Since the beginning of February 2024, a new unofficial token standard has emerged seemingly out of the blue.
ERC-404, the experimental Ethereum token standard, has given rise to a subclass of crypto assets that have garnered a market cap of over $170 million in little over a week.
Pandora, the novel ERC-404 token, surged from $1500 to a high of $32,427 within 7 days.
This new ERC-404 standard derived its name from the error “404 not found” message that is typically displayed when you try to access deleted web pages.
First of all, a token standard is a set of specific rules that determine the way a cryptocurrency token is created, behaves, and functions on a blockchain network.
Now let’s unpack;
What is ERC-404?
ERC-404 is an experimental token standard that combines two preexisting Ethereum token standards namely ERC-20 (the standard for fungible tokens) and ERC-721 (the standard for non-fungible tokens).
The combination of these two standards resulted in the creation of a unique semi-fungible token, which combines the advantages and properties of a typical ERC-20 token and an NFT.
In other words, ERC-404 tokens are both fungible and non-fungible at the same time. This means that this type of digital asset can be sold on exchanges as well as on NFT marketplaces.
Understanding ERC-20 Standard
To get the full picture we need to first understand the meaning of “fungible”.
Fungible refers to goods or assets that are interchangeable or replaceable with another identical item of the same type.
This means that each unit of the item is essentially the same as another unit, and they can be exchanged or substituted without affecting their value or functionality. For example, a particular denomination of a fiat currency let’s say a $100 bill can be replaced by any $100 bill and still retain the same value as well as perform the same function.
We can say therefore that paper currencies are fungible. This is one of the properties of tokens built using the ERC-20 standard, they are fungible and can be divided into fractions i.e. they are divisible and each unit has the same value.
However, ERC-721 which is the standard for NFTs is non-fungible, NFTs have different values, and they can not be fractionalized or broken down rather they can only be owned, bought or sold as a whole. You can either buy a whole NFT or nothing you can not buy 0.5 or 2.8 NFTs.
This is where ERC-404 comes in, these novel tokens can either be owned as a whole or fractionalized.
That means people can own and trade fractions of an NFT or as a whole, this will open up more liquidity for these types of tokens as these fractions can be sold at crypto exchanges that support them.
ERC-20
ERC-721
ERC-404
They are fungible
They are non-fungible
They are semi-fungible
They can be fractionalized
They cannot be fractionalized
They can be fractionalized
They are tradeable on AMM and order book exchanges
They are tradeable on NFT marketplaces
They can be traded on AMM and order book exchanges
How It Works
ERC-404 was developed by pseudonymous creators “ctrl” and “Acme.” Each of the ERC-404 tokens is linked or bonded to an NFT, that is every ERC-20 (fungible) token is linked to an ERC-721 token.
In other words, the ERC-404 standard works by linking every issued token to an NFT.
If less than one token or fractions of the token is purchased, the NFT linked to the token is burnt, i.e. once the NFT is broken down into fractions for trading as an ERC-20 token, the NFT is burnt.
If a user owns enough fractions of the token to form a whole an NFT would automatically be minted to their wallet.
This process is called mint-and-burn, when complementary fractions (e.g. 0.4 and 0.6) are combined to form a full token, a new NFT is minted.
Through this fusion, ERC-404 aims to broaden the use and functionality of tokens on the Ethereum platform, providing fresh possibilities for creators, developers, and users.
Risks And Limitations Of ERC-404
As with almost every novel concept or invention, there are bound to be risks and limitations. Here are a few risks associated with this new standard.
Lack of official recognition
Although ERC-404 tokens are buzzing the new standard unlike ERC-20 and ERC-721 are not officially recognized by the Ethereum Foundation.
This puts assets at risk as the standard hasn’t gone through scrutiny for security and the rigorous vetting process of the Ethereum Improvement Proposal. This is what many regard as the authenticity test for any Ethereum standard.
It is still Experimental
ERC-404 is very much an experimental standard, although I am sure the people who have profited from the rally of ERC-404 tokens would not mind.
Regardless the standard is very much an experimental standard which means that it is still in a developmental phase and may undergo significant changes.
Therefore Projects adopting ERC-404 might face challenges adapting to these changes or upgrades leading to instability or compatibility issues.
Potential for exploitation
This is web3, a new standard or concept for hackers and malicious actors means new opportunities, especially with the experimental nature of this standard bad actors will be looking for loopholes, bugs and vulnerabilities that may arise from this standard to take advantage of them.
Market Acceptance
For now, nobody knows for sure if the market initially gravitated towards these tokens due to their fundamentals or if traders/investors are just speculating.
At the time of writing “Pandora” the pioneer ERC-404 token has since fallen from its high of $32,427 (as of February 9th) to $14,316 (as of February 16th).
However, its experimental nature and potential security risk do not impede the ERC-404 adoption they might be here to stay.
Token standards are blueprints for creating these tokens, each with specific functionalities and purposes
ERC-404 is a new token standard for digital assets ERC-404 is a new token standard for digital assets on the Ethereum blockchain
Closing Thoughts
How of the biggest hurdle on the way of ERC-404 is the fact that ERC-404 is “experimental” and unofficial, it hasn’t been submitted for review as an Ethereum Improvement Proposal (EIP) or undergone a full external audit.
This means it could have undetected flaws, introducing significant risk to token holders or protocols who may have already implemented it.
According to reports the team behind the project is planning to submit an official Ethereum Improvement Proposal (EIP) this process could be lengthy.
As is usually the case in web3 when a narrative gains interest other narratives using the same template usually follow.
For this reason, there are suggestions that the ERC-404 team’s decision to circumvent the standard approval process may prompt other projects to follow suit and this could lead to more unaudited token standards going to market
[Author’s Note: This article does not represent financial advice, everything written here is strictly for educational and informational purposes. Please do your own research before investing.]
Author: Godwin Okhaifo