The best of both worlds —During its evolution, Ethereum has seen the development of several token standards. Among them, the most widespread are the ERC-20 and the ERC-721, used for fungible and non-fungible tokens (NFTs) respectively. Recently, a group of developers came up with the idea of mix these two standards to create a new type of token: the ERC-404. Let’s take a look at what ERC-404 is and what it offers.
ERC-404: the standard that is making waves on Ethereum
If you follow Ethereum news closely, you have probably seen the term ERC-404 this week.
This project was created by 4 developers, known under the pseudonyms ctrl, Searn, Acme And Hohenheim. In practice, the ERC-404 offers a rather surprising approach which aims to mix the ERC-20 and the ERC-721.
A surprising situation, because these two ERCs are theoretically opposites. Firstly, ERC-20 is the main standard for fungible tokens, namely that each token is interchangeable. For example, one USDC can be exchanged for another USDC and both will have the same value.
On the other hand, ERC-721 is a standard for non-fungible tokens, mainly used for NFTs. In this scenario, each token is different from the others. An NFT will not be interchangeable with another NFT and each NFT will have its own value.
So, our 4 developers had the idea of merge these two standards to create ERC-404. In practice, this aims to facilitate the exchange of NFTs by associating liquidity.
However, it is important to note that this ERC did not pass the usual community verification processes of the Ethereum Requests for Comments (ERC). Therefore, it does not have not been verified by the community for the presence of vulnerabilities. It is therefore essential to use it with caution.
So far, we have seen a lot of splitting protocols, allowing you to deposit an NFT and issue shares of that NFT in exchange. For its part, the ERC-404 aims to natively integrate this fractionation process.
In practice, the ERC-404 works with a pair of tokens, on the one hand a non-fungible NFT tokenon the other a fungible ERC-20 token. Each ERC-20 token is linked to an NFT and represents ownership of it.
Therefore, if you buy an entire token, the protocol will mint an NFT on your wallet. Conversely, if you sell half of your ERC-20 token, the protocol will destroy your NFTbecause you do not hold an entire ERC-20 token.
However, if you buy back the missing half of the ERC-20 token, the protocol will again issue an NFT on your wallet.
Towards more liquid NFTs
You will have understood, the objective is to improve the liquidity of NFTs by allowing the purchase of fractions of NFTs represented by a token.
Due to the fungibility of tokens, two parts of a token always allow the creation of an NFT. Therefore, tokens, whether full or split, retain the value of the underlying NFT. So these NFTs always have liquidity as long as there are tokens in the pool. This facilitates the resale of NFTs which no longer requires finding a taker for the NFT in question, but simply by returning the token linked to this NFT via a DEX.
Pandora and Replicant: the first experiment with ERC-404
On February 2, after several days of intensive development, our four developers deployed Pandorathe first project using the ERC-404.
The project Pandora East composed of 10,000 NFTs called Replicantswhich are linked to 10,000 PANDORA tokens.
Any purchase of an entire PANDORA token results in the creation of an NFT on the user’s wallet. These NFTs take the form of boxes of 5 different colors, depending on the rarity. Each box should be able to be opened in the future to reveal a unique NFT work.
However, it is important to note that the combining two parts of a PANDORA token will not necessarily produce the same NFT. With each “combination” of an entire token, the protocol will regenerate a new NFT, whose rarity will be random. Therefore, you must be careful not to inadvertently regenerate a very rare NFT by selling part of the PANDORA token.
The explosion of Pandora and the Replicants
The enthusiasm around this new standard has been massive on Ethereum. Indeed, since February 5, the token PANDORA saw its price increase by 18, just that. Thus, the PANDORA price is went from around $1,500 to more than $28,000 at the time of writing these lines.
For their part, NFT Replicants currently have a floor at 12.95 ETH, or approximately $30,240 at the current price. Since its launch, the collection has recorded a volume of $2.5 million.
For its part, the PANDORA token which is accessible on several decentralized exchange platforms recorded a total volume of 211 million dollars.
A total of 5,262 NFTs are currently in circulation. This means that 4,738 PANDORA tokens are fractionally held or deposited in liquidity pools.
Future developments
Quickly, we saw multiply ERC-404 forks on Ethereum. For its part, the Pandora project and the developers of ERC-404 plan to present a Ethereum Improvement Proposal (EIP)to do community check and validate the ERC-404 standard. This proposal should, according to Hohenheim, arrive in the coming days.
In addition, Pandora also revealed its desire to very soon launch a protocol that could accelerate the adoption of ERC-404. According to information reported by the developer ctrl, Pandora wants to create tools allowing the creation of crypto products using ERC-404.
Trend, or real innovation? The coming weeks and months will tell us.
For its part, the Ethereum network is preparing to undergo a major update. Indeed, the hard fork Cancun-Deneb should be deployed on March 13 on the mainnet. As a reminder, this will drastically reduce transaction fees on rollups, via the deployment of Proto-Danksharding.