What is the ERC-404 Token Standard?
The ERC-404 standard, whimsically named after the well-known web error code, marries the attributes of fungible (ERC-20) and non-fungible (ERC-721) tokens, giving rise to a novel category: semi-fungible tokens.
ERC-404 in Simple Words: What Is It?
The introduction of the new ERC-404 protocol aims at boosting NFT marketplace liquidity by drawing in more purchasers to the realms of tokenized real-world assets (RWA) and premium NFTs.
ERC-404 is an unofficial Ethereum standard built by the Pandora Labs team. This standard allows any issued token to be tied to an NFT. If a user purchases less than one NFT (we’ll elaborate on that further), the associated token is burned. A new NFT is created when all parts of the divided token are bought out.
For a clearer understanding, consider the following analogy.
Imagine desiring an expensive digital artwork but finding the price beyond reach. ERC-404 enables the acquisition of a piece of this artwork. The NFT representing the artwork is divided into fractions, each denoted by an ERC-404 token.
Should a digital rendition of the “Mona Lisa” be segmented into 1000 tokens, purchasing 10 would equate to a 1% stake in this invaluable digital piece. Collectively, fragment owners can make decisions regarding the artwork's exhibition location or the pricing of museum admissions.
Securing ownership rights to 10 fractions of the artwork in a smart contract leads to the burning of the 10 tokens utilized in the purchase. Conversely, selling your ownership stake would result in the reissuance of the same 10 tokens, exchanged for transferring your fractions to the new owner.
What's the benefit? Similar to traditional art investment, the potential appreciation of the tokens (or the artwork itself) offers a chance for profit.
Advantages and Risks of ERC-404
Pandora Protocol's initiative saw the release of 10,000 PANDORA tokens alongside 10,000 NFTs, granting token purchasers an NFT from this collection. The tokens witnessed a surge in demand, appreciating nearly fivefold shortly after their release. The innovative standard has garnered support from Web3 wallets like OKX and Binance.
PANDORA Price Dynamics. Source: Coinmarketcap.com
However, potential investors should also weigh the following risks:
- The project is helmed by anonymous developers, making it challenging to ascertain the identities behind “ctrl” (@maybectrlfreak) and “Acme” (@0xacme). While rumors suggest they are seasoned Ethereum team programmers, verifying this information remains difficult.
- ERC-404 represents an experimental standard, lacking in comprehensive verification and audit processes. This situation poses a risk of undiscovered vulnerabilities that malicious actors could exploit.
- The future of ERC-404 teeters on uncertainty, with its acceptance as mainstream or remaining as an esoteric technology for a select group of NFT enthusiasts yet to be determined.
- Early trading indicated limited holder diversity and predominant trade volumes circulating among a few addresses, raising concerns over market manipulation.
- The trend of creating fractional NFTs was rapidly picked up by several smaller or relatively unknown projects. Within three days, the ERC-404 standard was utilized by entities like DeFrogs, Rug, EtherRock404, Troves, and a handful of other issuers. Interestingly, the price trajectories of these assets are strikingly similar: an initial robust growth phase is quickly replaced by a decline ranging from 10-30%. Following this initial hype wave, this particular sector of the market has seen a nearly 20% drop in its total value, eliciting worried assessments from the community.
However, the ERC-404 standard's potential for positively transforming the liquidity issue surrounding high-value collectible NFTs cannot be understated. The mechanism of token issuance and burning upon smart contract execution obviates the need for locking NFTs and issuing fractional sales shares. Crucially, ERC-404 paves the way for gamification innovations, enabling the creation of games with intricate economies and valuable items.
The advent of new token standards highlights the expansive possibilities of smart contract technology, signposting future decentralized economy development avenues. Nonetheless, the allure of novelty should not precipitate hasty investment decisions. Engage in thorough research before committing to any new project.
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