What Is ERC-404? A Deep Dive into the New Semi-Fungible Token Standard
Tags: erc404, nft, web3
Published: 2024-03-06 12:19:31

**ERC-404, which emerged as a hot topic last month, is an experimental token standard developed by the Pandora team in early February for creators and developers. It is a hybrid of ERC-20 and ERC-721, combining the features of both fungible tokens and non-fungible tokens (NFTs), allowing them to be interchangeable and providing native liquidity and fractionalization. With its early development, more and more participants have started to pay attention to this new protocol standard.**

## What is ERC-404?
ERC-404 is a protocol standard that combines ERC-20 (fungible tokens) and ERC-721 (non-fungible tokens NFTs), enabling the conversion between NFTs and tokens. It allows NFTs to be traded in a fragmented manner, similar to splitting a piece of art into multiple parts and allowing multiple individuals to collectively own a part of it.

For some blue-chip NFT projects such as Bored Ape Yacht Club (BAYC) and Pudgy Penguins, the prices have become prohibitively high for ordinary retail investors, especially for those with rare attributes that become illiquid.

The introduction of ERC-404 is a significant improvement for these NFT projects that lack liquidity. These high-priced NFTs can now be traded in fragmented transactions on mainstream trading platforms, making it as convenient as buying assets like BTC and ETH.


## What is Pandora?
Pandora is the first project built on the ERC-404 token standard, offering a unique trading experience. In this project, every purchase of a PANDORA token results in the minting of an NFT, which automatically appears in your wallet. Conversely, when you sell a PANDORA token, the corresponding NFT is destroyed. The same process of NFT destruction and minting occurs when the token is transferred. However, transferring the token does not change the NFT.

This means that you can choose to sell your NFT to a liquidity pool without the need to list it on traditional NFT trading platforms. This new trading method provides holders with more flexibility and convenience while bringing more liquidity and vitality to the NFT market. Through this approach, the Pandora project introduces new possibilities for NFT trading, promoting the development and maturity of the NFT market.

Learn more about the leading project Pandora at NFTScan ⤵️

https://eth.nftscan.com/0x9e9fbde7c7a83c43913bddc8779158f1368f0413

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/6bxec0kja5westo4azpe.png)Data powered by NFTScan

## Innovations brought by ERC-404

One of the innovations of ERC-404 is its ability to behave as both interchangeable fungible tokens and non-fungible tokens (NFTs) under certain conditions. This flexibility allows ERC-404 to have a wider range of possibilities in the Web3 space, meeting users’ needs for highly liquid trading scenarios as well as asset management scenarios that require personalization and uniqueness, offering them more choices.

ERC-404 extends the application scenarios of tokens, providing users with more possibilities. For example, it allows tokens to represent partial ownership of assets. In the case of NFTs, the concept of partial ownership can be implemented, allowing multiple users to collectively own the same NFT and share corresponding ownership rights based on the number of tokens held. Moreover, ERC-404 can be applied to a wider range of assets, offering users a more diversified management approach.

It allows NFTs to be split into smaller token units, enabling more investors to participate in high-priced NFT investments without purchasing the entire NFT, thereby lowering the entry barrier for the market. It also increases the liquidity of NFTs as more tokens can be traded, resulting in a more active market.

ERC-404 involves the seamless integration of token fractions and NFT ownership through the automatic minting and destruction of corresponding NFTs within wallets.

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/rvqhq9vi6sp74g928pf2.png)

## Limitations of ERC-404
Initially, with the launch of various ERC-404 projects, the gas fees on the Ethereum network increased significantly. However, as issues emerged and the hype faded, the attention toward ERC-404 projects rapidly declined. The flagship project, Pandora, experienced a significant drop from its peak, while other ERC-404 projects suffered earlier and larger declines. What are the limitations of ERC-404?

1/ The complexity of the underlying smart contracts in the ERC-404 standard has significantly increased, resulting in higher gas fees during transaction execution compared to regular ERC-20 transfers. Given the limited performance of the current Ethereum network, the high gas fees pose a more prominent issue, directly impacting the user experience.

2/ The lack of official recognition and integration challenges. The ERC-404 protocol is not officially recognized by Ethereum, introducing uncertainties and risks before widespread adoption. Moreover, integrating this new standard into existing wallets, exchanges, and DApps within the extensive ecosystem faces various obstacles such as standardization, compatibility, and stability.

3/ During the trading of fungible tokens, there is a possibility of NFTs being transferred to the buyer without considering the rarity of the NFT. This situation may lead to the transfer of high-value NFTs that the original holder possesses, resulting in the loss of valuable NFT assets for the holder.

4/ There are potential technical risks. While ERC-404 draws on the mature elements of ERC-20 and ERC-721, the fusion of the two is novel, resulting in increased complexity of the smart contracts. This may introduce new attack surfaces and security vulnerabilities. The ERC-404 standard needs to undergo rigorous third-party security audits and penetration testing. Currently, this area may still require further improvement in terms of strict configuration and compatibility checks to prevent such vulnerabilities.

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/9w1i01pbh88zejxyvov9.jpeg)

The liquidity of NFTs has always been a challenging problem, and many projects are dedicated to addressing this issue. Various market platforms are attempting to solve this challenge by improving the user experience and increasing liquidity. Additionally, some projects are trying to enhance NFT liquidity through mortgage lending and NFT fractionalization, such as decomposing NFTs into ERC-20 tokens for liquidity mining on decentralized exchanges. The emergence of the ERC-404 protocol provides a good solution to these challenges.

## Conclusion
ERC-404 introduces a new concept of “hybrid tokens”, breaking down the barriers between fungible and non-fungible tokens and opening up new application scenarios for the Web3 ecosystem. However, as an experimental standard, ERC-404 is still in its early adoption phase and undergoing rigorous testing to ensure its robustness and reliability. Whether it will be widely adopted remains to be seen.

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/vm5zvuqzbx5dejrk7rhz.png)

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