Solving Challenges in the NFT Market! What is ERC-404?
ERC-404, first introduced in February 2024, is an experimental token standard developed by the Pandora team (note that as of February 16, 2024, ERC-404 has not been included in the standard Ethereum EIP). It combines the liquidity of ERC-20 tokens with the uniqueness and collectability of ERC-721 non-fungible tokens (NFTs).
ERC-404 allows NFTs to be divided into smaller parts, potentially addressing some key challenges in the NFT market, such as liquidity issues and price volatility.
Pandora Project: The First Application of ERC-404
Pandora is the first project to be launched using the ERC-404 standard.
When users purchase PANDORA tokens, the system automatically mints a randomly generated Pandora NFT. Conversely, when PANDORA tokens are sold, the corresponding NFT is destroyed. This mechanism means that Pandora NFT holders can enjoy the liquidity of $17 million in the PANDORA token liquidity pool without worrying about the liquidity of the NFT.
Pandora NFTs exist in five different rarities, with one rarity randomly selected each time they are minted.
However, when users transfer PANDORA tokens from one wallet to another, the NFT is also destroyed and regenerated. Therefore, the only way to avoid the regeneration of the NFT while transferring it is to directly buy or sell the NFT.
The Potential and Risks of the Token Standard
The core technological innovation of ERC-404 lies in allowing fungible tokens (FT) and non-fungible tokens (NFT) to coexist within the same framework and achieve seamless conversion between the two.
This new token standard, known as “tokenization,” can be compared to a loyalty card, where points (FT) can be exchanged for physical goods (NFT). This innovation not only expands the possibilities and imagination of digital assets but also combines the liquidity 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, Binance and OKX Web3 Wallet, have already launched markets that support ERC-404 token trading.
In addition to $Pandora, other tokens based on the ERC-404 concept, such as $DEFROGS, $RUG, $ANON, and $CRYSTAL, have also been listed for trading.
However, the ERC-404 standard currently faces the following risks:
1. Indiscriminate transfer of NFT rarities:
When trading FT, the corresponding NFT may be transferred to the buyer without considering its rarity. This could result in the original owner losing a higher value NFT.
2. FT precision issues leading to accidental burning of NFTs:
Due to FT precision issues, even a slight decrease in the quantity of FT (e.g., from 3 to 2.9999) could lead to the burning of an NFT.
3. Increased gas consumption:
The complex contracts of ERC-404 lead to increased gas consumption. Especially when handling FT and NFT transfers and burning mechanisms, more computation and storage operations are required, increasing transaction costs.
4. Limitations of the whitelist mechanism:
While the whitelist mechanism allows certain pairs/routers to process FT transactions without frequent handling of NFTs, it may limit the system’s flexibility and openness. Once revokeOwnership is executed, if the whitelist mechanism is not updated subsequently, the availability and security of the system may be compromised. If revokeOwnership is executed, the subsequent whitelist mechanism will also not be updated, potentially leading to the loss or opacity of contract control and increasing the risk of contract management.
Market Reaction to ERC-404
Due to the potential issues with ERC-404, Ethereum developers (code-named cygaar and quit) quickly introduced DN-404 to address some core issues, especially in efficiency and transaction costs:
1. Improved efficiency and reduced transaction costs:
DN-404 is expected to reduce the impact on transaction costs by 20% through optimized smart contract structures and operations. This is achieved by splitting the attempt to merge fungible and non-fungible token functionalities into a single contract in ERC-404 into two separate contracts: a “base” contract based on ERC-20 and a “mirror” contract based on ERC-721.
2. Simplified smart contract complexity:
By separating ERC-20 and ERC-721 functionalities into two independent contracts, DN-404 reduces the complexity of smart contracts. This not only makes contracts easier to understand and audit but also reduces the risk of introducing vulnerabilities due to complexity.
3. Compatibility with existing standards:
DN-404’s design allows the “mirror” ERC-721 contract to be processed 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:
When the underlying ERC-20 tokens are transferred, the corresponding mirror NFT is automatically minted or destroyed, providing a smooth and seamless user experience while maintaining a close connection between FT and NFT.
5. Handling extreme cases:
DN-404 aims to address potential issues that ERC-404 may encounter under certain edge conditions, such as the problem of regenerated NFTs being different from their original states. This is achieved through clearer contract logic and operations.
In addition, SmartLayer has proposed further integration with TokenScript, allowing users to independently choose which NFT to burn first when trading ERC-404 NFTs in their wallets. This allows for the retention of high rarity NFTs while refreshing the rarity of NFTs.
Conclusion
ERC-404, similar to the recently hyped NUTS based on the Tiny SPL token standard on Solana, breaks the framework of “tokens” and “NFTs.” Although they are still in the experimental stage, they indeed give NFTs native financial attributes and seamlessly integrate them into DeFi protocols, enabling easy implementation of financial applications such as lending, collateralization, and leverage.
Projects like Pandora have already demonstrated the practicality and market popularity of this hybrid standard. Whether ERC-404 ultimately becomes the mainstream token standard in the Ethereum market or not, it provides an innovative approach that brings more flexibility and possibilities to the world of crypto assets.
Opinion articles present diverse opinions and do not represent the stance of “WEB3+.”
Proofreading editor: Gao Jingyuan
