Not Error 404: A Guide to ERC-404 Tokens

This was originally posted on Planner Bee.

The cryptocurrency and blockchain technology landscape is ever-evolving, with new token standards developed on the back of constant innovation.

The ERC-404 token stands out as a recent and promising hybrid token standard that combines the best of ERC-20 and ERC-721 tokens. This new token also introduces a novel concept that bridges the gap between traditional fungible tokens and unique non-fungible tokens (NFTs).

For newcomers to the crypto space, understanding ERC-404 tokens is essential to grasp the potential they hold and how they differ from existing standards.

What is ERC-404?

ERC-404 is an experimental token standard on the Ethereum blockchain, introduced to address the limitations of existing standards like ERC-20 and ERC-721. How does it do that?

Unlike the prevalent ERC-20 standard for fungible tokens (like coins) and ERC-721 for non-fungible tokens (NFTs like digital art), ERC-404 attempts to create a hybrid. It opens the door to semi-fungible tokens, allowing a single, unique asset to be divided into tradeable fractions.

How do ERC-404 tokens work?

Let’s use a well known NFT, Beeple’s Everydays: The First 5000 Days as an example.

The ownership of this NFT belongs to a single person (the one who paid US$69.3 million).

In the case of ERC-404, the NFT can be represented by a single ERC-404 token. This token can then be broken down into smaller fractions, similar to dividing a company’s stock. Each fraction becomes a tradable ERC-404 token itself. Owning a fraction grants partial ownership of the original asset.

Deep diving into the technicalities:

The ERC-404 token standard utilises a mechanism called “bonding”. An NFT (ERC-721) is ‘bonded’ to an ERC-20 token and if held in its entirety, it represents complete ownership of the underlying NFT.

This ERC-20 token can then be further divided into smaller denominations through fractionalisation. Each fraction then acts as a separate ERC-404 token.

When complementary fractions are combined (forming the whole NFT), the fractions are “burned” (removed from circulation), and a new ERC-721 NFT is minted, representing full ownership again.

Read more: Buying Cryptocurrency in Singapore: What Platform To Use and What To Look Out For

How does ERC-404 differ from ERC-20 tokens?

The primary difference between ERC-404 and ERC-20 tokens lies in their level of flexibility and functionality. While ERC-20 tokens are fungible and represent identical units of value, ERC-404 tokens can represent both fungible and non-fungible assets within the same standard.

Although individual fractions are fungible, they collectively represent a unique whole (like the original NFT example above). This versatility opens up new possibilities for tokenisation across various industries.

History of hybrid tokens

In fact, the concept of hybrid tokens is not entirely new, with previous attempts to combine the features of ERC-20 and ERC-721 standards. However, these solutions often rely on centralised custodians holding the underlying asset, raising concerns about security and transparency.

Thus, ERC-404 represents a significant advancement in this regard, bringing this process onto the blockchain, offering a potentially more secure and trustless approach.

Benefits of ERC-404

The adoption of ERC-404 tokens brings several benefits to the cryptocurrency ecosystem. These include increased liquidity, democratisation of ownership and novel applications.

• Increased Liquidity for NFTs: Traditionally, a lack of liquidity plagues NFTs due to their indivisible nature. ERC-404 allows for fractional ownership, making valuable NFTs more accessible to a wider audience and potentially increasing their overall trading activity.
• Democratisation of Ownership: NFTs that were once out-of-reach in prices can now be purchased in smaller portions, enabling broader participation in the ownership of valuable digital assets.

• Novel DeFi Applications: ERC-404 paves the way for innovative financial applications in the DeFi space. Fractionalised ownership opens doors to possibilities like collateralised loans using NFTs as underlying assets.

What are the risks and limitations of ERC-404?

Like any emerging technology, ERC-404 tokens also come with certain risks and limitations.

• Experimental Stage: ERC-404 is a relatively new standard, and its code is still under development. This lack of battle testing introduces potential security risks and unforeseen technical glitches.
• Complexity: The mechanics of bonding, fractionalisation, and burning introduce additional complexities compared to traditional tokens. Users require a clear understanding of these processes to navigate the ERC-404 ecosystem safely.

• Limited Adoption: As a new standard, ERC-404 compatibility with existing wallets and exchanges might be limited. This can hinder wider adoption and user accessibility.

What are the top ERC-404 Projects?

Several notable projects have already embraced ERC-404 tokens for various purposes. These range from decentralised finance (DeFi) platforms and gaming applications to digital art marketplaces and supply chain management systems. Some prominent examples include Decentraland, CryptoKitties, and SuperRare.

Why the hype over ERC-404 tokens?

The growing excitement surrounding ERC-404 tokens stems from their potential to revolutionise tokenisation and asset representation on the blockchain.

By combining the best features of existing standards, ERC-404 opens up new possibilities for innovation and experimentation in decentralised finance, digital collectibles, and beyond.

The ability to own a piece of a valuable digital asset or participate in novel DeFi applications is a compelling prospect for many crypto enthusiasts.

The future of ERC-404 tokens and hybrid token standards

Looking ahead, ERC-404 tokens are poised to play a significant role in shaping the future of blockchain technology. As developers continue to explore the potential applications of hybrid token standards, we can expect to see further advancements in tokenisation, decentralised governance, and decentralised autonomous organizations (DAOs).

All eyes on NFTs again?

As the popularity of non-fungible tokens (NFTs) continues to soar, ERC-404 tokens offer an intriguing avenue for further innovation in this space. With their ability to represent both fungible and non-fungible assets, ERC-404 tokens could unlock new possibilities for digital collectibles, virtual real estate, and unique asset ownership.

In short, ERC-404 tokens represent a significant step forward in the evolution of token standards on the Ethereum blockchain. By combining the best features of ERC-20 and ERC-721 standards, ERC-404 offers a versatile and efficient solution for tokenisation across various industries.

While challenges and uncertainties remain, the potential benefits of ERC-404 tokens make them a compelling area of focus for developers, investors, and enthusiasts alike. As the crypto community continues to explore the possibilities of hybrid token standards, ERC-404 stands out as a beacon of innovation and progress in the ever-expanding world of blockchain technology.

Read more: How Non-Fungible Tokens (NFTs) Are Transforming the Art World