Tokens and NFTs in 1 Transaction?! Learn all about the ERC404 token standard

In the past couple of days and weeks, the Ethereum ecosystem has been agog with news of an innovative token standard – ERC-404. Here, we introduce what ERC standards are, the popular token standards available, and what makes ERC-404 different from the others.

What are ERC Standards?

Ethereum Request for Comment (or ERC) standards are a set of technical rules and protocols used to manage the creation and activities of tokens and smart contracts on the blockchain. In essence, they function like blueprints and are designed to ensure compatibility, interoperability, security, and efficiency within the ecosystem.

A blockchain asset management platform such as Flagship, for instance, uses smart contracts built upon these protocols to handle tokenized assets for users and customers. These rules are contained in a document whose proposals must have been scrutinized and approved by Ethereum’s core developers for use throughout the network.

Popular Ethereum Token Standards

To explain how the ERC-404 standard came about, it’s important to look at some popular standards and why they were developed.

1. ERC-20

This is, no doubt, the most popular standard on the Ethereum network. It defines the primary rules for creating fungible tokens that can be used to represent any kind of asset, right, ownership, access, etc. that is not transferable. It was introduced in 2015 as smart contracts became popular on the Ethereum blockchain and the proposal was approved in 2017. Popular ERC-20 tokens include Tether USD (USDT), USD Coin (USDC), Binance USD (BUSD), BNB, Maker (MKR), etc.

2. ERC-721

Like ERC-20 is the standard for fungible tokens, ERC-721 is the primary standard for non-fungible tokens (NFTS) and the latter was developed by the same teams that developed the former. These NFTs, so far, have found a wide range of applications in art, collectibles, gaming, real estate, and more, and ERC-721 facilitates the secure ownership and transfer of unique assets since metadata and ownership information can be verified on the blockchain. The popular Cryptokitties game, for instance, is built on this standard.

3. ERC-777

Introduced to enhance the functionality and usability of ERC-20 tokens, ERC-777 tokens have interesting features such as hooks, operators, granularity, and backward compatibility. It is a fungible token standard but it enables complex trading. They work in the same way as the ERC-20 tokens except for the hook mechanism. Despite its added features, many protocols still prefer the ERC-20 token because its successor is not as secure.

4. ERC-1155

This standard was introduced to simplify the complexity of multi-token platforms, introducing flexibility and versatility for the creation and management of multiple types of tokens in a single smart contract. ERC-1155 tokens can be fungible or non-fungible and they can be transferred in batches too, making transactions super-efficient.

Introducing the ERC-404 Standard

Enter ERC-404, an experimental token standard introduced with the aim of creating a new class of semi-fungible digital assets by combining features of the fungible ERC-20 and the non-fungible ERC-721 token standards. NFTs, by their creation, cannot be fractionalized, for instance, but ERC-404 promises the native fractionalization of NFTs, which will expand opportunities for trading non-fungible assets just like ERC-20 tokens.

Fractional NFTs already exist, but technically, they don’t; the actual tokens are simply locked up in a wallet, and entities that want to buy fractionalized tokens are issued tokens that represent that NFT, not fractions of the actual NFTs. This is a complex process that is prone to loss of value. With ERC-404 enabling native fractionalization, which means multiple wallets can directly own parts of an NFT, this new standard will be solving a major problem that has persisted for years.

Indeed, ERC-20 and ERC-721 tokens are not designed to be interoperable, and the developers of ERC-404 admit this, yet they aim to make their new standard as robust as possible. To be clear, ERC-404 is not yet an official Ethereum token standard. Typically, a new standard becomes officially recognized after going through the following steps:

• Developers create the document for the standard and submit it as an Ethereum Improvement Proposal (EIP).
• EIP editors and the larger Ethereum community, consisting of developers, users, researchers, and other stakeholders evaluate the standard.
• Experts formally review the proposal and they may approve or reject it outright, or request changes.
• The standard is implemented by Ethereum core developers for integration on Ethereum platforms.

Projects Using ERC-404

ERC-404 hasn’t been submitted for review as an EIP yet, but the team backing it says they are working towards submitting a ‘bulletproof proposal’. The approval process is a lengthy one that could take years. However, that means major Ethereum platforms don’t back it yet, although there are a few projects that have already implemented the standard.

Pandora (PANDORA)

Pandora is the inaugural framework to adopt the ERC-404 token standard, and it recorded an incredible 12,000% rise from $250 to $32,000 within a week of its launch. Its launch was acknowledged by various platforms such as OpenSea marketplaces as well as Bitget Wallet, LBank, Blur, etc. The Pandora token currently has a total supply of 10,000 and a market capitalization of about $230 million

DeFrogs (DEFROGS)

DeFrogs is a PFP NFT project, the first of its kind based on the ERC-404 standard. It’s only second behind Pandora as an ERC-404 project and has witnessed a similar upturn within the first couple of days since its introduction. It has a market cap of about $12 million

Monkees (MONKEES)

This is another PFP project, newer than Pandora and DeFrogs but which has also recorded a huge success following its launch. It has a market cap of around $2 million, which is quite impressive.

Other interesting ERC-404 projects launched so far include Ruge (RUG), Froggy Friends (TADPOLE), 404 Bakery (BAKE), Anon (ANON), Crystal (CRYSTAL), EtherRock404 ($ROCK), Pet the Dog (DOGPET), Troves (TROVES), Monarch (MNRCH), and so on.

Conclusion

ERC-404 is the most interesting news in the Ethereum ecosystem so far this year, and stakeholders are watching keenly. Projects based on ERC-404 have witnessed a quick and huge rise, and subsequently a downfall, but this kind of fluctuation is not uncommon because of the novelty of the standard.

Other watchers should remain aware that ERC-404 is not an official standard yet, and there might be risks with it, even though it holds enormous potential. So, it is not yet available via Flagship Vaults and other reputable platforms because the excitement should be managed with caution.

The prospects remain interesting, though, and such a standard implementing native fractionalization of NFTs, among other innovative features, will change the Ethereum and cryptocurrency landscape for years to come.