ERC-404: The Game-Changing Standard Merging Fungibility and Uniqueness in Tokens
Summary:
ERC-404 is an innovative token standard combining the properties of fungible ERC-20 and non-fungible ERC-721 tokens. Developed by two pseudonymous creators in February 2024, this standard aids in fractionalizing non-fungible tokens within the Ethereum network. Despite its potential benefits, including making NFTs more accessible and facilitating shared ownership of digital assets, ERC-404 faces several challenges. These include its experimental nature, lack of official recognition from the Ethereum Foundation, potential vulnerabilities, and uncertain market acceptance.
ERC-404 is an innovative token standard that merges features of both fungible ERC-20 tokens and nonfungible ERC-721 tokens, created in February 2024 by two anonymous creators named "ctrl" and "Acme". Despite blockchain standards ERC-20 and ERC-721 inherently incompatible, the creators aim to amalgamate them in a thorough way reducing compromise.
Fungible ERC-20 tokens possess an inherent value that can be exchanged, with key characteristic being divisibility into smaller units. Contrarily, ERC-721, known as the nonfungible token (NFT) standard, creates unique, irreplaceable tokens which are indivisible. Each ERC-721 token symbolizes a distinct digital asset or collectible.
The novelty of ERC-404, taking its name from the recognized web error code “Error 404”, allows NFTs to be divided to smaller fractions within the limit of Ethereum network. The fractured division of an NFT is made possible by associating it with a fungible token. The first project to adopt ERC-404 principles is Pandora through its PANDORA token and "Replicant NFT". Currently, ERC-404 is not an official Ethereum token standard, its functionality is facilitated by smart contracts.
The previous method to fractionize NFTs required third-party protocols. Users would put their NFTs in a wallet, get their tokens issued against them, and had to trust these third parties for the security of their tokens. ERC-404 bypasses this procedure by connecting the NFT to the value of the token through a decentralized smart contract; the token’s worth is a reflection of the real-time NFT, solving the problem with price errors and eliminating the need for third parties. ERC-404 tokens also add liquidity to the NFT eco-system, permitting factions of NFTs to be traded through liquidity pools.
The underpinning mechanism of ERC-404 is the mint-and-burn process; contributing towards fractional ownership and transfer of NFTs. Purchasing an ERC-404 token results in the minting of a corresponding NFT indicating ownership of the underlying asset. If one accumulates fractions of ERC-404 token equal to a full token, a new NFT is minted for them. However, if fractions are sold, the NFT is burned and fractional ownership transfers to buyer(s) of those fractions.
Comparatively, ERC-404 differs from ERC-20 and ERC-721 by enabling fractionalization of NFTs within Ethereum protocol; thus, fostering shared ownership and better liquidity for digital assets.
Despite in experimentation phase, the use cases of ERC-404 tokens extend across sectors such as real estate, digital art, gaming, and more, facilitating the tokenization of physical assets, decentralizing finance, and potentially revolutionizing in-game asset monetization.
However, ERC-404 faces its own share of challenges, lacking outright recognition from Ethereum Foundation, undergoing continuous modification due to its experimental nature, bearing a substantial risk quotient and uncertain market stability. Since the ERC-404 is rather new, it exposes opportunities for malignant players to exploit it, leading to security risks for ERC-404 associated assets.
Published At
5/29/2024 2:28:00 PM
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