How the ERC-404 Token Standard works?

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What is the ERC-404 Token Standard?

ERC-404 is a new Ethereum token standard, which combines features of two other token standards designed to operate within the cryptocurrency network—ERC-20 and ERC-721.

The new standard came into the spotlight in February 2024 with the release of the first ERC-404 tokens by the PANDORA project. The PANDORA team took inspiration from a group of developers of the Emerald platform, which ceased to exist in 2023.

Why is ERC-404 Needed?

First, let's clarify the terminology. ERC stands for Ethereum Request Comment (proposals for improvements to the second-largest cryptocurrency network, Ethereum (ETH)). 404 is the proposal number.

Thus, ERC-404 is an Ethereum improvement proposal numbered 404.

Now, let's delve into what exactly the creators of ERC-404 propose. To do this, we need to understand the two Ethereum token standards: ERC-20 and ERC-721, as ERC-404 combines their properties.

ERC-20 is the basic token standard on the Ethereum network. It allows for the creation of new fungible tokens. The 2017 ICO boom was largely driven by the ability of anyone to create their own Ethereum token using ERC-20. These tokens can be bought in parts.

ERC-721 is the Ethereum standard for non-fungible tokens (NFTs). It enables the creation of unique tokens on the ETH network, which cannot be bought in parts.

The new ERC-404 incorporates the best features of both standards, allowing participants to purchase fractions of NFTs. Technically, it is a smart contract template that integrates operations with both ERC-20 and ERC-721 tokens without altering the standards' parameters. In other words, ERC-404 synchronizes the operations of both token standards.

Thus, ERC-404 is both a fungible and non-fungible token. Some in the crypto community refer to it as a semi-fungible token.

The goal of ERC-404 is to solve the liquidity issue of NFT collections and provide market participants with new ways to use non-fungible tokens in the decentralized finance (DeFi) market by enabling the purchase of their fractions.

ERC-404 can be compared to another Ethereum standard, ERC-1155. The difference lies in their scope of action. ERC-1155 can be used for fractionalizing individual tokens, while ERC-404 can be applied to an entire collection of tokens simultaneously.

How ERC-404 Works: The PANDORA

Example One PANDORA asset consists of two tokens: a regular ERC-721 NFT (the token collection is called Replicants) and an ERC-20 token (PANDORA).

When a market participant buys 1 PANDORA, 1 Replicants NFT is automatically sent to their wallet. Upon transferring or selling PANDORA, the NFT Replicants associated with the token is burned. In the case of selling Replicants, the system does not burn PANDORA tokens but transfers them along with the NFT to the new owner's wallet.

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Important! A PANDORA buyer receives Replicants only if they purchase a whole token. Yes, you can buy parts of PANDORA, like 0.5 tokens, but the NFT will only be available when you have 1 PANDORA in your account. So, to get a non-fungible token, you must either buy 1 PANDORA outright or acquire it in parts.

The NFT add-on increases the token's value because the owner also receives a non-fungible token that may appreciate over time.

On February 10, 2024, PANDORA's trading volume on decentralized exchanges (DEX) approached $12 million. By early March, this figure had dropped to $200,000, which, amid a general market uptrend, indicates a decrease in investor interest in the tokens.

Nonetheless, PANDORA remains the most capitalized ERC-404 token, according to CoinMarketCap. The Future of the Standard ERC-404 can be considered an unofficial experimental Ethereum token standard, as it has not undergone a security audit nor been endorsed by ETH representatives. The decline in trading volume of the new standard tokens amid a general uptrend in the digital asset market is another concerning sign.

Unfortunately, as of the writing of this review, the future of ERC-404 remains uncertain. Despite the initial hype, the standard has yet to gain the Ethereum team's approval or maintain the crypto community's interest.

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