ERC-404: Innovation Merging Fungible & Non-Fungible Tokens Functionalities
On Ethereum, there are several standards for the creation of tokens, with names that many have seen or heard before, such as ERC-20 for Fungible Tokens and ERC-721 for Non-Fungible Tokens or NFTs.
Before we delve into the ERC protocol, let's understand how Fungible Tokens are distinct Non-Fungible Tokens or NFTs first.
- Fungible Tokens are assets without unique characteristics. One token is equal to another token and can be divided. For example, 1 ETH is equal to 1 ETH and can be exchanged without using the entire 1 ETH.
- Non-Fungible Tokens, on the other hand, are assets that are unique, have unique value, and cannot be divided. Each token has its own unique identity, as we can see from various digital artworks.
However, both types of tokens have their own limitations and challenges. For example, ERC-20 lacks uniqueness and cannot be customized to specific needs. While ERC-721 can, it lacks liquidity due to its high exchange value. Furthermore, many people still find it difficult to combine Fungible Tokens and Non-Fungible Tokens or create hybrid tokens.
Recently, we have seen news of the token "ERC-404", offering another possibility of combining Fungible Tokens and Non-Fungible Tokens. This new standard for token creation has attracted attention, and within a week of its launch, ERC-404 has seen its exchange value soar to over $76 million in 24 hours with a supply of only 8,000 tokens.
What is ERC-404? What is so interesting about it? And how will it play a role in the Ethereum ecosystem? In this article, we will take a look at this type of token, which, within a week of its launch, has seen its exchange value soar to over $76 million within 24 hours with only a supply of only 8,000 tokens, "ERC-404".
What is ERC-404?
ERC-404 is a token creation standard is still a work in progress, invented and developed by "ctrl" and "Acme".
The development approach of ERC-404 is to combine the features of ERC-20, which are Fungible Tokens that can be fractionalized, with the features of ERC-721, which are distinct and allow holders to add their own identity.
ERC-404 also introduces the concept of "Semi-Fungible Tokens", where interested token holders can partially own a token, not necessarily the entire token. This will increase liquidity and flexibility in digital assets.
ERC-404’s Operation
The core of ERC-404 is its ability to Mint (or create tokens) and Burn (or destroy tokens). ERC-404 tokens can be fractionalized and exchanged as NFTs, which allows token holders to divide parts of the token into smaller pieces, increasing access to high-value digital assets and adding liquidity to the market.
ERC-404 tokens will display special characteristics in each part of the NFT. Token holders can own the entire token or collect enough fractions to Burn and then receive a new NFT token in return.
Let’s understand better the mechanics of ERC-404 by taking a look at it step by step:
- Combines the features of ERC-20 and ERC-721: As explained above, ERC-404 tokens are designed to bridge the gap between Fungible and Non-Fungible Tokens. ERC-404 tokens will have functions that combine the special features of both types of tokens.
- Easily fractionalize and own NFTs: One of the key features of ERC-404 tokens is that they can be owned fractionally, without token holders having to buy the entire token. This combines the ability of Fungible Tokens to be fractionalized with high-value and unique NFTs.
- Has Minting and Burning mechanisms: When we exchange an ERC-404 token, which is part of an NFT, the remaining NFT can be Burned. However, if we collect the remaining parts until we have the whole token, the NFT can be minted into a new token. This mechanism will allow for seamless token exchange by making it easier to own NFTs through the same steps as exchanging Fungible Tokens.
ERC-404’s Distinguished Application
With the ability to own NFTs fractionally, ERC-404 will increase ownership accessibility and market liquidity, making NFT trading easier without requiring ownership of the entire token. This combination of the unique features of Fungible and Non-Fungible Tokens paves the way for new and intriguing NFT projects or applications in the Ethereum ecosystem. Examples include:
- Art and Collectibles: The ability to own a fraction of an NFT allows interested individuals to access high-value art or collectibles that they are passionate about, offering everyone an equal opportunity to own valuable assets.
