A new kind of NFT, with an in-built capacity for fractional trading, has risen in popularity this week.
Liquidity, interest, and infrastructure are pouring into this new meta—so let’s take a look at what ERC-404 is and how it works.
First of all, this standard is calling itself an ERC, but it’s not gone through the formal process of an EIP (Ethereum Improvement Proposal), meaning it’s not been fully vetted or audited by the Ethereum devs or governance structures. It’s calling itself an ERC, and there is a lot of public interest in the idea of ERC-404 tokens, so it may get codified officially in due course.
ERC-404 tokens are primarily on the Ethereum mainnet for now, but they can also be deployed on chains like Arbitrum—the first 404 there is called Crystal.
How It Works
“ERC404 aims to be a hybrid of ERC721 and ERC20 –it’s an NFT token that has fungible fractionalization built in,” Cygaar wrote in the post on X.
To illustrate how 404s are different, he first offered a familiar example of how a 721 token works.
“Let’s say we have an ERC721 NFT contract called Fantastic Figs.
When you mint a Fig, your balance goes from 0 to 1. When you transfer your Fig to someone else, your balance goes to 0. You can’t trade fractional parts of each NFT, it has to be whole tokens.
Very straightforward,” he wrote.
Next, he asked: what would happen if the Figs were 404s? “The fig contract now has a base unit like an ERC20 token. For this example, let’s assume a base unit of 100 (in reality it’ll be something like 10^18).
Now, if I mint a Fig NFT, my balance will be 100 instead of 1.
So far, not that different from before. But this is where it gets interesting.
You can actually trade fractions of your NFT around.
I can transfer 20 Fig NFT fractions to someone else. My balance will now be 80. However, because my balance is less than 100, I will lose the NFT,” he explained.
In practice, every time someone buys or sells fractions of a 404, the contract checks if it needs to burn or mint one of the NFTs of which these fractions are constituent parts.
Taking a look at the Pandoras, you can see their hybrid nature. The NFTs—little floating pixel art cyber-boxes, for the moment, which will unlock to reveal a unique Replicant at their reveal—are selling for over a 10 ETH floor, but if you want to get a fractional exposure, you can go over to Uniswap and purchase whatever amount your budget allows. The $pandora token trades at the same price as the NFT, but you can trade fragments of it.
For the inveterate rarity sniper, it is important to know that when you sell enough fractions of $pandora, you’ll burn an NFT! For those who want to keep hold of a particular Replicant NFT while they’re trading, a locking feature will roll out soon.
Degen Liquidity for NFT Art
Now, many of us are freaking out over these new 404s because the standard could solve the illiquid JPEG problem, making it easy for a collection of cartoon animals to attract liquidity pools at size, using the DEXes we already know for trading meme tokens.
Security researcher 0xQuit has taken a look at the standard’s code and has raised some technical concerns.
Founder Acme replied to these on the project telegram. “I think all criticism is valid, but just to be clear, he’s creating an example where a protocol doesn’t integrate correctly and is leveraging that in an attempt to reflect poorly on us.
Oh, also, we’ve just fully completed an initial Pandora audit, and it will be out today. The second iteration of ERC404 has just started an audit as well and will be audited prior to release.”
With the team saying audits are rolling out imminently for the standard, ERC-404s already being supported by wallets like OKX and Bitget Wallet, and announcements of a proper EIP application on its way, the new hybrid tokens could be a central theme in 2024—and are likely to transform the NFT landscape.