Why Is Everyone Talking About ERC-404 Tokens?

With the likes of Binance and OKX announcing Web3 wallet support for ERC-404 tokens, the crypto community has been are talking about the new unofficial experimental Ethereum token standard that combines fungible and non-fungible token (NFT) features.

So just what is all the hype is all about?

The semi-fungible standard

The ERC-404 token standard combines aspects of ERC-20 and ERC-721, establishing a new ‘semi-fungible’ hybrid token. In short, this makes it possible to create fractionalized NFT collections that can be traded and leveraged on the open market.

As per the official GitHub: “ERC-404 is an experimental, mixed ERC-20 / ERC-721 implementation with native liquidity and fractionalization. While these two standards are not designed to be mixed, this implementation strives to do so in as robust a manner as possible while minimizing tradeoffs.”

Just as you can buy a fraction of a whole Bitcoin (BTC), ERC-404 improves the liquidity of NFTs, which are more or less illiquid in many instances. Instead of waiting for a collector to purchase your NFT a user can now essentially sell shares of an NFT without needing to lock up or wrap them using third-party protocols.

Fractionalized NFTs do already exist, but they rely on third-party entities that lock the NFTs and issue tokens that represent the deposited NFT. Though they can be traded freely, their value doesn’t quite match that of the locked asset, another area ERC-404 is hoping to solve.

Using unique token minting and burning mechanics, multiple wallets can directly own a single NFT, and in time with enough experimentation, this could see many new use cases for NFTs, perhaps giving them the boost in utility they’ve needed for some years.

ERV-20 and ERC-721 explained

For those unfamiliar, token standards are a set of rules and protocols that govern the functionality and behavior of a cryptocurrency on their respective networks.

On Ethereum, these are known as ‘Ethereum Request for Comment’ or ERC, which are a set of technical documents and guidelines on creating a smart contract, laying out the specifications and functions for each token type.

ERC-20 is the most common standard that Ethereum tokens are built on. These are fungible tokens that are identical and are therefore a means of basic transfer and trade between parties, just like regular fiat currency.

ERC-721 is a token standard for NFTs. These are tokens that have been given unique individual specifications, turning them into artworks, game items, domain names, and ownership rights, and are therefore not mutually interchangeable.
Pandora

The creators of ERC-404 also established Pandora (PANDORA), the first issuance of this new token type. Since its launch in early February 2024, the token managed to break past the $30,000 price tag before correcting down to a price of $14,000.

Pandora is made up of 10,000 PANDORA ERC-20 tokens, and 10,000 linked ‘Replicant’ NFTs. When a user purchases a full PANDORA token, a Replicant NFT (of varying rarity) is minted to the user’s wallet. On the flip side, if you sell one PANDORA token, the connected NFT is burned.

As per data available on CoinGecko, the market cap for ERC-404 tokens is presently sitting at $160million, down some 34% in the last 24 hours, with Pandora taking up approximately $137m of that figure, suggesting a slight market correction amid overall bullish conditions for the market.
Utility Pending?

In 2021, the NFT market was booming with billions of dollars pouring into a curious space brimming with potential. NFTs gained traction as they were a novel way to create and own unique digital assets such as artwork, music, videos, games, and more.

The most prevalent projects were the limited-run collections such as Bored Ape Yacht Club (BAYC) or CryptoPunks. These projects featured images with different traits/characteristics that set them apart, making them highly speculative although lacking in any major utility for the most part.

Oversaturation followed, with many new NFT projects launching in hopes of capturing some portion of the market share in one way or another. Following the decline of the overall crypto market, the term ‘NFT’ became synonymous with useless and expensive JPEG images, and has been considered somewhat of a joke ever since.

The introduction of fractionalized ownership and highly liquid NFTs could cause another speculative bubble around unique digital assets, but it is in these moments where experimentation and innovation take hold, often leading to a breakthrough of some kind.

Though ERC-404 remains an unofficial token standard, the team appears to be set on giving it some legitimacy through an Ethereum Improvement Proposal (EIP) that the Ethereum community can vote on in the near future.