- Real Estate: Real estate has been transformed into digital assets and gained popularity. The emergence of ERC-404 will allow investors to benefit from fractional ownership, making real estate investment more accessible to everyone.
- Gaming and Metaverse: In the Gaming and Metaverse worlds, fractional token ownership will enhance the ability to trade in-game assets and Virtual Land, further improving the Virtual world economy.
- Decentralized Finance: Owning a fraction of an asset or a share of a startup or project opens up opportunities for everyone interested to participate in investing in various startups or projects.
Notable ERC-404 Project Examples
Despite its recent launch, ERC-404 has attracted significant attention, with projects experimenting with the ERC-404 protocol to transform the digital asset landscape on Ethereum. With wider adoption of ERC-404, we can expect to see more Semi-Fungible Token projects in the future.
Here are some interesting ERC-404-related projects:
- Pandora: The first project to showcase ERC-404's capabilities is Pandora, which allows users to own fractionalized Pandora NFTs.
- DeFrogs: DeFrogs emerged following Pandora's success in utilizing ERC-404. The DeFrogs project allows users to own 10,000 frog PFPs or Profile Picture NFTs, with the purchase of one DeFrogs token equivalent to minting one NFT.
- Monkees: Monkees is the latest player to adopt ERC-404. The project is similar to DeFrogs, allowing ownership of a collection of Monkey PFPs. Monkees asserts that using ERC-404 has resulted in more tangible growth compared to the prior approach.
There are other projects like Punks404 and EtherRock404 that will also operate on ERC-404, despite them having market value and trading volume differences compared to the projects mentioned above.
Limitations and Challenges
ERC, or Ethereum Request for Comments, is a standard for programming on Ethereum. Developers need to submit proposals and allow the community to test them to ensure feasibility, security and usefulness.
However, ERC-404 is still unaudited and has not gone through the ERC and EIP (Ethereum Improvement Proposal) proposal process. This lack of auditing raises concerns about potential vulnerabilities, inefficiencies, and operational risks within the Ethereum ecosystem.
Moreover, combining the capabilities of Fungible and Non-Fungible Tokens into a single token presents various challenges, along with the need for thorough testing in terms of functionality and security. Key challenges of ERC-404 that require attention include:
- Liquidity Concerns: While ERC-404 is designed to enhance liquidity by allowing ownership of any token fraction, achieving liquidity still depends on several factors, including the number of users, the platforms used, and market capacity. Early projects may face challenges and barriers until wider adoption occurs.
- Low User Base: Due to its early development stage, ERC-404 has a limited number of projects operating under it, resulting in a smaller user base compared to ERC-20 and ERC-721.
- Technical Challenges: Combining both Fungible and Non-Fungible Tokens into ERC-404 entails technical complexities and potential security risks. Additionally, there are challenges regarding existing asset trading platforms and wallets supporting this hybrid token type.
- Speculative Investments: Investing in ERC-404 projects carries a high risk of speculative investments, potentially leading to a market where all parties focus on this type of investment, which could eventually result in a bubble burst.
- Regulatory Uncertainty: The unique characteristics of ERC-404 could attract regulators to provide more support for the crypto and NFT worlds, as there is ongoing debate in this area. Appropriate regulatory frameworks could encourage wider ERC-404 adoption.
Nevertheless, the ERC-404 development team has confirmed that they are working on an EIP to propose a usage standard. The review process may take some time, and if approved, it will be accepted by the Ethereum Foundation and become usable on Ethereum.
Summary
The arrival of ERC-404 represents a significant leap forward in the development of the Ethereum ecosystem. This advancement paves the way for the creation of more flexible tokens by combining the key functionalities of Fungible and Non-Fungible Tokens. This opens up opportunities for easier token ownership and enhances market liquidity.
However, due to its early development stage, ERC-404 has not yet undergone formal auditing within the Ethereum ecosystem. Concerns regarding potential risks and limitations associated with hybrid token usage remain.
References: Cyberscope, Anndy Lian’s LinkedIn, Nasdaq, CoinDesk, Transa
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