ERC-404: Understanding Ethereum Semi-Fungible Tokens

The cryptocurrency ecosystem is abuzz again with the advent of a new token standard known as ERC-404. This token standard combines the functionality of crypto assets and non-fungible tokens (NFTs), opening up exciting new potential in digital assets.

ERC-404 is an experimental token standard on the Ethereum network that integrates the functionality of fungible and non-fungible tokens into a single digital entity called a “semi-fungible.”

To understand what ERC-404 is, how it works, its specialties, projects, future, and potential security and challenges, check out the following review!

What is ERC-404?

ERC-404 is the latest innovation in token standards for digital assets on the Ethereum blockchain. It was developed in collaboration between the pseudonymous creators “ctrl” and “Acme.”

As a framework, the token standard includes a formal set of rules and protocols that govern the behavior of tokens on blockchain networks, primarily Ethereum.

By combining features from ERC-20 and ERC-721, ERC-404 enables the creation of “semi-fungible” tokens.

It provides the ability to utilize the features of both exchangeable and non-exchangeable tokens, creating a unique and innovative model in the blockchain ecosystem.

How ERC-404 Works

NFTs, which are not exchangeable, signify unique properties and cannot be divided or sold fractionally. The owner of an NFT cannot own a fraction of the NFT.

The innovation of ERC-404 overcomes this limitation by implementing a token minting and burning mechanism. It enables fractional transfers of an NFT.

Issued tokens are directly linked to an NFT. If you buy the full token, the corresponding NFT will be minted into your wallet. Conversely, if you sell a portion of the token, the corresponding NFT will be burned.

When a wallet holding a fractional of a token buys enough fractionals to hold a full token, a new NFT will be minted automatically.

ERC-404 Specialty

The ERC-404 token standard paves the way for the organic fractional splitting of NFTs and presents new ways and mechanisms that can be explored for NFT experimentation and trading.

The creators of this token standard assert that the goal is to create NFTs that have “natural fractional splitting, liquidity, and encourage multiple aspects of trading and engagement to form a unique feature set.”

The team behind the Pandora project, which uses the ERC-404 standard, claims that this effectively allows NFTs built with this standard to have “token prices that reflect the underlying price in real-time” as it facilitates “true natural liquidity”.

Holders of ERC-404 tokens can sell them as they see fit, avoiding reliance on a single buying party and utilizing a liquidity pool.

Furthermore, fractional splitting of NFTs can be achieved naturally without the need to lock or layer them and without relying on third-party protocols or solutions.

One of the use cases proposed by the Pandora team is a gaming NFT that incorporates an element of randomness in NFT destruction and reprinting.

ERC-404 Projects

Here is a breakdown of the ERC-404 projects to know about, among others:

1. Pandora: One of the first initiatives to adopt the ERC-404 token standard, Pandora consists of 10,000 PANDORA ERC-20 tokens linked to 10,000 “Replicant” NFTs. If you purchase PANDORA tokens on an exchange, the Replicant NFTs will be automatically minted into your wallet.

2. DeFrogs: A collection of 10,000 NFTs with a Pepe the Frog theme, DeFrogs uses the standard variant of the ERC-404 token and is considered the first ERC-404 PFP collection. Its creators claim that this collection has deflationary properties.

3. Monkees: Another PFP collection that utilizes the ERC-404 token standard, Monkees consists of 100 NFTs that come with ten attributes and six unique traits.

The Future of ERC-404

Unlike the commonly used ERC-20 and ERC-721 token standards, ERC-404 is considered an “experimental” and non-official standard.

This means it has not been submitted for review as an Ethereum Improvement Proposal (EIP) or through a thorough external audit.

This factor suggests that the standard may have potentially unidentified flaws that pose a significant risk to token holders.

The development team states, “While these standards are not designed to be merged, this implementation attempts to do so to the best of its ability while minimizing compromises,” despite being recognized as a “non-standard” implementation of ERC-721.

As ERC-404 is non-official, most NFT platforms and marketplaces do not automatically support it. The team developing this token standard has plans to submit it as an official Ethereum Upgrade Proposal, a process that may take some time.

However, their decision to avoid the standards approval process may be an impetus for other projects to take a similar approach, potentially resulting in more unaudited token standards coming to market and increased risk for users.

Security Potential and Challenges

Pandora’s success highlights the huge potential of ERC-404 in reshaping the dynamics of tokenization and asset ownership in the Ethereum ecosystem.

Notably, the Pandora token managed to attract attention on platforms such as Blur Marketplace, with the base price reaching 7.45 ETH and attracting over 1,300 token holders.

However, despite the excitement surrounding ERC-404 and its lead project, Pandora, concerns continue to arise regarding the security and stability of the standard.

Unlike the established ERC standards that undergo rigorous vetting processes and external audits, ERC-404 is an experimental standard that has not followed the conventional Ethereum Improvement Proposal (EIP) path.

Although it has undergone rigorous testing, the absence of formal validation raises questions about the robustness and security of ERC-404.

Conclusion

In conclusion, ERC-404 offers a major shift in the dynamics of tokenization in the Ethereum ecosystem. In this regard, the success of Pandora as the main project to adopt the standard reflects its appeal and potential.

Nevertheless, it remains important to consider the security and stability aspects before widespread adoption. That’s because, as an experimental standard, ERC-404 has not gone through the conventional Ethereum Improvement Proposal (EIP) process.

Not only that, attention to formal validation is also required to ensure the long-term robustness and security of this standard. Furthermore, we are heading towards the potential future of ERC-404 in the blockchain ecosystem.

While its initial success shows great potential, the journey ahead requires constant attention to security, readiness, and community acceptance to ensure successful and sustainable integration in the evolving ecosystem.

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Invest in Ethereum on INDODAX

Well, now you understand what ERC-404 is, how it works, its specialties, its projects, its future, to its potential security and challenges.

Furthermore, if you want to invest crypto assets in Ethereum at INDODAX, you should first check the price of Ethereum today on the INDODAX Market.

For those of you who are interested in buying Ethereum on INDODAX, see the steps below:

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• Alternatively, you can place a sell order at the desired price immediately after you have Ethereum. Be sure to pay attention to previous price movements when making your decision.

As a disclaimer, it is highly recommended to recognize the risks associated with crypto trading due to its high volatility before transacting.

The decision to buy Ethereum is the sole responsibility of the user. In addition, you should also do careful research before making an investment decision.

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