Imagine owning a small piece of a famous piece of digital art. Sounds impossible, right? Well, thanks to ERC-404 tokens, it’s becoming a reality. This exciting new way to own NFTs is changing the game.
Instead of purchasing the entire NFT, you can now purchase a small portion of it. This means more people can enjoy owning something special, which makes NFT More accessible to everyone. Let’s take a closer look at how the ERC-404 token standard is shaping the future of digital art.
focus:
- The ERC-404 token standard allows multiple people to own part of a single NFT, making high-value digital assets more accessible.
- By merging the properties of ERC-20 and ERC-721 tokens, ERC-404 enables fractional ownership, thereby enhancing NFT liquidity.
- The best use cases for the ERC-404 token standard include real estate, art, collectibles, games, and more, democratizing asset ownership and investing.
- The top ERC-404 projects on the Ethereum blockchain are $PANDARO and $DEFROGS.
ERC-404 token standard explained
In short, “ERC-404 is an experimental token standard that allows multiple people to own part of a single NFT.”
The ERC-404 token standard is a concept on the Ethereum blockchain that aims to bridge the gap between fungible and non-fungible tokens. Unlike traditional ERC-20 tokens and unique and indivisible ERC-721 tokens that are identical and interchangeable, ERC-404 tokens offer a hybrid approach.
The ERC-404 standard was created by two anonymous developers named “ctrl” and “Acme” and combines the properties of ERC-20 and ERC-721 tokens.
This concept opens up new possibilities for asset management and investing. For example, through fractional ownership, high-value NFTs can be more easily acquired by a wider range of investors. Additionally, it can facilitate the creation of complex financial instruments based on NFTs.
For better understanding, here is a quick comparison between ERC-404 vs ERC-20 vs ERC-721:
Comparison between ERC-404, 20 and 721 token standards. Source: DeFrogs
How do ERC-404 tokens work?
ERC-404 tokens function by combining the properties of the ERC-20 and ERC-721 token standards.
As mentioned above, ERC-404 tokens represent Fractional ownership of NFTs. When an NFT is divided into ERC-404 tokens, each token becomes a divisible unit that represents part of the NFT. These tokens are fungible, meaning they can be traded like regular digital currencies (similar to ERC-20 tokens).
The key mechanism is the connection between the ERC-404 token and the underlying NFT. When someone owns all the ERC-404 tokens associated with an NFT, they effectively own the entire NFT. This is achieved through smart contract logic that manages the relationship between tokens and NFTs.
If someone sells a portion of their ERC-404 tokens, they are essentially selling a portion of their NFT ownership (not the entire NFT). The remaining tokens still represent ownership of the NFT. Instead, if someone accumulates enough ERC-404 tokens, they can “burn” them to claim ownership of the entire NFT. The system allows for fractional ownership of NFTs and increases liquidity.
Operation of ERC-404 tokens. Source: Mercury
Use cases for the ERC-404 token standard
ERC-404 opens up a wide range of potential applications. Here are some standout use cases:
- real estate: Expensive property can be tokenized into ERC-404 tokens, allowing multiple people to own portions. This democratizes real estate investing and enhances liquidity.
- Artwork and Collectibles: High-priced art or rare collectibles can be divided into ERC-404 tokens, allowing for broader ownership participation and potential price appreciation.
- mortgage: ERC-404 tokens can be used as collateral for lending protocols, expanding the range of acceptable assets.
- Liquidity supply: Fractional ownership of NFTs can increase liquidity by increasing the number of potential buyers and sellers
- Games and the Metaverse: Virtual items, characters or land in the game can be represented as ERC-404 tokens. Fractional ownership of in-game assets can create dynamic economies in virtual worlds.
- Asset Tokenization: Real-world assets (RWA) such as commodities, bonds, or intellectual property rights can be tokenized and fragmented.
Top ERC 404 Projects
$Pandora
Pandora, built on the ERC-404 standard, is the first project of its kind. This innovative system connects 10,000 ERC-20 tokens with 10,000 “replica” NFTs.
When you purchase full PANDORA tokens, a Replicant NFT is created and added to your wallet. If you sell PANDORA tokens, the connected NFT will be destroyed. These Replicant NFTs come in different rarities and are displayed in different colors, with green being the most common and red being the rarest. You can change the rarity of clones by trading PANDORA tokens.
$DEFROGS
Defroggs is another project built on the experimental ERC-404 standard. It combines the features of ERC-20 and ERC-721 tokens to create a hybrid token that supports NFT native liquidity and fractional ownership. It also offers a collection of 10,000 unique frog avatar NFTs. Purchasing DeFrogs tokens creates a new Frogs NFT.
DeFrogs plans to embrace meme culture and aims to elevate the quality of meme coins and NFT art. It launches with no pre-sale, has zero taxes, and has a locked liquidity pool. The program promotes itself as a fun and artistic event that encourages participation through humor and creativity rather than financial gain.
Challenges of the ERC-404 Token Standard
Although promising for NFT fragmentation, the ERC-404 token standard also faces some obstacles.
- experimental: A major challenge is its experimental nature. As a relatively new standard, it lacks the maturity and widespread adoption of predecessors such as ERC-20 and ERC-721. This novelty means there is a higher risk of unforeseen problems and vulnerabilities.
- technical challenges: Another issue of concern is the potential for complex interactions between the fungible and non-fungible components of ERC-404 tokens. Ensuring accurate calculations and preventing accidental burning of NFT fractions due to rounding errors is a key technical challenge. Additionally, the complexity of the standard may result in increased NFT gas feemaking transactions more expensive.
- market adoption: Although ERC-404 provides an NFT liquidity solution, it requires a strong ecosystem of platforms, wallets, and decentralized applications (dApps) to support its functionality. Building this infrastructure and educating users on the benefits of fractional ownership will take time.
- regulations: The supervisory uncertainty of the ERC-404 standard is very prominent. As fractional ownership introduces new financial dynamics, regulators may need to develop specific guidelines for such assets. Navigating this regulatory environment can be a challenge for projects and users.
- untested: Finally, the ERC-404 standard has not yet undergone the rigorous review process of the Ethereum Improvement Proposal (EIP). The lack of formal standardization may hinder its long-term acceptance and raise questions about its safety and reliability.
The future of ERC-404 tokens
One of the most promising aspects is the potential for wider adoption. As more people become familiar with fractional ownership and the benefits it offers, demand for ERC-404 tokens is likely to grow. This increased adoption could lead to a more liquid market, making it easier to buy and sell shares of some NFTs.
ERC-404 could also pave the way for new types of financial instruments. For example, we may see the emergence of NFT-backed securities or derivatives. This may bring new investment opportunities and bring more traditional financial players into the NFT ecosystem.
The gaming industry is another area where ERC-404 could have a significant impact. Imagine owning a rare in-game item or a small piece of virtual real estate. This can create entirely new economic models in games and virtual worlds.
in conclusion
ERC-404 tokens are changing the way we think about NFTs. They make NFTs more accessible and exciting by letting people own tiny, special digital items.
While there are still some questions to be answered, such as how to ensure everything runs smoothly, the future looks bright. This new way of owning things can open up a lot of cool opportunities in digital art, games, and more.
