What is ERC-404? An In-Depth Look at the Future of NFT Protocols
TechFlow Selected TechFlow Selected
What is ERC-404? An In-Depth Look at the Future of NFT Protocols
Does ERC-404 have the potential to drive industry-wide development and unlock more possibilities for NFTs?
Navigating Web3 tides with focused insightsBy NFTScan
At the beginning of last month, ERC-404 became the hottest topic. Introduced in early February by the Pandora team as an experimental token standard for creators and developers, ERC-404 combines ERC-20 and ERC-721 implementations, featuring native liquidity and fractionalization. With its early development, increasing numbers of participants have begun paying attention to this entirely new protocol standard.
1. What is ERC-404?
ERC-404 is a hybrid protocol standard combining ERC-20 (fungible tokens) and ERC-721 (non-fungible tokens, or NFTs), enabling mutual conversion between NFTs and tokens. It's a protocol with native liquidity and fragmentation capabilities.
In simpler terms, this protocol allows NFTs to be split and traded like regular tokens—similar to dividing an image into multiple parts so that several people can jointly own portions of it. Some blue-chip NFT projects such as BAYC and Pudgy Penguins have prices so high that average retail investors find them inaccessible. Especially those NFTs with rare traits often become prohibitively expensive, resulting in low market liquidity. Therefore, ERC-404 represents a significant improvement for these originally illiquid NFT projects. High-priced NFTs can now be fractionally traded on major marketplaces, making purchases as convenient and fast as buying token assets like BTC or ETH.
2. What is PANDORA?
Pandora is the first project built on the ERC-404 token standard, offering a unique trading mechanism. In this project, each purchase of a PANDORA token triggers the minting of an NFT, which automatically appears in your wallet. Conversely, when you sell a PANDORA token, the corresponding NFT is destroyed. The same NFT destruction and re-minting process occurs during token transfers. However, transferring the NFT itself does not cause any changes to the NFT.
This means holders can choose to sell their NFTs directly into liquidity pools without having to list them and wait on traditional NFT marketplaces. This new trading method provides greater flexibility and convenience for holders while also bringing increased liquidity and vitality to the NFT market. Through this approach, the Pandora project unlocks new possibilities for NFT trading and promotes the growth and maturation of the NFT market.
Leading ERC-404-based project Pandora:
https://eth.nftscan.com/0x9e9fbde7c7a83c43913bddc8779158f1368f0413
3. Innovations Brought by ERC-404
-
One key innovation of ERC-404 is its ability to function as a fungible token under certain conditions and as a non-fungible token (NFT) under others. This flexibility opens up broader possibilities within Web3, satisfying diverse user needs—from high-liquidity trading scenarios to asset management requiring personalization and uniqueness—offering users more options.
-
ERC-404 expands token use cases, bringing greater possibilities for users. For example, it enables tokens to represent partial ownership of assets. In the context of NFTs, this realizes the concept of shared ownership, allowing multiple users to co-own a single NFT and share corresponding ownership rights based on their token holdings. Additionally, ERC-404 can apply to a wider variety of assets, providing users with more diversified management options.
-
It allows NFTs to be divided into smaller tokenized shares. This fragmentation mechanism enables more investors to participate in high-value NFT investments without purchasing an entire NFT, thereby lowering market entry barriers. It also enhances NFT liquidity, as more tradable tokens increase overall market activity.
-
ERC-404 involves the automatic minting and burning of corresponding NFTs within wallets during token transactions, achieving seamless integration between token shares and NFT ownership.
4. Limitations of ERC-404
Initially, as various ERC-404 projects launched, Ethereum network gas fees noticeably surged. However, as issues emerged and hype faded, interest in ERC-404 projects rapidly declined. The leading project PANDORA has fallen sharply from its peak, while other ERC-404 projects experienced even earlier and steeper declines. What are the limitations of ERC-404?
1. First, due to the significantly increased complexity of the underlying smart contracts, the gas fees required during transaction execution are considerably higher than standard ERC-20 transfers. Given the current limitations in Ethereum’s network performance, the high gas fee issue becomes even more pronounced, directly impacting user experience.
2. Second, the lack of official recognition and integration challenges: ERC-404 is not an officially recognized standard by Ethereum, increasing uncertainty risks before widespread adoption. Moreover, integrating this new standard into existing wallets, exchanges, DApps, and the broader ecosystem faces numerous obstacles related to standardization, compatibility, and stability.
3. During fungible token trades, there may be instances where the associated NFT is indiscriminately transferred to the buyer regardless of the NFT’s rarity. This could result in higher-value NFTs being unintentionally transferred, causing holders to lose valuable NFT assets.
4. Potential technical risks: Although ERC-404 draws upon mature elements from both ERC-20 and ERC-721, its method of combining the two is entirely novel, inevitably increasing smart contract complexity and potentially introducing new attack vectors and security vulnerabilities. The ERC-404 standard requires rigorous third-party security audits and penetration testing. Currently, such efforts may still be insufficient, necessitating strict configuration and compatibility checks to prevent vulnerabilities.
NFT liquidity has always been a persistent challenge, with many projects striving to address it. Marketplaces attempt to improve user experience and boost liquidity, while others explore solutions such as collateralized lending and NFT fractionalization—like breaking down NFTs into ERC-20 tokens for liquidity mining on decentralized exchanges. In this context, the emergence of the ERC-404 protocol offers a promising solution.
In summary, ERC-404 introduces a novel "hybrid token" concept, breaking down the barriers between fungible and non-fungible tokens and opening new application scenarios for the Web3 ecosystem. However, as an experimental standard, ERC-404 remains in its early adoption phase and is undergoing rigorous testing to ensure robustness and reliability. Whether it will gain mainstream acceptance remains to be seen and warrants close observation.
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
