Combining Homogeneity and Heterogeneity: The Rise of ERC-404
Since its explosive popularity in 2021, Non-Fungible Tokens (NFTs) have not only established a presence in the digital art and collectibles field but have also disrupted the gaming and retail industries. In recent years, new NFT standards and protocols have been continuously developed to meet market demands and address pain points, including the highly discussed “ERC-404”.
First introduced in February 2024, ERC-404 is a new token standard created by former Coinbase engineer 0xacme. It combines the features of the homogenized token protocol “ERC-20” and the non-fungible token protocol “ERC-721”.
Simply put, each NFT will have a corresponding token. When a user sells an NFT, the corresponding fungible token will also be transferred. Conversely, when a user sells a fungible token, the corresponding NFT will be destroyed and re-minted in the wallet of the user purchasing the fungible token.
This transaction mechanism ensures that both NFT and token holders can enjoy good liquidity without worrying too much about the difficulty of transferring assets.
The token “Pandora” is the first project to be issued using the ERC-404 standard. The NFTs tied to this token have different degrees of rarity, and one type is randomly selected each time they are minted. Pandora skyrocketed from less than $5,000 to over $23,000 in a short period of time, demonstrating the strong collecting and experiential frenzy triggered by ERC-404.
Lootex, a Taiwanese NFT trading market and issuer, sees great potential in ERC-404 and has created the “404 Journey” in 2024 to allow users to explore the features of ERC-404 through a gaming experience. The platform has already accumulated over $200,000 in trading volume.
What makes Lootex’s ERC-404 Journey stand out?
Firstly, users can earn points by holding or trading Lootex’s native NFT IP “Smart Frens”. The accumulated points vary based on the rarity and trading volume of the NFTs.
Based on these points, users will enter the leaderboard and be assigned to one of three factions: “Freedom,” “Bravery,” or “Kindness.” Users will then receive an airdrop of the “$FRENS” ERC-404 token based on their ranking. Token holders will see both an ERC-20 and an ERC-721 token in their wallets.
The ERC-721 token bound to the “$FRENS” token represents a prop NFT, and each NFT is linked to a different faction. Users belonging to a specific faction need to actively buy their faction’s props and sell those of other factions, just like “supporting the frontlines”. The more props a user has from their faction, the higher their score, ultimately competing for the faction’s prize pool. Both ERC-20 and ERC-721 tokens can be used in transactions, depending on the user’s strategy.
Through the game and leaderboard experience, Lootex allows users to understand the features of ERC-404. Lootex’s co-founder and CEO, Lu Ji-jie, shared that the player response has been enthusiastic. Users are willing to purchase and join the 404 Journey, even if they don’t initially hold the free airdropped Smart Frens NFT. Everyone is eager to understand how to accumulate points to participate in the entire process.
As the Smart Frens NFT was initially distributed for free, most community members find the 404 Journey very “generous” and akin to the concept of “free-to-play”. Lu Ji-jie explained that ERC-404 itself is an experimental standard that brings new narratives to the dormant NFT field. Lootex hopes to lower the entry barrier, allowing the community to experience the fun of the new NFT protocol.
What are the advantages of ERC-404?
Advantage 1: Solving NFT Liquidity Issues
Lu Ji-jie believes that liquidity is the primary pain point ERC-404 addresses. In the crypto market, NFTs lack market liquidity. Even if blue-chip NFTs have high value, it still takes time to find the next buyer willing to “bid”. However, ERC-404 allows NFTs to have liquidity like ERC-20 tokens. If there is no reason to continue holding an NFT, the token can be sold directly.
Advantage 2: Fractionalizing NFT Ownership to Increase Investor Participation
A valuable NFT can be worth millions, but with the ERC-404 standard, a digital collectible can be divided into multiple parts, with each part having a corresponding token representing partial ownership, similar to buying fractional shares of stocks. This lowers the threshold for investing in high-priced NFTs and makes it easier to sell. It increases buyers’ willingness to enter the market.
To facilitate convenient transactions, the Lootex website also incorporates a “Swap” feature that allows users to easily dispose of their ERC-404 tokens, whether they want to trade tokens or the associated NFTs.
Advantage 3: Gaming Applications
Based on recent experiences participating in exhibitions in Japan and Hong Kong, Lu Ji-jie observed that many developers are still paying attention to the development and opportunities of ERC-404, especially in gaming applications where ERC-404 has great potential. For example, the concept of synthesizing unwanted props into new weapons is similar to the concept of NFTs being “destroyed” and “re-minted” in ERC-404.
Lu Ji-jie revealed that many game projects have begun researching how to incorporate the ERC-404 protocol into their gaming systems.
Experimental standards still carry risks
Despite ERC-404 bringing new narratives and opportunities to the NFT market, Kerel Verwaerde, the Chief Marketing Officer of the exchange Cryptology, warns that ERC-404 is still in its early stages of development and, due to its immaturity, potential technical or risk issues should be noted.
Jesse Leclere, a blockchain analyst at the Web3 security company CertiK, agrees that introducing new experimental token standards may bring risks. For example, malicious individuals may attempt to exploit the hype surrounding the new standard to attract users to invest funds and engage in fraudulent activities.
The emergence of ERC-404 brings more possibilities and vitality to the NFT market, enriching the entire NFT ecosystem. However, when participating in and applying new standards, it is important to remain vigilant, be prepared for potential risks, and conduct thorough research.