What is ERC-404?
ERC-404 is a new token standard that combines the features of ERC-20 and ERC-721. This standard allows tokens to be both divisible and unique. This allows tokens to have inherent liquidity and fungibility, opening up new possibilities for asset representation and interactivity within the Ethereum ecosystem.
How ERC-404 Works
Each ERC-404 token has a unique ID, just like ERC-721 tokens. However, ERC-404 tokens, like ERC-20 tokens, can be split into smaller pieces, thus enabling the seamless exchange of both fungible and non-fungible assets within the same token contract. In addition, each token in ERC-404 is tightly linked to an underlying NFT. The associated NFT is immediately stamped in the buyer's wallet when a full ERC-404 token is purchased, proving ownership of the specific digital asset. On the other hand, when a portion of the linked NFT is sold, the corresponding portion of the ERC-404 token is destroyed, taking ownership rights to that portion. Then, in the case of reassembling a whole token when a user has collected enough fractions, each fraction is destroyed and a new NFT is created, thus re-enforcing ownership. This technique makes it easier for users to trade and own fractional shares of NFTs, thus providing the opportunity for greater participation in the digital asset market.
The Difference of ERC-404
Token Ownership: Instead of owning the ERC-404 token, you can own a portion of it. For example, you can own 0.5 tokens instead of one full token.
Token Transfer: When you transfer a fractional amount, such as 0.5, one full token is subtracted from your account. This ensures that the total amount of tokens remains consistent. When a full token is subtracted from your account due to a fractional transfer, it enters a special ID pool for usable tokens. This pool makes sure that even if some tokens are divided into fractional amounts, there are always enough unique IDs available for new tokens.
Path Determination Mechanism: ERC-404 uses a technique called path determination to efficiently manage token transfers. Routing allows token quantity data and identities to share space, which makes transfers smoother and reduces unnecessary complexity.
Integration with Existing Protocols: Designed to be compatible with existing token standards such as ERC-404, ERC-20 and ERC-721. It isolates different functionalities and uses path identification to make integration smooth and simple.
ERC-404 brings a number of advantages to the NFT ecosystem. First, fractional ownership increases accessibility and liquidity for NFTs, allowing users to buy and sell high-value assets in smaller amounts. By democratizing ownership of valuable digital assets and diversifying portfolios, this feature creates new investment opportunities. Furthermore, the introduction of ERC-404 tokens could also encourage wider use of NFTs in applications outside of areas such as art and collectibles.
However, these advantages come with some significant challenges. Under current standards, the technical complexity of ERC-404 may make it difficult for developers to adopt and may require more knowledge. It should be noted that regulatory uncertainties around fractional NFTs may hinder widespread adoption, raising concerns about compliance and regulatory frameworks.
To ensure the security and integrity of fractional NFT transactions, it is also necessary to address some inherent security risks and weaknesses. Strong security mechanisms and comprehensive audit procedures need to be implemented to mitigate potential threats. In summary, although ERC-404 offers promising outlooks for the NFT industry, resolving these issues is important to ensure the smooth integration and sustainability of the standard.
Uses of ERC-404
ERC-404 could have a significant impact on the DeFi and NFT ecosystems. In DeFi, ERC 404 integration increases liquidity pools, DEXs and AMMs by fractionalizing unique assets, enabling higher capital efficiency and broader access to previously illiquid assets. In the area of NFTs, ERC404 opens new possibilities in dynamic NFTs with customizable fungible and non-fungible properties, thus opening up new creative possibilities in gaming, digital art and virtual worlds.
