both ERC-20 fungible tokens and linked NFTs. Acquiring one complete ERC-20 token leads to the creation of an NFT in the holder’s wallet. Individuals with less than one complete ERC-20 token will not have access to the NFT.

In addition, the standard facilitates native fractionalization of NFTs, fostering liquidity and enabling various use cases such as trading, engagement, and gaming. Moreover, unlike existing methods, ERC-404 eliminates the need for third-party protocols for fractionalization, which are noted to pave the way for efficient and innovative NFT trading ecosystems.

In a recent X post by Acme, they announced a “significant improvement” to ERC-404, modifying exemptions to be decentralized and egalitarian. They noted that previously exemptions were handled through an owner-gated function, causing friction for new projects. With the update, any user can now self-exempt, enabling major gas savings for protocols and centralized exchanges (CEX). Additionally, users can opt out of ERC721 logic, reducing transfer costs. 

“This will all come with V2’s production release, available after audit/test suite improvements (within the next day or two),” Acme added.

Moreover, according to Parsec Finance, the surge in fees in Ethereum was predominantly attributed to the emergence of the ERC-404 tokens. 

ERC404's like pandora and monarch are currently pushing mainnet gwei to its highest level in 30 days

404's are a hybrid token/nft standard, each buy mints X amount of nfts resulting in high transaction fees and ETH burn pic.twitter.com/V0qtFWN2w6

— parsec (@parsec_finance) February 8, 2024

However, it must be noted that ERC-404 is an unofficial and experimental token standard. Different from the widely accepted ERC standards, ERC-404 has not undergone review as an Ethereum Improvement Proposal (EIP) nor undergone external audits, posing potential risks to token holders due to undiscovered flaws. 

Key Features

Fractional Ownership

ERC-404 enables investors to hold fractions of NFTs which may foster broader participation in NFT markets and make high-value digital assets more accessible.

Token Minting and Burning

ERC-404 uses token minting and burning to enable fractional ownership. Selling token fractions burns the corresponding NFTs, updating ownership records accordingly.

Enhanced Liquidity and Trading

Through enabling fractional ownership, ERC-404 enhances liquidity as it makes NFTs more accessible to smaller investors. 

Pros and Cons

In an article by Anndy Lian, an intergovernmental blockchain expert, he laid out the benefits and drawbacks the web3 industry can expect from the emerging token standard.

Pros

Increased liquidity

Trading NFTs as fungible tokens on DEXs improves liquidity. It solves the problems of low trading volume and high price volatility associated with unique NFTs.

Lower costs

Transferring multiple tokens simultaneously in a single transaction can significantly reduce gas fees and save time, addressing the high costs associated with individual and complex NFT transactions.

Greater flexibility

ERC-404 offers the ability to switch between fungible and non-fungible modes, enabling creators and users to explore expanded options. It supports the development of dynamic NFTs that can adapt their state and value based on specific criteria, adding an interactive element to NFTs.

 Additionally, fractional ownership of NFTs becomes feasible, widening the potential market and reducing entry barriers.

Enhanced interoperability

ERC-404 tokens are versatile and can be used in various protocols and platforms across the fungible token and NFT domains. They can be leveraged as collateral, governance, or utility tokens in DeFi protocols, and simultaneously as assets, rewards, or currencies on NFT platforms.

Cons

Experimental status

As an experimental Ethereum standard, ERC-404 introduces uncertainties related to bugs, vulnerabilities, and compatibility issues. This poses risks for token creators and users, along with potential legal and regulatory challenges in jurisdictions with strict crypto asset regulations.

Complexity

ERC-404 is a complex token standard demanding a profound grasp of blockchain and smart contracts. Developers must meticulously study the standard, whereas users should comprehend the token’s behavior, logic, risks, and benefits for effective interaction.

Competition

ERC-404 faces competition from other token standards like ERC-998 and ERC-1155, which may offer different features and advantages. The viability of ERC-404 will depend on its ability to compete in this landscape.

ERC-404 Projects

Pandora

Pandora pioneers the use of the ERC-404 token standard; it is comprised of 10,000 PANDORA ERC-20 tokens and 10,000 linked “Replicant” NFTs. 

When purchasing a PANDORA token on an exchange, a Replicant NFT is minted to your wallet. The system links ERC-20 tokens with NFTs, granting a Replicant NFT upon acquiring a PANDORA token and destroying the NFT when selling fractions of the token. 

The $pandora token symbolizes ownership of a Pandora Box, an NFT containing a Replicant. While the token can be exchanged as an FT on decentralized exchanges (DEXs) such as Uniswap, its opening unveils the enclosed Replicant NFT, which may possess varied attributes and worth.

Nonetheless, Pandora reached its highest market capitalization of $324 million on February 9. However, it has since declined by fifty percent to $150 million, causing the price per token to drop below $15,000.

DeFrogs

DeFrogs is a profile picture (PFP) collection of 10,000 tokens and corresponding NFTs. The image for this collection is derived from the popular internet meme Pepe the Frog.

When purchasing a DEFROGS token on Uniswap, buyers not only acquire the token itself but also receive a DeFrogs NFT through a mint contract. 

The creators clarified that purchasing 0.9 DEFROGS tokens yields only the tokens without the accompanying NFT while acquiring a total of 1 DEFROGS token automatically mints an NFT. Additionally, they advised users to sell tokens with attached NFTs to avoid parting with valuable NFTs inadvertently. 

Monkees

According to an article, Monkees showcases the versatility of ERC-404 beyond traditional NFTs by exploring fractional ownership across diverse digital asset classes such as artwork, real estate, and intellectual property. 

It is a PFP collection comprises 100 NFTs with ten attributes and six traits.

This article is published on BitPinas: What are ERC-404 Tokens & Why is it Gaining Momentum?

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