Introduction

Ethereum has significantly shaped the crypto world with its introduction of smart contracts and decentralized applications (DApps). This has led to innovative developments in decentralized finance (DeFi). Among its notable advancements are the ERC-20 and ERC-721 token standards, supporting fungible tokens and unique digital assets. The latest addition, ERC-404, merges these concepts to offer ‘semi-fungible’ tokens, enhancing Ethereum’s capabilities in tokenization. This new standard paves the way for more sophisticated and flexible digital assets, marking an important evolution in Ethereum’s ecosystem.

This blog explores ERC-404, uncovering its mechanisms, significance, and transformative potential for smart contracts and tokenization on Ethereum. We’ll explore its unique features and how ‘semi-fungible’ tokens are created, covering the innovative projects using it and how it impacts Ethereum’s path.

What is ERC-404?

Designed by the mysterious developers “ctrl” and “Acme,” the ERC-404 token standard introduces an innovative token design. It combines ERC-20’s divisibility and fungibility with ERC-721’s uniqueness and non-fungibility.

ERC-404 introduces the innovative concept of “semi-fungible” tokens, which allows for partial ownership of distinct non-fungible tokens (NFTs). This development marks a new era for digital asset ownership, enabling fractional ownership of high-value digital items. It also enhances the liquidity of NFT markets and makes the way for unique decentralized finance (DeFi) innovations. 

Imagine holding a fraction of a desired digital art piece through a fractional NFT. ERC-404 envisions fractional ownership, fluid NFT markets, and innovative DeFi solutions. 

Let’s look at a comparison between ERC 404 and other token standards – 

Technical Aspects of ERC-404 Token Standard

At its core, ERC-404 tokens employ smart contracts to facilitate NFTs’ division and communal ownership. Each token symbolizes a fraction of an NFT, with the overall token count reflecting the available fractions. Users can collect tokens or burn them to obtain the complete NFT. This method boosts NFT market liquidity and democratizes access, enabling dynamic asset management and trading.

Here’s a more comprehensive explanation of how ERC-404 tokens operate: 

Merging ERC-20 and ERC-721 Standards: ERC-404 tokens are engineered to serve as fungible and non-fungible tokens. They merge fungible tokens with non-fungible tokens, mixing characteristics of both token types. 

Fractional Ownership of NFTs: A significant feature of ERC-404 tokens is their ability to enable fractional ownership of NFTs. This is done by connecting a fungible token with an NFT and dividing the NFT into tradable parts. This approach enhances liquidity and accessibility in the NFT market. 

Dynamic mint and burn: When trading a fractional token for part of an NFT, the NFT can be dynamically generated or destroyed. When a portion of a token is sold, the associated NFT is destroyed. A new NFT is generated automatically if additional portions form a complete token. This process enables smooth exchange and modification of NFT ownership and attributes through fungible token transactions.

If you want to learn how to create your ERC-404 token, you can find out more below.

How to create an ERC-404 Token?

1. To initiate the creation of an ERC-404 token, access the GitHub URL.

2. Clone the project using the command:- 

git clone https://github.com/hironate/erc404.git

3. In the contracts,you can see the ERC404 Standard smart contract to be used. 

4. Add your Alchemy Sepolia Testnet API and Your Account Private key. 

5. After doing all the changes and adding your Alchemy Sepolia testnet API key and your private account, compile your project using ➖

npx hardhat compile

6. Deploy the MyERC404 contract to the Sepolia network:- 

npx hardhat deploy:my-erc404 –network sepolia

7. As you can see, your contract has been deployed  

8. Verify the MyERC404 contract on the specified network.

npx hardhat verify:my-erc404 –network sepolia

9. Whitelist the owner of the contract.

npx hardhat whitelist-owner:my-erc404 –network sepolia

This task will whitelist the deployer/owner of the contract. Whitelisting will exempt them from token minting and burning during transfers

10. Set the dataURI for the NFTs.

npx hardhat set-data-uri –network sepolia

11. Now that that the token is deployed you can transfer the token to any account 

So, that was a short demonstration of how you can craft your personalized token. If you’re interested in discovering the ongoing projects that are adopting and utilizing the ERC-404 Token, we’ll explore them below.

