ERC-404 Token Standard: A Complete Guide. To create a token with the best of both worlds—fungibility, and nonfungibility—the experimental ERC-404 standard integrates parts of the ERC-20 and ERC-721 standards. Two anonymous developers, going under the names “ctrl” and “Acme,” came up with a new experimental token standard in February 2024 that merges features from two existing standards: ERC-20 and ERC-721. Both standards “are not designed to be mixed,” according to the ERC-404 GitHub page, but the goal is to merge them “as robust a manner as possible while minimizing tradeoffs.”
A “fungible token” is the intended outcome of the ERC-20 token standard. The capacity to exchange one token for another of the same value is known as fungibility. Key to ERC-20 tokens is the fact that they may be divided into smaller units, a property known as divisibility.
Meanwhile, the nonfungible token (NFT) standard, based on the ERC-721 token standard, is designed to provide distinct, non-exchangeable tokens. Each ERC-721 token is an independent digital asset or collectible, unlike ERC-20 tokens. The ERC-404 token standard, based on the famous “Error 404” web page error code, allows for the fractionalization of NFTs on the Ethereum network. Connecting an NFT to a fungible token makes this possible, allowing for fractional division.
The PANDORA coin and its associated “Replicant NFT” were created by the same group responsible for the ERC-404 token standard, making Pandora the pioneering project to use the ERC-404 idea. The ERC-404 token standard, implemented by smart contracts, is not yet officially part of Ethereum.
What Makes ERC-404 Tokens Valuable?
Only third-party protocols were able to fractionalize NFTs before ERC-404. Sharing NFTs using these protocols would cause them to be locked in a wallet, and tokens would be issued against them.
Users encountered difficulties in relying on a third party to safeguard their NFT tokens and in dealing with the possibility of discrepancies between the NFT’s worth and the token’s value, leading to a loss. By utilizing a decentralized smart contract to link the NFT to the token’s value directly, ERC-404 circumvents this issue. The system ensures that the token’s value is directly proportional to the underlying NFT’s current price, removing the possibility of price errors and the necessity for intermediaries.
ERC-404 tokens increase the liquidity of the NFT ecosystem by allowing users to exchange fractions of NFTs through bright contract-controlled liquidity pools. The intelligent contract secures user cash, directly issuing tokens against assets and bypassing intermediaries. Selling an ERC-404 token is the same as selling the corresponding NFT.
How does ERC-404 Work?
To facilitate the fractional ownership and transfer of NFTs, ERC-404 employs a novel “mint-and-burn” mechanism that operates behind the scenes. The smart contract will create an NFT and deposit it into the user’s wallet once they buy a whole ERC-404 token. They own the asset behind the token, and the NFT shows it. The smart contract creates a fresh NFT for the buyer whenever their fractional ERC-404 token purchase equals a whole token.
Conversely, the corresponding NFT is destroyed or burned when the bearer sells fractions of their ERC-404 token. When someone buys a fraction of a share, the protocol officially hands over ownership to them. A complete set of ERC-404 tokens is required for the NFT to exist.
Envision a coin that serves as a medium of exchange (like a dollar bill) and an item of collector value (like an autographed baseball card). Tokens can transition between these functions based on the number of them, thanks to the ERC-404 standard.
Use Cases of ERC-404?
The ERC-404 token standard has experimental uses, but its potential applications are wide-ranging: fractionalized access to digital art, gaming, real estate, and more.
Asset tokenization
One area where ERC-404 could be helpful is the possibility of tokenizing physical assets. Luxury goods, real estate, and artwork are valuable possessions that can be fractionally owned. By reducing the barrier to entry, fractional ownership makes these industries more liquid and attractive to investors.
DeFi
The ERC-404 standard increases the breadth of decentralized finance (DeFi) applications by allowing the use of nonfungible assets. Regarding ERC-404 tokens, fractional shares open up a world of previously inaccessible assets.
Gaming
Game assets, like avatars or weapons, can be represented by ERC-404 tokens. Fractionalization improves access to uncommon in-game objects and opens up new gameplay advancement and asset evolution possibilities. A new option for players to make money from their assets is to exchange small quantities of them.
Challenges Faced by ERC-404
Problems with the ERC-404 token standard include its experimental character, the fact that the Ethereum Foundation has not officially approved it, the fact that it could be exploited, and the fact that market adoption is unknown.
Official recognition
There is no official recognition of ERC-404 coins by the Ethereum Foundation, unlike ERC-20 and ERC-721. Since the standard has not yet been evaluated, security and integrity are concerned over its lack of recognition. There is an element of risk with assets made using ERC-404 since the standard hasn’t been validated thoroughly.
Experimental aspects
There are hazards for early adopters of ERC-404 because it is still in the experimental stage. Because of the standard’s youth, it is likely to have significant revisions or enhancements, which could make its adoption more difficult.
Market status
There has been some early interest in ERC-404 tokens, but whether or not they will be stable in the long run is an open question. Token values might experience wild swings due to speculative trading. From a high of $30,144.97 on February 9, 2024, to a low of about $3,730 on May 16, 2024, the. The value of the first ERC-404 token, PANDORA, fell.
Potential exploits
Malicious actors can take advantage of ERC-404 because it is experimental. Assets created on ERC-404 could be in danger if they attempt to exploit flaws.
