ERC-404 on Ethereum: The Hybrid Token Standard Causing a Buzz in the NFT Market

Background: Why Is the Crypto Community Paying Attention to ERC-404?

The Ethereum blockchain ecosystem is currently the leading player in blockchain technology and DeFi applications. Its strength lies in the ability to deploy flexible smart contracts, allowing the creation of tokens with highly diverse functions. Each token standard (is called by the abbreviation ERC, which stands for Ethereum Request for Comments), serving as a technical blueprint that defines how tokens operate on the Ethereum network.

Recently, a new token standard named ERC-404 has caused a wave in the community. What makes it unique? It combines features of the two most popular types of tokens: fungible tokens (like money) and non-fungible tokens (like NFTs). This combination promises to open new opportunities for the struggling NFT market.

Practical Applications: What Problems Does ERC-404 Token Solve?

Addressing NFT Liquidity Issues

The biggest challenge in the current NFT market is liquidity. High-value NFT artworks are often difficult to sell quickly due to their large price tags, accessible only to major investors who can buy the entire piece. ERC-404 tokens solve this problem by allowing an NFT to be divided into millions of small parts (tokens), similar to breaking a large bill into small coins. This makes buying and selling NFTs more accessible and significantly increases market flow.

Democratizing Ownership of Rare Assets

With this standard, a collection of paintings or ancient art NFTs no longer belongs to just one individual. Instead, thousands of people can co-own a part, turning expensive assets into common investment opportunities. Similarly, virtual real estate in the metaverse or assets in blockchain games can also be subdivided and traded more easily.

Opening New Doors for DeFi

When NFTs can be subdivided, they become better collateral assets for lending, borrowing, and yield farming protocols (yield farming). Decentralized financial applications will have additional tools for innovation.

Technical Mechanism: How Does ERC-404 Token Work?

The Fusion of ERC-20 and ERC-721

ERC-20 is the “fungible” token standard (fungible), meaning each token is identical, divisible, and tradable like currency. ERC-721 is the “non-fungible” standard (non-fungible), where each token is unique, indivisible, like a piece of original art.

ERC-404 is the first time these two types are “embedded” into a single standard. Each ERC-404 token issued is directly linked to an NFT (or a part of an NFT). When you collect enough tokens to reach a certain amount, the system automatically “burns” them and grants you a complete NFT.

Mint & Burn Process( (Minting and Burning)

The system operates on a dynamic mechanism:

• When you purchase an ERC-404 token, a new NFT is “minted” )mint( accordingly
• When you sell a token, the related NFT is automatically “burned” )burn(
• If you accumulate enough tokens to assemble a complete NFT, a new NFT will be created

This mechanism is controlled by smart contracts, ensuring all transactions occur seamlessly and automatically.

Notable Projects Using ERC-404

) Pandora ###PANDORA( - The Pioneer

Pandora claims to be the first project to fully adopt the ERC-404 standard. Each PANDORA token is linked to a unique NFT, allowing users to share ownership of these artworks.

The project has garnered significant attention. In less than a week since launch, PANDORA’s price reached $32,000 – a staggering figure. Although it later decreased, it remained very high compared to the initial trading price of $1,500. This clearly demonstrates market interest in this new standard.

) DeFrogs ###DEFROGS( - Frog NFT Collection

DeFrogs is the next project successfully inheriting Pandora’s success. It consists of 10,000 frog avatar NFTs, each DeFrogs token can be burned to receive a unique frog NFT.

Unlike Pandora, DeFrogs did not experience explosive price increases. However, its price rose to over $3,500 before dropping to $1,255 )at the time of writing(.

) Monkees ###MONKEES( - Monkey Collection

Monkees is a new player in the ERC-404 space, offering a collection of monkey profile pictures. Although recently launched, the project has seen significant growth thanks to the appeal of the ERC-404 standard.

Additionally, other projects like Punks404 )PUNK( and EtherRock404 )ROCK( are also participating, though their market cap and trading volume are still below the top three projects.

Why Is ERC-404 Causing a Market Frenzy?

There are three main reasons explaining the hype around this standard:

First, it addresses real-world problems. As mentioned, the poor liquidity of NFTs has been a long-standing issue with no solution. ERC-404 not only solves it but also makes assets more accessible.

Second, it opens new DeFi opportunities. When NFTs can be subdivided, they can be integrated into protocols for lending, borrowing, yield farming, and many other decentralized finance activities.

Third, it is a new technology. Investors and industry pioneers are always eager to find breakthrough innovations. The novelty of ERC-404, combined with promising early results, has fueled a speculative frenzy in the market.

Risks You Need to Know

) Lack of Official Validation

The ERC-404 standard is still in the testing phase and has not undergone the Ethereum Improvement Proposal ###EIP( or Ethereum Request for Comments )ERC( process officially. This means it has not been thoroughly audited, posing risks of security vulnerabilities and technical bugs.

) Unclear Actual Liquidity

Although promising in theory, the actual liquidity of ERC-404 tokens depends on many factors: user acceptance, support from exchanges, and overall market conditions. Early projects may face liquidity droughts until the standard is widely adopted.

Lower Adoption Compared to ERC-20 and ERC-721

ERC-20 and ERC-721 have been trusted and widely adopted by the community for years. In contrast, ERC-404 is still very new, with limited support from dApps, wallets, and platforms.

Technical and Security Challenges

Combining two completely different token types introduces technical complexities. Integrating ERC-404 tokens into existing wallets and exchanges is no small feat. Moreover, potential security flaws have not yet been fully discovered.

Speculative Risks and Bubbles

The current prices of ERC-404 project stocks are likely driven more by speculation than fundamental value. Such surges often end with sharp declines, causing late investors to suffer heavy losses.

Unclear Regulatory Landscape

Regulatory authorities worldwide are still “mapping out” how to manage NFTs and cryptocurrencies. With its unique hybrid nature, ERC-404 may come under regulatory scrutiny. Sudden regulatory changes could threaten the future of this standard.

Long-term Outlook: Is ERC-404 the Future?

The emergence of ERC-404 marks a significant milestone in the Ethereum ecosystem. If this standard passes official validation processes and gains broad community support, it could revolutionize how we manage and trade digital assets.

The potential of ERC-404 is enormous. Its ability to bridge the gap between fungible and non-fungible tokens opens up a host of innovative use cases. From democratizing ownership of rare artworks to creating groundbreaking DeFi applications, the future may see the development of technologies built on the ERC-404 platform.

However, it is still too early to declare ERC-404 as the dominant standard. It must prove its resilience and practical value. Investors should carefully consider before entering this space.