By Michael Scott
In February this year, ‘ctrl’ and ‘Acme,’ two pseudonymous developers, created a new experimental token the ERC-404 standard that integrates the properties of ERC-20 and ERC-721 token standards. According to the ERC-404 GitHub site, the two standards it plans to combine ‘are not created to be mixed.’ Instead, the effort seeks to integrate them ‘robustly while reducing tradeoffs.’
The ERC-20 token standard seeks to develop a ‘fungible token,’ while the ERC-721 standard (or the nonfungible token standard) is designed to provide unique, non-interchangeable tokens. The ERC-404 token standard, named after ‘Error 404,’ a famous web page error code, allows nonfungible tokens to be fractionalized within the Ethereum network’s limits.
The group behind the ERC-404 token standard created Pandora as the initial project to execute the ERC-404 idea via the PANDORA token and the equivalent ‘Replicant NFT.’
Aspects that Promote ERC-404’s Usefulness
Initially, users encountered the issue of trusting the third party to secure their NFT tokens and grappled with possible gaps between an NFT’s value and the token, leading to a loss. ERC-404 addresses this using a decentralized smart contract to connect the NFT directly to the token’s value.
The token’s value reflects the underlying NFT’s real-time price, eliminating price mistakes and the need for third parties. ERC-404 tokens promote liquidity in the NFT ecosystem, allowing users to trade parts of NFTs via liquidity pools.
User funds are locked within the smart contract, allowing token issuance against assets without involving intermediaries. When an ERC-404 token holder sells the token, it is similar to selling the associated nonfungible token.
ERC-404 Standard Functions Explained
When a person buys a whole ERC-404 token, the smart contract automatically generates an equivalent NFT and sends it to the wallet. If one purchases adequate fractions of an ERC-404 token to complete a full token, the smart contract generates a new NFT.
The related NFT is destroyed or burnt when a holder sells part of their ERC-404 token. This protocol moves the fractional ownership to the fractions’ purchaser(s). The nonfungible token exists only when an individual holds a whole ERC-404 token.
One can visualize a token that can be a currency unit, for instance, a dollar bill and a unique collectible such as a rare baseball card. The ERC-404 standard permits switching tokens between the functions based on how many they are.
ERC-404 is Different from ERC-721 and ERC-20
The ERC-404 token standard is unique from ERC-721 and ERC-20 by permitting nonfungible tokens for fractionalizing within the Ethereum protocol. This enables shared ownership and improved liquidity for exclusive digital assets.
ERC-404 Use Cases
Decentralized finance (DeFi)
By allowing the utilization of nonfungible assets, the ERC-404 standard widens the reach of apps linked to DeFi. Fractional shares permit ERC-404 token owners to access assets that were mainly inaccessible.
Gaming
The tokens can represent game assets like weaponry and avatars. Fractionalization brings new opportunities that facilitates gameplay while enhancing accessibility to uncommon in-game projects.
Asset tokenization
A potential ERC-404 token application is physical asset tokenization that entails fractionalized ownership of costly possessions such as real estate, luxury goods, and artwork. Fractional ownership reduces the entry barrier for investors and makes the industries liquid.
Problems Encountered by ERC-404
Market status
Despite the tokens gaining traction, long-term stability and market acceptance are still uncertain. Speculative trading activity can cause a sharp fluctuation in token prices.
Official recognition
Unlike ERC-721 and ERC-20 tokens, the Ethereum Foundation does not formally acknowledge ERC-404 tokens. This situation evokes integrity and security concerns since the standards lack vetting.
Experimental elements
Since ERC-404 is in the experimental phase, it presents potential risks for early adopters. The standard is relatively new, so it might undergo significant improvements or changes, evoking issues in its adoption.
Possible exploits
ERC-404’s experimental nature develops opportunities for malevolent actors to exploit it.