ERC-404 semi-fungible tokens, are they real innovations or gimmicks?

php editor Baicao takes you to explore the true face of ERC-404 semi-fungible tokens. This new type of token is getting a lot of attention, but its true innovations have yet to be revealed. In the cryptocurrency market, new projects are emerging one after another, and investors need to carefully assess their value. Whether ERC-404 tokens truly have potential requires a deep understanding of the technology and team strength behind them in order to make informed investment decisions.

ERC-404 was born, PANDORA skyrocketed, and several exchanges such as OKX and Binance launched the ERC-404 section on their Web3 wallets.

Concept

ERC-404 is an experimental Ethereum token standard that aims to combine fungible tokens (such as ERC-20) and non-fungible tokens (such as ERC-721 ) characteristics are combined to create a “semi-fungible token” that is both fungible and non-fungible. This kind of token can exhibit fungible or irreplaceable attributes depending on its usage scenarios or purposes. It allows NFTs to be split and traded like ERC20 tokens, and has the dual attributes of "graphic currency". The picture is the coin again.

Let’s understand ERC-404 through examples. The prices of blue chips such as BAYC and Azuki are prohibitive for ordinary retail investors. Especially blue chips with rare attributes are so expensive that they have no market and are difficult to circulate. With ERC-404, these expensive NFTs can be directly split into tokens and traded directly on DEX without having to wait for buyers to pick up orders. ERC-404 works like splitting a picture into multiple parts, allowing multiple people to jointly own part of the picture.

Innovation point

Pandora (PANDORA) is the first token based on the ERC404 standard. Since its launch, Pandora's value has grown rapidly, and its token price has never reached less than 100% in a short period of time. US$5,000 has soared to more than US$23,000, with a market value of nearly US$200 million. This significant growth highlights the market's interest and potential confidence in this new standard. Nonetheless, as an experimental standard, ERC404 is still in the early stages of adoption and is undergoing rigorous testing to ensure its robustness and reliability.

The innovation of ERC-404 is reflected in the following aspects:

Conditional fungibility: One of ERC-404 tokens The key novelty is their conditional fungibility. This means that these tokens act as fungible assets under certain conditions and behave as non-fungible assets under other circumstances. This flexibility expands the application scenarios of the token, allowing ERC-404 tokens to be more widely used in various blockchain applications.

Enhanced Utility: By introducing semi-fungible tokens, ERC-404 increases the utility of tokens and provides new token opportunities. This includes fractional ownership of NFTs, or dynamic assets that evolve over time. For example, an ERC-404 token could represent fractional ownership of a piece of art, allowing multiple users to share ownership of this precious digital asset.

Improving market liquidity and lowering the barrier to entry: By allowing the sharding of NFTs, ERC-404 tokens help increase the liquidity of the NFT market and lower the barriers faced by potential investors. . This segmentation mechanism makes higher-value digital assets more accessible, thereby attracting a wider audience to participate in the NFT market.

Token Minting and Burning Process: ERC-404 involves the process of token minting and burning, allowing for partial transfer of NFT ownership. When an ERC-404 token is purchased, an NFT associated with it is minted in the buyer’s wallet. Accordingly, when the coins in the wallet are insufficient for a complete token, the corresponding NFT will be destroyed, and when the wallet accumulates enough shares to form a complete token, a new NFT will be automatically generated. This mechanism provides an innovative way to exchange and interact with NFTs, increasing market activity and inclusiveness.

Some people may ask, how does ERC-404 handle NFTs with rare attributes?

For NFTs with rare properties, ERC-404 proposes an innovative way to deal with them. A typical case is the Pandora project. Under this framework, each ERC-404 token is tied to a unique Replicant Box NFT with different rarity colors. When you purchase an ERC-404 token, a box NFT associated with it is randomly generated, with different colors reflecting its rarity. This move not only increases the liquidity of the NFT, but also provides buyers with a new way to increase the rarity of the collection by selling tokens and reminting the NFT.

Specifically, ERC-404 also allows users to evaluate the rarity of the NFT obtained after the initial purchase of tokens, and to "re-extract" the characteristics of the NFT by transferring the tokens to a new wallet, in order to Increase its rarity. This mechanism not only promotes token trading activities on DEX, but also creates additional revenue opportunities for liquidity providers.

However, this mechanism for handling rarity attributes also brings some challenges, such as how to maintain the value of rare NFTs during the reminting process, and how to balance market demand and evaluation for NFTs of different rarities. These considerations need to be addressed and balanced in the further development and practice of the ERC-404 standard.

Limitations

Although ERC-404 offers many innovative application possibilities, it also faces some limitations and challenges.

1. Code risk: The audit agency Beosin conducted a detailed analysis of the design mechanism of ERC-404 and the contract code of ERC-404 v2, indicating that although the v2 contract has added EIP-2612 support , improved minting and destruction logic, but there are still risks: the whitelist function may bring about centralization issues or the possibility of abuse; developers or users may make mistakes when calling the transfer function; there is still a lot of room for improvement in gas optimization; Missing emergency pause function. Therefore, the development team requires formal verification and manual auditing by security experts to ensure that the code has no logical loopholes.

