The new ERC-404 token standard presents promises and uncertainties 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 merges the features of ERC-20 fungible tokens with ERC-721 non-fungible tokens.
ERC-20 serves as a standard protocol that governs the issuance of tokens on the ethereum network, facilitating the exchange of tokens according to predefined rules. In contrast, ERC-721 functions 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 accommodate fungible assets such as coins and unique collectibles, including digital art. However, this categorical division complicates the rapid and shared exchange of specialized digital assets.
Understanding the ERC-404 standard: what we know so far
The developers present the ERC-404 standard as a new protocol aimed at merging the desirable features of ERC-20 fungible tokens and ERC-721 non-fungible tokens (NFTs). Its primary goal is to address the liquidity challenges faced by nft collections and improve their utility within the defi ecosystem.
How does ERC-404 work? ERC-404 represents a contract template designed to facilitate transactions involving ERC-721 and ERC-20 tokens. This contract does not alter 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 operates two assets: a fungible ERC-20 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 representing a different level of rarity. For example, normal tiles are green, while rare tiles are red. When purchasing a PANDORA ERC-404 token, buyers receive a random nft box associated with the token.
Essentially, every time a user purchases a PANDORA token, the Mint contract automatically generates a corresponding nft replicator, which is then transferred to their wallet. Later, when a token is sold or transferred to another wallet, the associated nft is burned.
However, the process does not apply in reverse. When transferring or selling an nft, the PANDORA token is not affected; instead, the fungible token is transferred to the new owner's wallet along with an instance of Replicants.
With each PANDORA purchase, the Mint 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 ensures equal opportunity for all users and introduces an element of unpredictability and speculation into trading.
defrogs
DEFROGS is a meme coin inspired by the PEPE crypto project. The DeFrogs collection consists of 10,000 NFTs, each representing a frog with unique characteristics and accessories. Built on the ethereum blockchain, each DeFrog guarantees proof of token ownership and distinctive individuality.
Launched in July 2022, the project quickly attracted considerable attention from the nft community.
Why is ERC-404 gaining popularity?
ERC-404 has become a focal point of discussion within the of the Replicators.
Since its launch on February 5, the PANDORA token has seen a remarkable 290% increase in value, reaching $16, according to CoinMarketCap. Notably, between February 5 and 9, the token experienced explosive growth, rising from $4,018.12 to $32,854.52, with a current market capitalization of $166 million.
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Several factors contribute to this rapid success. First of all, 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 caused gas fees on the second cryptocurrency's blockchain to spike, reaching an eight-month high. Regular transactions required users to pay $60, with costs peaking at 377 Gwei, the highest since May 2023.
ERC-404 standard stimulates the competitor
In the wake of the rapid rise of ERC-404, the Cryptocurrency Development Group has introduced an alternative implementation of the experimental ERC-404 token standard.
To address concerns regarding fees, 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. The developers claim that this segregation minimizes potential problems.
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 among 22,140 wallets of active users of the Joepegs marketplace and holders of nft projects affiliated with the Joe Studios accelerator.
What is the future of ERC-404 tokens?
Critics have raised concerns about the practicality and effectiveness of the rule. Developer Quit highlighted potential vulnerabilities in lending pools not configured in ERC-404, which could allow users to exploit the system and withdraw high-value NFTs instead of their exchangeable fractions.
These criticisms underscore the experimental nature of ERC-404 and the unforeseen challenges it may face in real-world applications.
Despite these obstacles, the ERC-404 standard has garnered interest due to its unique approach to nft fractionation. The ability to trade token shares on decentralized exchanges has increased the liquidity of NFTs.
This concept was novel for NFTs, treating them similarly to regular ERC-20 tokens. However, the drop in the price of Pandora and other ERC-404 tokens raises questions. This raises questions about the long-term success and acceptance of this standard within the crypto community.
