Ok, there's no ERC-420, but there was definitely a missed opportunity there -IYKYK.
And while 420 may be a pipe dream, ERC-404 is stirring up some serious hype.
Most of you will be familiar with the ERC-20 and ERC-721 standards - fungible (ERC-20) and non-fungible tokens (ERC-721) or NFTs.
ERC-404 is a new, experimental token standard that merges these two standards. It is like splitting up a rare Punk or Bored Ape into tradeable slices.
So, like, a fungible, non-fungible token…
Sound confusing? That’s because it is.
Let's break down WTF is going on with ERC-404 and why you should keep an eye on them.
TLDR
- ERC-404 is a new experimental token standard that combines aspects of fungible ERC-20 tokens and non-fungible ERC-721 NFTs.
- When an ERC-404 NFT is fractionalized, the original is burned. All fractions need to be recombined for a new NFT to be minted.
- Early ERC-404 projects like PANDORA and DeFrogs saw massive rallies, but the prices have since retraced.
- ERC-404 may help spark innovation in the NFT space - this could give NFTs a shot at getting back in the limelight.
- The standard is still very new and untested, so risks remain
ERC-404 is the melting pot of standards
Let’s break it down:
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ERC-20 tokens like UNI, SUSHI, THOR, etc, are fungible because there is more than one. You can swap 1 UNI for 1 UNI, and you would be no better off - all UNI tokens are of equal value.
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ERC-721 tokens are unique because no two tokens (or NFTs) are identical. If you swap 1 ERC-721 for another, you swap one unique asset for another. It’s kind of like swapping trading cards or signed posters - that kind of idea.
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ERC-404 tokens are a combination of the above standards. Combining the fungible with the non-fungible, the idea of a unique NFT remains. But ERC-404 allows a fraction of that NFT to be traded. Essentially, this new standard builds on the idea of fractionalisation within the NFT space.
How does ERC-404 work?
Since a non-fungible token can only exist as a 1-of-1, in order to own the whole NFT, you need to collect the pieces. These pieces are represented by tokens that are fungible. If the NFT is the entire jigsaw puzzle, then the “fractional” tokens are the pieces that make up that puzzle.
As soon as fractionalisation is initiated, the NFT is broken up, and the parts distributed, the NFT is burned. Only when all the pieces are collected can the NFT be minted. Whether that’s a brand-new NFT or simply the original is entirely up to the project’s use case or intended utility.
The flexibility that this could offer NFT-based projects is huge:
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When an NFT is destroyed, collecting all the pieces could allow for an entirely new, rarer NFT to be minted.
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Mixing and matching parts is now possible - 60% of one NFT could be matched with 20% of a second and third to combine attributes.
ERC-404s don’t just take the best parts of ERC-20s and ERC-721s - this new standard literally merges everything about the 20s and 721s.
Who are the players?
The ERC-404 standard has proven quite popular in the few weeks it has existed. This is despite the fact that it’s experimental and not in any way audited or an official Ethereum token standard.
The first protocol to support ERC-404 tokens was Pandora check the date - this is brand new; we’re talking barely two weeks ago.
Since launch, the PANDORA token has had an exceptional run, at one point topping out at a ~$320 million market cap.
Similarly, another ERC-404 project called DeFrogs peaked at a ~$38 million market cap.
Both projects trended last week; their tokens peaked but have since retraced at least 60%.
Will they return to winning ways?
Will new projects emerge in this sector to repeat similar supersonic rallies?
It remains to be seen – but if ERC 404 succeeds, they could give NFTs a rebrand and supercharge that sector to be relevant in the current bull market.
Is there any substance to the hype?
NFT fractionalisation has long been discussed, and there have been attempts to implement something similar in the past. However, the methods attempted involved the NFT in question being taken into custody by a protocol and tokens issued by that protocol.
It's kind of like how a bridging protocol issues “wrapped” assets, which are essentially an I.O.U - any number of things can (and have) gone wrong with this methodology.
ERC-404 represents the first attempt to write NFT fractionalisation “into code” at the protocol level.
Solana also has an experimental standard that is ERC-404 called SPL-22.
Now, whether or not 404 will become an official standard or not, we can’t know at this stage. There are too many unknowns and not enough “battle-tested” protocols.
The actual implementation could be faulty - we’re dealing with a brand-new utility that hasn’t been done before.
But we do know that shiny new things attract the degens from far and wide. We’re in one of the most speculative markets in existence, so it’s reasonable to assume that there will be some interest, especially from NFT market participants.
So where does that leave us?
Cryptonary’s take
It is important to remember (we cannot stress this enough) that the 404 standard has not been audited and is not recognised as an official Ethereum token standard.
The same goes for SPL-22. Many things can go wrong, so be cautious if you plan to mess around with it.
In terms of investment, although this could potentially represent the birth of a new sector, we are still classifying ERC-404s as part of the NFT sector. Until we see some truly bespoke use cases for the new standard, it remains a novelty for us at the moment.
For those looking to enter, the retrace has presented an opportunity for speculation.
Beyond that - we’re waiting for things to develop.
The NFT sector has not been running too hot recently.
Maybe fungible non-fungible tokens are the spark that revitalises the sector?
We will keep an eye on this development.
Stay tuned.