ERC-404 Explained: What Is It & How Does It Work?

ERC-404, a new Ethereum Token Standard, has taken the blockchain world by storm.

There were already tokens of Crypto Tokens and NFTs, that are already built on this new standard, which is a combination of the previous token standards that exist.

Let’s have a look at what this token standard is, how NFTs are being created with this standard, and how it’s gonna play out in the NFT ecosystem.

What is ERC-404?

ERC-404 combines the popular ERC-20 (the liquid tradable nature) and ERC-721 (the non-fungible nature) standards.

Just FYI, ERC-20 represents tokens like $UNI, $MANA… Whereas ERC-721 represents NFTs like Punks, Cats, Dogs, whatever. You can find more info on token standards here.

Image Source: @eli5_defi

Pandora is the first token to use this standard. They’ve issued 10k ERC-20 tokens along with 10 NFT replicants, and if you buy 1 full Pandora token, you’ll get 1 replicant NFT into your wallet.

And also, if you sell the token, the linked NFT will be burned.

According to Pandora, this is how ERC 404 differs or combines both of these popular token standards.

Note that ERC-404 is not an officially recognized Ethereum token standard. It’s experimental as of now.

On another note, ERC-404 is developed by pseudonymous developers only known as “ctrl” and “Acme” under a project called Pandora.

What Problem ERC 404 is Solving?

Tokens or cryptocurrencies are divisible. As in, you can buy 0.01 $BTC or 0.25 $SHIT. But when it comes to NFTs, you just have to buy 1 NFT. Not, 0.45 of an NFT.

You either have a bored ape or you don’t. (I don’t).

And that’s when Fractional NFTs came in.

A F-NFT is an NFT that has been broken down into fractions to be sold individually.

Instead of having to worry about getting a million-dollar loan to buy the picture of a monkey, the picture can be divided into million pieces (or ERC-20 tokens), and by owning 100 of these tokens, you own $100 worth of a picture.

If the NFT value goes to $2M, your tokens will be worth $200.

Note that NFTs are not divisible, and F-NFTs are just a percentage ownership (a fraction) of a complete NFT.

Now, although fractionalized unlocked more liquidity, it comes with a few issues.

They typically depend on an entity that locks up those NFTs in a wallet. Also, the only way to reconstitute the NFT would be to buy all the sold fractions back from their respective owners.

The fractionalized tokens derived from the NFT are freely traded and may not accurately match the locked NFT’s value. That means, $1M worth of NFT =! 1M * Price of each token.

Now, what ERC 404 does is, it allows multiple wallets to directly own a single NFT. They have these functions by default and don’t rely on third-party protocols and solutions, unlike fractionalizing an NFT.

How Does ERC-404 Work?

The ERC-404 token standard enables native fractionalization of NFT.

It uses the token mint and burn mechanics to enable fractional transfers of an NFT.

Let’s understand this with an example.

  • Bob wants to invest in a large plot of land but doesn’t have enough funds to buy it outright.
  • He decides to buy 0.25 ERC-20 tokens representing a specific plot of land.
  • As a result, the corresponding NFT representing that plot of land is burned, and Bob owns a quarter of the token linked to that land.
  • Later, Bob decides to buy another 0.75 ERC-20 tokens (totalling 1 token), so the corresponding NFT representing the plot of land is minted back into his wallet.
  • Now, Bob owns the full ERC-20 token, representing ownership of the entire plot of land.

In the case of Pandora, anyone who buys a token will get an NFT — and, if they spend half of that token, the NFT is destroyed. That means selling a fraction of a token will “burn” the NFT, requiring you to repurchase to restore it.

When new NFTs are minted, they are randomized, meaning that the distribution and rarity can change over time.

Ok, but what happens if I transfer the NFT or ERC-20 tokens?

If you transfer your ERC 20 tokens, your NFTs (ERC 721) will be burnt and a new one will be re-minted & sent to the targeted destination wallet.

On the other hand, if you transfer the NFT, it won’t be re-minted, but rather, both the NFT and the fungible token will go to the destination wallet.

Advantages of ERC-404

ERC-404 allows the NFTs built using this standard to effectively have a token price that reflects a floor price in real-time because it allows for “actual native liquidity”.

The other main advantage is its inbuilt fractionalization feature. Instead of having to lock up or wrap NFTs and issue shares against them, fractionalization of NFTs can be achieved natively without relying on third-party protocols and solutions.

Conclusion

ERC-404, a novel Ethereum Token Standard, merges the liquidity of ERC-20 tokens with the non-fungible nature of ERC-721, presenting a groundbreaking solution for fractionalizing NFTs.

With Pandora leading the way, ERC-404 offers direct ownership of NFTs across multiple wallets, eliminating the need for third-party protocols and unlocking real-time liquidity while maintaining fractional ownership seamlessly.

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