The cryptocurrency and NFT industry has been presented with a standard for tokens that promises to add value to their utility through a variety of intriguing new capabilities. ERC-404, which became a popular issue last month, is an experimental token standard created by the Pandora team in early February for creators and developers. It is a combination of ERC-20 and ERC-721, combining the qualities of both fungible and non-fungible tokens (NFTs), allowing them to be interchanged while still providing native liquidity and fractionalization. With its early development, an increasing number of participants have become aware of this new protocol standard for NFT development.

What is ERC-404 

ERC-404 is a token standard, an experimental proposal, designed to bridge the gap between fungible tokens (ERC-20) and non-fungible tokens (ERC-721). This is equivalent to combining the attributes of both to create semi-fungible tokens. Let's go deeper:

Understanding ERC-20 And ERC-721 Token Standards

ERC-20 and ERC-721 are Ethereum token standards, with ERC-20 primarily utilized for fungible tokens and ERC-721 for non-fungible tokens (NFTs). ERC-20 tokens are interchangeable and can be used to represent assets comparable to currencies.

However, each ERC-721 token contains distinct attributes and metadata that enable ownership and uniqueness verification on the blockchain. These tokens represent specific digital assets, such as digital real estate or collectibles.

ERC-721 tokens encourage creativity and a range of use cases in decentralized apps (dApps) and the digital economy by allowing the creation and trade of original digital assets, as opposed to ERC-20 tokens, which follow a predefined framework.

Also, Read | ERC-721 Non-Fungible Token Standard Development

Key Points 

• ERC-404 offers fractional ownership to NFTs by combining features from the ERC-20 and ERC-721 standards, improving liquidity and accessibility in the NFT ecosystem.
• ERC-404 enables users to buy and sell fractions of NFTs, broadening access to high-value assets and generating new investment options.
• Unlike other techniques, ERC-404 allows fractionalization directly within the token standard, removing the need for extra platforms or intermediaries.
• The ERC-404 standard may enable greater usage of NFTs beyond art and collectibles, supporting innovation in industries including real estate, gaming assets, and intellectual property.
• It is still in development and has not yet been publicly proposed as an official Ethereum Improvement Proposal (EIP).

Why Choose the ERC-404 Token Standard for Project Development

Fractional Ownership

ERC-404 allows several individuals to own an NFT (ERC-721) using fractions. You can buy and sell individual pieces of an NFT rather than the full thing.

Native Fractionalization

Unlike previous methods, fractionalization occurs directly within the token standard using minting and burning processes. Users do not require additional platforms or intermediaries.

Liquidity Enhancement

Fractionalization expands the audience for NFTs and enhances liquidity, potentially making them more accessible and tractable.

Dynamic Trading

Users can freely exchange fractions of an NFT, just like fungible tokens, resulting in a more dynamic and interesting market.

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How The ERC-404 Token Standard Works?

ERC-404 introduces a novel concept: each token is inextricably linked to its underlying NFT. When a complete ERC-404 token is purchased, the accompanying NFT is immediately created and delivered to the buyer's wallet, showing ownership of the exclusive digital asset.

When a segment of the connected NFT is sold, the corresponding portion of the ERC-404 token is destroyed, resulting in the loss of ownership rights over that component. On the other side, this action creates a new fraction token, which represents the piece being sold.

When a user collects enough fractions to reassemble a whole token, each fraction is destroyed and a new NFT is created, confirming ownership once more. This technique makes it easy for users to trade and own fractional shares of NFTs, increasing their opportunities to participate in the digital asset market.

Also, Explore | ERC-1155 | An Introduction to Multi-Token Standard Development

ERC-404 | Use Cases and Applications

The most significant benefit of the ERC-404 standard is the potential of its use cases and applications in a variety of sectors. Among the most profitable avenues for its utilization are the following:

Tokenization of Assets

Tokenization of real-world assets, or RWA, is a rapidly expanding trend in the crypto and blockchain markets that might use the new standard to enable fractionalized ownership of assets such as real estate, art, equipment, and luxury products. This would not only cut the entry barrier to these businesses for a large number of ordinary investors, but it would also secure an inflow of liquidity.

DeFi

The ERC-404 standard could assist lending, borrowing, and yield farming by allowing the introduction of new types of assets as collateral. The fractionalization of assets would also allow players to divide the value of portfolios and liquidate them to create additional income through sales or lending.

Gaming and NFTs

Asset ownership, transferability, and interoperability are key drivers of ERC-404 adoption in the gaming and NFT sectors. The new standard would enable developers to fractionalize in-game assets, introducing a completely new layer to gameplay mechanics and streamlining virtual economies. The NFT sector would also benefit from allowing more users to participate in collection ownership and trading.

Supply Chain Management

Transparency, verification, and efficiency in supply chain management applications are critical issues that ERC-404 could address by greatly simplifying the issuance of unique IDs to varied goods. The tying of fractionalized NFTs to a single original could aid in tracing product origins, whereas burn mechanics can be extremely useful in guaranteeing effective perishable storage.

More about ERC Standards | Unexplored ERC Token Standards On Ethereum

Notable Examples of ERC-404 Projects

Pandora

One of the first projects to use ERC-404 to issue 10,000 Replicant NFTs, which are then tied to 10,000 ERC-20 tokens. When customers buy a PANDORA token, they receive a newly minted NFT in their wallets, which sold for up to $32,000 per unit on February 9.

Monkees

Another ERC-404-based PFP collection consisting of only 100 unique NFTs, each having ten specific qualities and a combination of six traits.

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Conclusion

The ERC-404 is a novel token standard that promises to be an evolutionary step in the development of NFTs, accelerating ownership and diversifying use cases. Despite existing obstacles that ongoing development will undoubtedly address, the potential for NFTs to extend liquidity and increase applications in areas such as gaming, real-world asset tokenization, DeFi, and others is clear.

Interested in project development with ERC-404 and looking for a crypto token development company? Connect with our blockchain developers to get started.