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Non-fungible tokens (NFTs) have exploded in popularity for their ability to represent unique digital assets. However, a lingering challenge has been the lack of liquidity in NFT markets. ERC-404 offers an innovative solution by coupling the strengths of fungible ERC-20 tokens with the uniqueness of non-fungible ERC-721 tokens.
What are the limitations of current token standards?
Existing ERC standards like ERC-20 and ERC-721 cater to either purely fungible assets like currencies or entirely unique collectibles like digital art. This division makes it difficult to enable shared ownership or fluid exchange of distinctive digital items.
Understanding ERC-404 through the Pandora project
The Pandora project represents the first real-world application of the novel ERC-404 token standard. ERC-404 aims to introduce “semi-fungibility” by bundling interchangeable ERC-20 tokens with unique ERC-721 NFTs.
Pandora issued 10,000 ERC-404 tokens tied to 10,000 colored box NFTs called Replicants. These NFT boxes appear in one of five colors denoting varying levels of rarity, with common green boxes and rare red boxes. When an ERC-404 PANDORA token is purchased, a random box NFT is generated and bound to that token.
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You can trade PANDORA tokens fractionally, with each whole token entitled to one NFT. Selling the tokens burns the tied NFTs and remints new ones. But transferred NFTs persist independently when unbundled from the tokens.
This fractional binding to an NFT collection provides Pandora tokens with a constant source of liquidity from the Uniswap pool. Projects can use such liquidity to fund development. It essentially makes NFTs as liquid as the paired token and its pool.
In summary, ERC-404 tokens like Pandora fuse fungible tokens with non-fungible digital collectibles. This framework promises to solve perennial NFT issues like fractionalization and illiquidity. The Pandora experiment illuminates these possibilities in pioneering ERC-404’s model of semi-fungible tokens.
What does this actually enable?
ERC-404 introduces two major functionalities:
Liquidity and fractionalization
The fungibility of the bound ERC-20 token acts as a price floor for the NFT and allows shared ownership of the unique asset. This solves liquidity by letting you easily buy and sell fractions of the NFT on a decentralized exchange.
Dynamic rarity
ERC-404 allows collectors to influence the rarity of their NFTs post-acquisition. Upon purchasing these tokens, collectors can initially assess the rarity of the NFT they have minted. For enthusiasts aiming to enhance the rarity of their collectibles, there is an innovative option available: transferring the ERC-404 token to a new wallet. This action serves as a mechanism to “re-roll” the NFT’s traits, potentially elevating its rarity.
The experimental status of ERC-404
While pioneering in its conceptualization, ERC-404 currently remains an experimental token standard. The “ERC” designation implies a standardized protocol that has undergone rigorous peer review and testing through Ethereum’s formal governance processes.
However, ERC-404 has not officially passed through the Ethereum Improvement Proposal (EIP) or finalized Ethereum Request for Comments (ERC) stages. Without this formal assessment, the standard lacks the assurance and security auditing of established specifications like ERC-20 and ERC-721.