Revolutionary or a Fiasco: Understanding the ERC-404 Token Standard

Traders and digital art enthusiasts are both excited and apprehensive about the new ERC-404 token standard. This experimental standard aims to solve the liquidity problem faced by NFT collections by combining the characteristics of ERC-20 fungible tokens and ERC-721 non-fungible tokens.

ERC-20 is a protocol standard that governs token issuance on the Ethereum network, allowing for the exchange of tokens based on predefined rules. On the other hand, ERC-721 is a standard for non-fungible tokens, enabling 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, including digital art. However, this division complicates the sharing and swift exchange of specialized digital assets.

The ERC-404 standard is introduced as a fresh protocol that aims to merge the desirable traits of ERC-20 and ERC-721 tokens. Its primary goal is to address the liquidity challenges faced by NFT collections and enhance their utility within the defi ecosystem.

So how does ERC-404 work? It represents a contract template designed to facilitate transactions involving both ERC-721 and ERC-20 tokens. This contract does not change the parameters of existing standards but rather enables transactions across different asset types. However, it’s important to note that the recognition of ERC-404 by the Ethereum Foundation and the broader community is still pending.

There are already some projects utilizing the ERC-404 standard, such as Pandora. Pandora debuted as the first ERC-404 coin in February 2024. It operates with two assets: an ERC-20 fungible token (PANDORA) and a non-fungible ERC-721 token known as the Replicants collection. Each PANDORA token is linked to a unique NFT within the Replicants collection, which is randomly generated and transferred to the buyer’s wallet upon purchase.

Another project, DeFrogs, is a meme coin inspired by the PEPE crypto project. It consists of 10,000 NFTs, each depicting a frog with unique features and accessories. DeFrogs ensures proof of token ownership and distinct individuality.

ERC-404 has gained popularity within the crypto community, evident in metrics like trading volume, market value, and the price of tokens like PANDORA and Replicants. The PANDORA token, for example, has seen a remarkable 290% increase in value since its launch, reaching $16. This success can be attributed to the novel token standard and the lucrative opportunities it creates for investors.

However, the popularity of ERC-404 has also led to a surge in gas fees on the Ethereum blockchain, reaching an eight-month high. This increase in fees is a result of the high demand for ERC-404 transactions.

In response to ERC-404’s success, the Cryptocurrency Development Group has introduced an alternative implementation called the Divisible NFT standard (DN-404). DN-404 allows non-fungible tokens to be split into pieces and exchanged among users. Unlike ERC-404, DN-404 employs two contracts: the “base” ERC-20 and the “mirror” ERC-721. This segregation is intended to minimize potential issues.

Despite the excitement surrounding ERC-404, critics have raised concerns about its practicality and effectiveness. They highlight potential vulnerabilities in lending pools not configured on ERC-404, which could be exploited by users to withdraw high-value NFTs instead of their exchangeable fractions.

Overall, the ERC-404 standard has garnered interest due to its unique approach to NFT fractionation and increased liquidity. However, the decline in the price of tokens like Pandora raises doubts about its long-term success and acceptance within the crypto community.