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Author: Dilip Kumar Patairya Source: cointelegraph Translation: Shan Oppa, Bitchain Vision
What is ERC-404?
ERC-404 is an experimental token standard that combines elements of the ERC-20 and ERC-721 token standards to generate tokens with both replaceable and irreplaceable token attributes.
In February 2024, two pseudonym creators, “ctrl” and “Acme”, developed a new experimental token standard that combines the properties of two established token standards: ERC-20 and ERC-721.The ERC-404 GitHub website says the two standards it intends to merge “is not designed for mixing”, but its goal is to “merge them in a way that is as robust as possible while minimizing trade-offs.”
The ERC-20 token standard is designed to create “fungible tokens.”Fluency refers to the ability to exchange tokens for something of equal value.One of the key features of ERC-20 tokens is their splitability, which allows them to be broken down into smaller units.
Meanwhile, the ERC-721 token standard (commonly known as the non-fungible token (NFT) standard) was created to provide unique, non-swap tokens.Unlike ERC-20 tokens, each ERC-721 token represents an indivisible single digital asset or collection.
The ERC-404 token standard is named after the famous web error code “Error 404”, allowing NFTs to be segmented within the limits of the Ethereum network.This is done by linking NFTs to alternative tokens to implement fractional division.
The team behind the ERC-404 token standard developed Pandora as the first project to implement the ERC-404 concept through PANDORA tokens and the corresponding “Replicant NFT”.ERC-404 is not the official Ethereum token standard and is executed by smart contracts.
What are the uses of ERC-404 tokens?
Prior to ERC-404, only third-party protocols could shard NFTs.When users share their NFTs with these protocols, the protocol locks their NFTs in the wallet and issues tokens against them.
The problem faced by users is trusting third parties to ensure the security of their NFT tokens and working to resolve potential gaps between NFT and token values, resulting in losses.ERC-404 solves this problem by using decentralized smart contracts to link NFTs directly to the value of tokens.Thanks to this mechanism, the value of the token reflects the real-time price of the underlying NFT, eliminating price errors and eliminating demand for third parties.
The ERC-404 token makes the NFT ecosystem more liquid, allowing users to trade portions of NFTs through a liquidity pool controlled by smart contracts.User funds are locked in smart contracts, so tokens can be issued against assets without the participation of intermediaries.When the holder of the ERC-404 token sells the token, the NFT associated with the sale is the same.
How does ERC-404 work?
A unique “casting and destroying” mechanism is adopted in ERC-404, which enables partial ownership and transfer of NFTs.
When people buy the entire ERC-404 token, the smart contract automatically mints the corresponding NFT and sends it to their wallet.NFTs indicate their ownership of assets under the token.If someone buys enough ERC-404 tokens to complete the full token, the smart contract will mint a new NFT for them.
On the other hand, when the holder sells a portion of its ERC-404 token, the associated NFTs are burned or destroyed.This agreement transfers part of ownership to the buyer of these parts.NFTs exist only if one holds a complete ERC-404 token.
Imagine a token can be either a unit of currency (such as a dollar bill) or a unique collection (such as a rare baseball card).The ERC-404 standard allows tokens to switch between these functions based on the number of holdings.
How is ERC-404 different from ERC-20 and ERC-721?
The ERC-404 token standard differs from ERC-20 and ERC-721 in that it allows NFTs to be segmented in the Ethereum protocol, enabling shared ownership of unique digital assets and enhancing liquidity.
The following table lists the experimental ERC-404 token standards and the ERC-20 and ERC-721 token standards:
What are the use cases of ERC-404?
Even if it is experimental, the standard use cases of ERC-404 tokens span industries, allowing segmented access to real estate, digital art, gaming, and more.
Asset tokenization
One potential application of ERC-404 is tokenization of physical assets.It involves dividing ownership of expensive properties such as luxury goods, real estate and art.Partial ownership lowers the barriers to entry for investors and makes these industries liquid.
Decentralized Finance
By allowing the use of irreplaceable assets, the ERC-404 standard expands the scope of applications related to decentralized finance (DeFi).Some shares allow ERC-404 token owners to access assets that were otherwise inaccessible.
gamble
ERC-404 tokens can represent game assets, such as avatars or weapons.Fragmentation opens up new opportunities for game progression and asset evolution, while also improving accessibility to rare objects in the game.Players can exchange small amounts of assets and introduce them to new ways to monetize assets.
What challenges does ERC-404 face?
The ERC-404 token standard faces challenges due to its experimental nature, lack of official approval from the Ethereum Foundation, potential exploitation and uncertainty in market adoption.
Officially approved
Unlike ERC-20 and ERC-721, the Ethereum Foundation does not officially recognize the ERC-404 token.The lack of recognition has raised concerns about safety and integrity, as the standard has not yet been reviewed.Assets created with ERC-404 have risk factors as this standard has not been rigorously tested.
Experimental aspects
ERC-404 is still in the experimental stage, which poses potential risks to early adopters.The standard is relatively new and therefore may undergo significant changes or improvements that will challenge its adoption.
Market status
Although the ERC-404 token has received initial attention, its long-term market acceptance and stability are still uncertain.Speculative trading activities may cause substantial fluctuations in token prices.The first ERC-404 token, PANDORA, fell from its peak of $30,144.97 on February 9, 2024 to around $3,730 on May 16, 2024.
Potential utilization
The experimental nature of ERC-404 creates opportunities for malicious actors to use it.They may try to exploit vulnerabilities that present security risks to ERC-404-based assets.
