ERC-404 Tokens: Unveiling Key Features and Objectives

The latest experimental token standard, ERC-404, has the opportunity to solve NFT challenges such as illiquidity and price volatility. ERC-404, which combines the ERC-20 and ERC-721 token standards in Ethereum, allows multiple wallets to directly own a portion of a single NFT and use that portion for trading or borrowing. We promised an ERC-404 guide – we did it!

This article will discuss ERC-404 token development on Ethereum, how ERC-404 tokens work, and successful ERC-404 projects.

Table of Contents:

1. Unveiling ERC-404: Disrupting the Future
2. Key Features and Objectives
3. Potential Impacts of ERC-404 on the Current Landscape
4. Risks of ERC-404
5. Use Cases and Applications
6. DN-404: Market Reaction to ERC-404
7. Summary

Unveiling ERC-404: Disrupting the Future

First launched in February 2024, ERC-404 is an experimental token standard developed by the Pandora team (it is important to note that as of March 18, 2024, ERC-404 has not yet been included in the standard Ethereum EIP). It combines the liquidity of the ERC-20 tokens with the uniqueness and collectability of the ERC-721 tokens.

It allows NFTs to be split into smaller segments, and it can potentially address some of the market’s major challenges, such as illiquidity and price volatility.

Key Features and Objectives

Take a close look at the features of ERC-404 tokens:

• Divided ownership. With the ERC-404 token, multiple individuals can own portions of an NFT (ERC-721) through fractional shares. This allows buying and selling fractions of an NFT rather than the entire asset.
• Inherent fractionalization. Unlike existing approaches, fractionalization occurs seamlessly within the token standard itself through minting and burning mechanisms. Users are spared the need for additional platforms or intermediaries.
• Boosted liquidity. Fractionalization broadens the NFT market’s appeal and enhances liquidity, potentially rendering these assets more accessible and liquid.
• Dynamic exchange. Users can freely exchange fractions of an NFT, akin to fungible tokens, fostering a more dynamic and interactive marketplace.

This new token standard is like a point card, exchanging points (fungible tokens) for physical goods (NFT). This innovation not only expands the possibilities and imagination of digital assets but also combines the mobility of ERC-20 tokens with the uniqueness and collectability of ERC-721 tokens.

Thanks to the innovative potential of this token standard, two leading trading platforms, Coin and OKX Web3 Wallet, have also launched marketplaces that support the trading of ERC-404 tokens. In addition to $Pandora, other tokens based on the ERC-404 concept, such as $DEFROGS, $RUG, $ANON, and $CRYSTAL, are already available for trading.

Potential Impacts of ERC-404 on the Current Landscape

The ERC-404 features immense potential in various industries, with promising applications unfolding across the following lucrative avenues:

• Asset tokenization. The burgeoning trend of Real World Asset tokenization within the crypto and blockchain spheres stands to benefit significantly from this standard. By enabling fractional ownership of assets such as real estate, art, equipment, and luxury items, ERC-404 could democratize entry into these sectors for a vast number of retail investors while injecting liquidity into traditionally illiquid markets.
• DeFi. The utilization of the ERC-404 standard holds promise for DeFi applications like lending, borrowing, and yield farming. This standard could introduce novel asset types as collateral, while the fractionalization of assets empowers participants to unlock value from portfolios through sales or lending, thereby generating additional income.
• Gaming and NFTs. In the gaming and NFT realms, the ERC-404 token on Ethereum shines with its potential to revolutionize asset ownership, transferability, and interoperability. Developers can leverage this standard to fractionalize in-game assets, paving the way for innovative gameplay mechanics and streamlined virtual economies. Additionally, a broader user base can engage in ownership and trading within the NFT sector, fostering greater inclusivity.
• Supply chain management. ERC-404 offers solutions for transparency, verification, and efficiency in supply chain management applications. This standard can enhance traceability and authenticity by simplifying the issuance of unique IDs to various supplies. Fractionalized NFT tethering to a single original enables seamless product tracing, while burn mechanics ensure efficient storage of perishables, thereby optimizing supply chain operations.

So, the ERC-404 token standard on Ethereum has a big influence on the whole industry.

Risks of ERC-404

The core technological innovation of ERC-404 on Ethereum is that it allows fungible tokens and NFTs to coexist under the same framework and realizes seamless conversion between them. However, the ERC-404 token standard still has the following risks:

1. Accidental burning of NFTs due to fungible tokens accuracy problems. Due to fungible token accuracy problems, an NFT may be burned even if the number of fungible tokens is only slightly less than a whole number (e.g., reduced from 3 to 2.9999).
2. Increased gas consumption. Because of the complexity of the ERC-404 contract, gas consumption increases. Transaction costs are also increased when dealing with fungible tokens and NFT transfer and burn mechanisms due to the need for more computation and storage operations.
3. Limitations of the whitelisting mechanism. Although the whitelisting mechanism allows some pairs/routers to process fungible token transactions without frequent NFT processing, it may limit the system’s flexibility and openness. Once ownership is revoked, the usability and security of the system may be compromised if the whitelisting mechanism is not subsequently updated. This may result in the loss of control over the contract. It can even become opaque, increasing the risk of contract management.