2. Lack of official recognition: ERC-404 is not an officially recognized token standard by Ethereum, which increases the risk because this standard has not been rigorously reviewed by the EIP process. This process provides security, usability, and compatibility for community discussion and review. At the same time, ERC-404’s experimental label is a risk in itself. This status means that the standard is still under development and may undergo significant changes. Projects adopting ERC-404 may face challenges adapting to these changes, leading to instability or compatibility issues.

3. Potential exploitation risk: A developer named "quit" proposed that if an ERC-404 standard NFT is put into a loan that does not appropriately adapt to its unique requirements In the agreement, there may be a risk of NFT being stolen. This note highlights the need for rigorous configuration and compatibility checks to prevent such vulnerabilities when integrating experimental standards into the broader ecosystem. At the same time, because the ERC-404 standard is informal and eager to go into production, there may be a wave of non-innovative projects, rug pulls, and other malicious behaviors that use ERC-404 as a gimmick.

4. Integration Challenges: Integrating the characteristics of fungible and non-fungible tokens in ERC-404 may cause difficulties for platforms and protocols built on existing standards. These barriers may limit the efficiency and effectiveness of projects using ERC-404.

Extensions based on ERC-404

1. PORTAL404

PORTAL404 is a project based on the ERC-404 v2 standard and has launched a series of The portal with rich interactive interface improves user experience and simplifies the transaction process. Although ERC-404 v2 introduces features such as ultra-high liquidity, sharding, and resets, this rapidly evolving technology also brings new complexities and risks, such as the management of multiple dApps and multiple interfaces, and Uncertainty about which NFT will be destroyed or transferred. In order to solve these challenges, PORTAL404 introduced the ERC-5169 standard - calling the corresponding token front end through the token contract, that is, providing a token interface to support ERC-404 token holders to view each token on the same interface Complete data for associated NFTs, ERC20s and ERC721s, including balances, owners, market prices, contracts, etc., and allows interaction with external contracts, such as increasing leverage via Wasabi Protocol, conducting trade analysis using Candlestick or monitoring trading pairs via Floor Protocol.

Overall, the PORTAL404 project provides NFT and token holders with a higher level of control and security by combining ERC-404 and ERC-5169 standards.

2. DN-404

DN-404 is a supplement and improvement to the ERC-404 standard, launched by developers cygaar and quit, aiming to solve The rising fees on the Ethereum network caused by ERC-404. DN-404 is called "Divisible NFT-404". Unlike ERC-404, which attempts to merge NFT and token functions in a single contract, DN-404 uses two separate contracts: a standard ERC-20 token and a mirror. ERC-721 NFT. Developers believe this decoupled approach mitigates potential security risks, adheres to established standards, and ultimately simplifies the process. However, the code for DN-404 has not been audited, so there are inherent risks in its use.

The DN404 standard was proposed to solve the efficiency problem of ERC-404. This newly proposed "divisible NFT" standard is designed to allow NFT holders to trade the split parts of the NFT with others. Developer cygaar explained on social media that their ultimate goal is to create an NFT standard with native split functionality.

3. Smart Layer

We have previously conducted a detailed analysis and introduction of Smart Layer's TokenScrip and ERC-5169: TokenScript is a programming interface specially designed for tokenization proposed by Smart Token Labs in 2019. This interface not only helps users access all functions of the token, but also allows the creation of more advanced, complex and flexible "user token" interactions. In order to enable tokens to interact with various services and applications in the Web3 ecosystem, Smart Token Labs proposed the Ethereum standard ERC-5169 in May 2022 (which has become Final status). This standard introduces the concept of executable scripts, allowing tokens to carry their own logic and behavior and have stronger interactive capabilities. TokenScripts can be embedded into tokens according to the ERC-5169 standard, allowing tokens to exhibit dynamic behavior when interacting with various services and platforms.

Smart Layer recently launched an upgraded ERC-404 application. Based on ERC-404 V2, ERC5169 and TokenScript are added to ERC404 tokens as the token front end to help users more securely and conveniently Operating ERC404 tokens makes transactions more secure and frictionless, and even further amplifies liquidity. Crypto researcher Haotian analyzed: "As for Smart Layer, it actually has nothing to do with ERC-404. It's just that ERC-404 aims to make tokens have the basic functions corresponding to NFT images, while Smart Layer is a set of ERC-5169 that integrates And the TokenScript standard is essentially to achieve the programmable execution properties of FT tokens."

Summary

The ERC-404 standard brings new possibilities for token applications and liquidity by combining the characteristics of fungible and non-fungible tokens. The market's interest and potential confidence in this new standard has been significantly demonstrated with the launch and implementation of tokens such as PANDORA, demonstrating its potential to increase NFT market liquidity and lower barriers to entry. However, as an experimental standard, ERC-404 also faces many challenges and limitations, including code risks, lack of official recognition, and potential exploitation risks, which require high attention and caution from developers, investors, and users. .

With the continuous development of technology and the gradual maturity of the market, we can look forward to ERC-404 and its derivative projects such as PORTAL404 and Smart Layer, etc., to continue to explore and expand the boundaries of tokenization. These innovations not only provide NFT and token holders with richer interactive experiences and investment opportunities, but also bring new vitality and development potential to the entire blockchain ecosystem. In the future, as more projects adopt and optimize this standard, we may witness a major change in the field of blockchain tokenization, creating more value and opportunities for users and developers.

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