Projects Adopting the ERC-404 Token Standard

1. Pandora:- Pandora is the first project built on the ERC-404 standard. It exemplifies the standard’s capabilities by linking every issued token to an NFT. This enables the fractionalization and trade of NFTs in a novel way. The system allows for increased liquidity and accessibility in the NFT market. Parts of NFTs can be bought and sold as tokens, potentially solving liquidity issues traditionally associated with NFTs.

Its token, $PANDORA, spiked from $212 to $33,000 and is now at around $17,000, showcasing its significant crypto market impact.

2. DeFrogs:- After Pandor’s success, DeFrogs emerged as a new venture embracing the ERC-404 standard. It offers a collection of 10,000 frog-themed Profile Picture NFTs (PFPs). Each acquisition of a DeFrogs token corresponds to the creation of an NFT. 

Although DEFROGS hasn’t experienced the same dramatic surges as PANDORA, its price did climb significantly to peak at over $3,500 before declining. As of now, DEFROGS is trading at approximately $688.

3. EtherRock404:- The EtherRock NFT collection comprises 100 rock-themed graphics, each with a tradable token available on compatible exchanges. As per details from the project’s official page, EtherRock404 became available on Uniswap DEX on February 7th, 2024. Trading this NFT collection on DEX confirms ERC-404 NFT’s viability for derivatives, marking high engagement. The EtherRock404 token trades at $1,335 at the time of writing, which once peaked at $34500. 

Challenges faced in adopting ERC-404 standard.

ERC-404 lacks audit and has yet to undergo the Ethereum Improvement Proposal (EIP) and Ethereum Request for Comments (ERC) processes. Because the ERC-404 standard is still in its experimental phase, various obstacles must be tackled before it can be widely adopted. 

Some of the challenges are as follows:- 

1. ERC-404 improves NFT liquidity via fractional ownership, but its success depends on user adoption and market conditions. Projects might encounter liquidity hurdles until wider adoption of the standard.
2. ERC-404 is new and has yet to be widely used, unlike ERC-20 and ERC-721, which are already popular among projects and users.
3. The unique ERC-404 tokens might catch the eye of regulators as they work on rules for cryptocurrencies and NFTs worldwide. New regulations could impact how ERC-404 tokens are used and accepted.
4. We must deal with security worries because we must examine the new standard’s weaknesses or risks. Plus, the system is at risk because we can’t predict how markets will respond to it, potentially making things less predictable.

Conclusion

ERC-404 is a fresh token standard that aims to advance NFTs, making their ownership faster and opening up new possibilities. It could enhance liquidity and enable wider usage in gaming, tokenizing real-world assets, Real Estate, DeFi, and more, though challenges remain that ongoing work will likely resolve. 

As we navigate this new advancement, ensuring the security of digital assets is crucial. In this ever-expanding NFT market, QuillAudits NFT due diligence is essential. Our expertise ensures your digital assets are secure, maintaining trust and stability in the DeFi and NFT space.

FAQs

1. What makes ERC 404 important?

ERC 404 brings inbuilt fractionalization and liquidity to NFTs, promoting creativity and expanding the reach of valuable digital assets.

2. How does ERC-404 enable fractional ownership?

ERC-404 enables users to buy and exchange portions of NFTs via minting and burning mechanisms integrated within the token standard, thereby boosting liquidity and ease of access.

3. What obstacles does ERC 404 face?

ERC 404 is in an experimental phase and hasn’t undergone an official audit, thus lacking formal acknowledgment. It encounters difficulties concerning security, incorporation, and gaining traction in the market as it progresses in its development.