Nevertheless, there are many ERC-404 projects on the market today.

Use Cases and Applications

Here are 5 ERC-404 projects you must be aware of today.

DeFrogs ($DEFROGS)

Leading the charge in the ERC-404 landscape, DeFrogs introduces a dual-asset realm comprising 10,000 tokens and NFTs. Acquiring DEFROGS tokens on DEXs automatically triggers the minting of a corresponding DeFrogs NFT, merging the thrill of NFT collections with the dynamic nature of trading fractional token ownerships. 

With the standard’s adaptability shining through, holders can strategically maneuver between tokens and NFTs across platforms like Uniswap and OpenSea to optimize their investment returns.

Rug ($RUG)

The rebranded collection Penguin NFT on Solana breathes new life into its artwork through ERC-404 compliance. This innovative technology enables the token-NFT duality to be traded on various marketplaces or DEXs. Named in homage to its origins, $RUG symbolizes a community-driven second chance.

Froggy Friends ($TADPOLE)

The well-established Froggy Friends brand has already garnered over 20 million GIF views on Giphy, leveraging its charming amphibian IP. Expanding their business model, they now focus on product placement marketing through viral GIFs. 

$TADPOLE serves as the project’s official ERC-404 collection, unlocking new avenues for licensing opportunities.

Crystal ($CRYSTAL)

Crystal swiftly emerges as the premier ERC-404 token on Arbitrum, fostering a vibrant community within its category. Building on this momentum, Scattering.io, the brains behind Crystal, aims to collaborate with ambitious developers to further integrate 404 standards across Arbitrum. Their vision revolves around establishing Scattering as the leading ERC-404 marketplace on the network, with $Crystal at its nucleus. 

By supporting projects planning Arbitrum launches, Scattering seeks to empower the next wave of high-potential tokens to fully realize their potential.

Bakery404 ($BAKE)

Bakery404 stands as the pioneering ERC-404 Factory, revolutionizing the token creation process. It’s a platform where custom tokens come to life swiftly without the need for any coding expertise. Picture deploying a unique token on Ethereum Mainnet and soon on Base and Arbitrum in the time it takes to savor your morning coffee. Bakery404 ensures that the process is not only seamless but also an enjoyable experience from start to finish.

DN-404: Market Reaction to ERC-404

Recognizing the potential problems with ERC-404 coins, the Ethereum developers quickly introduced DN-404 to address some of the core issues faced, particularly in the areas of efficiency and transaction fees:

1. Improving efficiency and reducing transaction costs. DN-404 is expected to reduce the impact on transaction costs by 20% by optimizing the structure and operation of smart contracts. This is achieved by splitting the original attempt in ERC-404 to merge fungible and non-fungible tokens into a single contract into two separate contracts – a “base” contract based on ERC-20 and a “mirror” contract based on ERC- 721.
2. Simplifying smart contract complexity. By separating the ERC-20 and ERC-721 functions into two separate contracts, DN-404 reduces the complexity of smart contracts. This not only makes the contracts easier to understand and audit but also potentially reduces the risk of vulnerabilities introduced by complexity.
3. Compatibility with existing standards. The design of DN-404 allows “mirrored” ERC-721 contracts to be handled like any standard ERC-721 token, ensuring compatibility with existing protocols that support ERC-721. This design supports broader ecosystem integration without the need to modify existing infrastructure to accommodate the new token standard.
4. Seamless integration process. As the underlying ERC-20 tokens are transferred, the corresponding mirror NFTs are automatically minted or destroyed, providing a smooth and seamless user experience while maintaining a tight connection between the fungible tokens and the NFTs.
5. Addressing extreme circumstances. DN-404 is intended to address the problems that ERC-404 may encounter under certain edge conditions, such as the problem that a reorganized NFT may be in a different state than its original state, by making this possible through clearer contractual logic and operations.

So, DN-404 is an improved ERC-404 implementation that can get a strong position in the market.

Summary

NFT ERC-404 is similar to the hyped NUTS based on the Tiny SPL token standard on Solana. Although still in the experimental stage, it does break through the framework of “tokens” and “NFTs”, gives NFTs native financial properties, and allows them to be seamlessly integrated into the DeFi protocol. This makes it easy to realize financial applications such as borrowing, collateralization, leverage, and so on.

Projects such as Pandora have demonstrated the utility and popularity of this hybrid standard. Regardless of whether ERC-404 eventually becomes the mainstream token standard in the Ethereum market, ERC-404 provides an innovative way of thinking, bringing more flexibility and possibilities to crypto assets.