Source: Decrypt

“404 Error…

Page Not Found”

Sounds familiar? Oh yeah, the browser page that pops up when you browse a URL that doesn’t exist or has been pulled down. Anyway, talking about 404s, there’s a new kid on the Ethereum block called ERC-404 that has been gaining attention in the past few weeks.

Hopefully, it doesn’t mean “token not found :)”

Introduction

Over the years since the Ethereum mainnet launched, we’ve seen hundreds of Ethereum token standards come to light. Ethereum has one of the highest number of improvement proposals (EIPs) which has resulted in the birth of many of these token standards revolutionizing the Ethereum ecosystem.

These standards allow for the creation of tokens with different functionalities. ERC-20 and ERC-721 token standards are, by far, the most popular as they represent fungible tokens like $ETH, $WLD, $MAVIA, etc, and non-fungible tokens like CryptoPunks, Axie Infinity, etc respectively.

Imagine a single token standard that combines both ERC-20 and ERC-721 into one - the emergence of ERC-404. Think of it as an experiment to test the marriage between both standards to enable NFT fractionalization and liquidity.

NFT Fractionalization and Liquidity: a prevalent issue

Fractionalization of NFTs:

Fractionalization in this context simply means breaking down tokens into smaller fractions to encourage fractional ownership, control, and greater flexibility; as well as promote financial inclusion. Fractionalization also results in better liquidity provision.

Fungible tokens are naturally fractionalized, meaning you don’t necessarily have to own 1 ETH, you can buy and hold 0.2 ETH and still be considered an ETH holder/owner. Unlike NFTs where you can’t buy fractions, say 0.5 CryptoPunk from the NFT collection.

Fractionalization of NFTs implies breaking NFTs into smaller fractions.

Liquidity:

NFTs can be used to provide liquidity and are mostly utilized in the DeFi space. However, because NFTs are not naturally fractionalized, it leads to a few people participating as NFT liquidity providers. But the more people holding fractions of an NFT, the higher the participation in NFT liquidity provision.

The native inability to fractionalize NFTs has been a prevalent issue for a while now and there are only a few people paying attention to it and even building solutions to it. ERC-404 is one such solution. Other solutions to NFT fractionalization require a custodian to the original NFT or a platform designated for the role of fractionalization, however, ERC-404 takes a different approach as it proposes native fractionalization.

What is ERC-404?

Source: PublishOx

ERC-404 is a token standard that is being developed to be utilized as both fungible and non-fungible. A hybrid of ERC-20 and ERC-721.

It is an innovative experiment that was brought to the limelight by a team of four under the project name, Pandora and was introduced earlier this month.

How does ERC-404 propose to fractionalize NFTs?

ERC-404 involves bonding ERC-20 and ERC-721 tokens such that an ERC-20 token represents an NFT when two complementary fractions (say 0.2 and 0.8) of the token combine to form a full token (ERC-404). They can be converted back to the original standard - ERC-20 when the make-do NFT is fractionalized and broken down to be traded as fungible tokens, thus we say the NFT has been burnt. This all happens behind the scenes, on the interface, you either have a token or an NFT.

Mint - to combine fractions of a particular fungible token to create an ERC-721 standard token (an NFT).

Burn - to fractionalize/break down an NFT to get back the fractions of the fungible token (ERC-20).

ERC-404 aims to make fractionalization an in-feature embedded into the NFT natively.

In an interview with The Block, one of the founders, @maybectrlfreak on X mentioned that ERC-404 will allow one to do things that are impossible to do with the ERC-721 token standard.

As a user, what does ERC-404 mean?

As a user or trader, here’s what ERC-404 means. If you purchase an ERC-404 token, you’re simultaneously minting an NFT. When you sell that ERC-404 token, you’re also burning that designated NFT.

N.B: It is worth mentioning that ERC-404 is not yet official as it hasn’t been approved via the EIPs. Now we know why it is being referred to as experimental.

How it’s going so far:

Developers looking to create the “first XYZs” on ERC-404 are seemingly jumping on the trend. Even notable projects have announced their support for Pandora’s ERC-404 as they keep testing the waters.

The explosion of ERC-404, even though it is not official, has led to intense scrutiny by the crypto X (Twitter) community with many prominent Ethereum devs and contributors citing the challenges that come with such an innovative idea. Since ERC-404 came out, some developers have taken the last few days to propose their ideas for a “better” NFT fractionalized token standard.