- A group of developers have launched an experimental Ethereum token standard combining the qualities of ERC-20 and ERC-721.
- ERC-404, the experimental token standard, holds significant promise but carries risks.
- Find out about the experimental token that has taken the crypto space by storm.
The Ethereum network has two major token standards: the ERC-20 token standard for fungible tokens, which function like digital cash, and the ERC-721 token standard for non-fungible tokens (NFTs), which act like digital collectibles. For the most part, these token standards have operated in isolation, serving two different purposes, but this might be about to change.
A group of developers have introduced a new standard, albeit experimental and unofficial, that promises to shake things up in the Ethereum ecosystem. In this article, DailyCoin will explain what this experimental token standard ERC-404 is and why it might be needed while discussing the projects already building around it.
What is ERC-404?
Named after the popular website error code, ERC-404 is an unofficial Ethereum standard built by the Pandora team that combines the capabilities of fungible tokens with non-fungible tokens to create what the developers call a semi-fungible token.
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The token standard works by linking every issued token to an NFT. If less than one token is purchased, the NFT linked to the token is burnt. However, adding more fractions would automatically mint another NFT when the fraction of the token is whole. This process, of course, does come at the cost of gas efficiency.
In this system, people can buy and sell NFTs as usual or sell parts of them as tokens. Depending on how a project implements the token standard, the regenerated NFTs could be the same as the burnt one or entirely different.
Why is the ERC-404 Token Standard Needed?
The ERC-404 standard potentially solves two significant issues with NFTs. First is the issue of liquidity.
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Traditionally, for users to sell an NFT, they need to have a ready counterparty. With ERC-404 tokens, however, functioning like tokens, holders can sell at any time if there is a liquidity pool.
At the same time, the ERC-404 token standard offers native fractionalization of NFTs instead of the status quo, where fractionalization projects have to lock up NFTs and issue shares against them.
Despite the promise of this solution, users of the experimental ERC-404 standard may be exposing themselves to significant risk.
An Unofficial and Experimental Standard
Despite being called an “ERC” token standard by developers, the ERC token standard has yet to undergo the typical vetting process for all ERC standard tokens. This process includes submitting improvement proposals (EIPs) and the request for comment phase (ERC). These are designed to ensure that Ethereum upgrades are thoroughly tested and reviewed by the community.
Having yet to undergo these processes and being unaudited, the project may carry many flaws that bad actors can exploit.
These risks, however, have not stopped many investors from piling into Pandora, the project created by the ERC-404 founders, and other projects that have moved to jump on the trend.
The Pandora Project
On February 2, ERC-404 developers launched the Pandora (PANDORA) token project with 10,000 tokens and 10,000 associated “Replicant” NFTs with varying rarity levels.
These NFTs are all represented as boxes, with the community anticipating them to reveal something later.
PANDORA is already trading for over $23,000 after less than a week of trading and boasting a fully diluted valuation of over $222 million, per CoinGecko data.
Following the launch of PANDORA, other tokens using the ERC-404 standard have emerged. An example is DeFrogs, a PFP project that claims to be deflationary.
On the Flipside
- The ERC-404 standard is not the first time an unconventional token standard has captured the imagination of crypto market participants. In early 2023, blockchain inscription tokens took the market by storm.
Why This Matters
It is necessary to understand what ERC-404 tokens are and the risks associated with the experimental standard as it quickly begins to dominate discussions in the crypto space.
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