Established token standards for Ethereum include fungible ERC-20 tokens and non-fungible ERC-721 tokens (NFTs). Now an experimental and unofficial new token standard, ERC-404, aims to combine elements of both into a single “semi-fungible” digital asset.

What is ERC-404?

ERC-404 is a new token standard for digital assets on the Ethereum blockchain developed by pseudonymous creators “ctrl” and “Acme.”

Token standards are formal sets of rules and protocols that determine the behavior of tokens on blockchain networks such as Ethereum.

The ERC-404 token standard combines features of ERC-20 and ERC-721, enabling the creation of “semi-fungible” tokens that employ features from fungible and non-fungible tokens.

How does ERC-404 work?

NFTs are non-fungible, meaning that they are unique and indivisible; you can’t own fractions of an NFT.

ERC-404 circumvents this limitation by using token mint and burn mechanics to enable fractional transfers of an NFT.

Issued tokens are linked to an NFT. If you buy a full token, the linked NFT is minted to your wallet. If you sell a fraction of the token, the linked NFT is burned. If a wallet holding fractions of a token purchases enough fractions to hold a complete token, a new NFT is minted automatically.

What’s so special about it?

The ERC-404 token standard enables native fractionalization of NFTs, creating new primitives and new mechanics built atop them. This, in turn, allows for experimentation with NFTs and the trading of them.

The token standard’s creators suggest that the goal is to create an NFT with “native fractionalization, liquidity and encourages some aspects of trading/engagement to farm unique trait sets.”

The team behind Pandora, a project using ERC-404, claims that it effectively enables NFTs built using the standard to “effectively have a token price that reflects a floor price in real-time” because it allows for “actual native liquidity.” Rather than needing a single counterparty to buy their NFT, holders of ERC-404 tokens can sell at a time of their choosing if there’s a liquidity pool.

Furthermore, instead of having to lock up or wrap NFTs and issue shares against them, fractionalization of NFTs can be achieved natively without relying on third-party protocols and solutions.

Another possible use case suggested by the Pandora team is gaming NFTs that incorporate randomization into the destroying and reminting of NFTs.

ERC-404 projects

• Pandora: Pandora is one of the first projects to employ the ERC-404 token standard. It comprises 10,000 PANDORA ERC-20 tokens and 10,000 linked “Replicant” NFTs. A Replicant NFT is minted to your wallet if you purchase a PANDORA token on an exchange.
• DeFrogs: DeFrogs is a collection of 10,000 Pepe the Frog-themed NFTs using a variant of the ERC-404 token standard, billed as the first ERC-404 PFP collection, which its creators claim is deflationary.
• Monkees: Another PFP collection using the ERC-404 token standard, Monkees consists of 100 NFTs with ten attributes and six traits.

The future of ERC-404

Unlike the popular ERC-20 and ERC-721 token standards, ERC-404 is “experimental” and unofficial. That means it hasn’t been submitted for review as an Ethereum Improvement Proposal (EIP) or undergone a full external audit. This means it could have undiscovered flaws, introducing a significant risk to token holders.

The team states that, “While these two standards are not designed to be mixed, this implementation strives to do so in as robust a manner as possible while minimizing tradeoffs,” though they concede it is a “non-standard” implementation of ERC-721.

Because ERC-404 is an unofficial token standard, many NFT platforms and marketplaces do not support it by default

The team behind the token standard plan to submit it as an official Ethereum Improvement Proposal, a potentially lengthy process. However, their decision to circumvent the standard approval process for token standards could encourage other projects to do the same—which could lead to more unaudited token standards going to market, with the attendant risks to users that entails.

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• Source: https://decrypt.co/resources/what-is-erc-404-the-experimental-semi-fungible-ethereum-token-standard