ERC 404: New Hot Token Standard Explained

The cryptocurrency industry is still in its infancy, and every day sees the birth of a new concept or idea that may or may not gain traction. Recently, a new token standard was created on Ethereum called ERC404, which aims to combine the liquidity and fractionalization of ERC20 tokens with the uniqueness of NFTs. Let’s dive into this new standard, why Pandora uses it, and what its future could be.

Since Ethereum is a fully open and trustless development environment, anyone can create a token with whatever features they want. Early in its history, Ethereum developers established the ERC20 token standard that would generally be used to define a fungible token on the blockchain. By agreeing to a set of standards, it became possible to create composable, modular applications capable of using and integrating all ERC20 tokens. These standards are responsible for massive network effects and are why decentralized exchanges like Uniswap can natively support tens of thousands of tokens.

ERC-721 tokens are the standard for non-fungible tokens or NFTs. They have the same transferability properties as ERC20s, but each token is unique, allowing many tokens to have different properties and characteristics. While this is great for creating uniqueness within an NFT collection, it comes with many issues, primarily around the exchange and fractionalization of these tokens. There is no great solution for selling an NFT on a Uniswap-style marketplace, nor is there a way to break an NFT into pieces and sell partial ownership.

ERC404 tokens aim to bridge the gap between ERC20s and ERC721s. Pandora, a new experimental project, created it. Holding 1 PANDORA token allows a user to be minted 1 “Replica” NFT, and the token and NFT are tied to one another. Selling the token means the NFT is burned. This is a difficult concept to understand at first. It basically means that each token is inherently tied to an NFT, and these tokens, or fractions thereof, can be exchanged on regular decentralized exchanges. This Tweet from @wacy_time1 explains it well:

Though it has garnered lots of interest, and Pandora is now trading at a $220 million market capitalization, ERC404 has a long way to go before it becomes a popular and well-adopted standard. The standard has yet to undergo a rigorous security audit, meaning there could be an unforeseen bug or exploit in these token types. Additionally, unlike ERC20 and 721, ERC404 did not go through an open development process and was not legitimized using the traditional ERC method. ERC stands for “Ethereum Request for Comment” and is the forum through which standards and proposals are typically made. Pandora did not pursue this formal method and instead released its token and made their announcement in an unexpected manner. Though these are by no means dealbreakers for ERC404, they certainly raise some level of concern about the long-term viability of the standard. This choice has also led to criticisms from developers and thought leaders in the Ethereum community.

ERC404 is an extremely interesting experiment in mixing the fractionalization of fungible tokens with the value and properties of non-fungible tokens. The standard is still very new, and thus it has yet to be properly vetted for security and value. Whether or not ERC404 becomes a popular new token standard remains to be seen, but this type of open innovation is what blockchain is all about. Any new attempt at innovation is exciting and worthy of respect.

By Lincoln Murr

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