Combining Homogeneity and Heterogeneity: The Rise of ERC-404
Since the explosive popularity of Non-Fungible Tokens (NFTs) in 2021, they have not only found a place in the digital art and collectibles field but have also disrupted the gaming and retail industries. In recent years, new NFT standards and protocols have been continuously developed to meet market demands and address pain points, including the widely discussed “ERC-404.”
ERC-404 was first introduced in February 2024 and was created by former Coinbase engineer 0xacme. It combines the features of the homogeneity token protocol “ERC-20” and the heterogeneity token protocol “ERC-721.”
In simple terms, each NFT will have a corresponding token. When a user sells an NFT, the corresponding homogeneity token will also be transferred. Conversely, when a user sells a homogeneity token, the corresponding NFT will be destroyed and re-minted in the user’s wallet who purchased the homogeneity token.
This transaction mechanism means that whether you are an NFT holder or a token holder, you can enjoy good liquidity without worrying too much about the difficulty of transferring your assets.
The token “Pandora” is the first project issued using the ERC-404 standard. The NFTs tied to this token have different levels of rarity, with one being randomly selected each time it is minted. Pandora skyrocketed from less than $5,000 to over $23,000 in a short period, demonstrating the strong collecting and experiential frenzy triggered by ERC-404.
Lootex, a Taiwanese NFT marketplace and issuer, sees great potential in ERC-404 and has created “404 Journey” in 2024 to allow users to explore the features of ERC-404 through a gaming experience. Currently, it has accumulated over $200,000 in transactions.
What makes Lootex’s ERC-404 Journey unique?
Firstly, users can earn points by holding or trading Lootex’s native NFT IP, “Smart Frens.” The accumulated points vary depending on the rarity and trading volume.
Based on the points, users will enter the leaderboard and be assigned to one of the three factions: “Freedom,” “Bravery,” or “Kindness.” Subsequently, users will receive an airdrop of “$FRENS” ERC-404 tokens based on their ranking. Token holders will see both an ERC-20 and an ERC-721 token in their wallets.
The ERC-721 token tied to the “$FRENS” token represents a prop NFT, with each NFT linked to a different faction. Users belonging to a specific faction need to actively buy their own faction’s props and sell the props of other factions, just like “supporting the front line.” The more props a user has from their own faction, the higher their points will be, ultimately competing for the faction’s prize pool. During this process, users can choose to trade using either ERC-20 or ERC-721 tokens, depending on their strategy.
Lootex uses gaming and leaderboard experiences to help users understand the features of ERC-404. According to Lu Ji-Jie, Co-founder and CEO of Lootex, players have responded enthusiastically, and even users who did not initially hold the free airdropped Smart Frens NFTs are willing to purchase and join the 404 Journey. Everyone is eager to understand how to accumulate points in order to participate in the entire process.
As the Smart Frens NFTs were initially distributed for free, most community members consider the 404 Journey to be very “generous” and equivalent to the concept of “Free-to-play.” Lu Ji-Jie explains that ERC-404 itself is an experimental standard that brings a new narrative to the dormant NFT space, and Lootex hopes to lower the threshold so that the community can experience the fun of the new NFT protocol.
What are the advantages of ERC-404?
Advantage 1: Solving NFT Liquidity Issues
Lu Ji-Jie believes that liquidity is the primary pain point ERC-404 addresses. In the crypto market, NFTs lack market liquidity. Even though blue-chip NFTs are valuable, it still takes time to find the next buyer who is willing to “bid.” However, ERC-404 allows NFTs to have liquidity like ERC-20 tokens. If there is no reason to continue holding an NFT, it can be sold directly.
Advantage 2: Splitting NFT Ownership to Increase Investor Participation
A valuable NFT can be worth millions of dollars, but with the ERC-404 standard, a digital collectible can be divided into multiple parts, each with a corresponding token representing partial ownership, similar to buying fractional shares of a stock. This lowers the barrier to invest in high-priced NFTs and makes it easier to sell them if desired, thus increasing buyers’ willingness to enter the market.
To facilitate transactions, the Lootex website also integrates a “Swap” feature, allowing users to easily deal with their ERC-404 tokens, whether it’s trading tokens or associated NFTs.
Advantage 3: Gaming Applications
Based on recent experiences participating in exhibitions in countries like Japan and Hong Kong, Lu Ji-Jie observes that many developers are still focused on the development and opportunities of ERC-404, especially in gaming applications. ERC-404 has great potential in the gaming industry. For example, the concept of synthesizing unwanted props into new weapons is similar to the concept of “destroying” and “re-minting” NFTs in ERC-404.
Lu Ji-Jie reveals that many game projects have already started researching how to incorporate the ERC-404 protocol into their game systems.
Experimental Standards Still Pose Risks
Even though ERC-404 brings new narratives and opportunities to the NFT market, Kerel Verwaerde, the Chief Marketing Officer of the exchange Cryptology, warns that ERC-404 is still in its early development stage and needs to be cautious about potential technical or risk issues due to its immaturity.
Jesse Leclere, a blockchain analyst at Web3 security company CertiK, agrees that introducing new experimental token standards may bring risks. For example, malicious actors may attempt to exploit the hype around the new standard to attract users and engage in fraudulent activities.
While ERC-404 has brought more possibilities and vitality to the NFT market, making the entire NFT ecosystem richer, participants and adopters should remain vigilant and be prepared to address potential risks while conducting thorough research.
