Dr. DODO is Researching

Posted on Feb 08, 2024Read on Mirror.xyz

ERC-404: Bridging NFTs and Tokens Through Creative Encoding | CryptoSnap

The hottest topic on social media recently is definitely "ERC-404", the new token standard developed by the Pandora team. Although it does not have the formal approval process of the Ethereum Foundation, and is only an unofficial standard, the "dual fungibility" design of ERC-404 has caught many people's eyes, and set off a speculation craze. Not only did the official $PANDORA token surged over 100X in less than a week, it has also driven many projects to rush to issue tokens under the ERC-404 standard protocol.

This week, Dr. DODO will take you to understand what exactly is the ERC-404 standard.

Source: https://x.com/Pandora_ERC404/status/1755310974578381180?s=20

Origins

To introduce Pandora, we have to mention a new project called Uniswap Emerald (EMERALD) that emerged earlier this month. In order to solve the liquidity problem of NFTs, Emerald launched an improved token standard that directly establishes liquidity on Uniswap. When you buy 1 $EMERAID on Uniswap, you get 1 token and 1 NFT at the same time. 1 NFT = 1 $EMERAID token (ERC-20). However, due to vulnerabilities in the contract, it was attacked multiple times and the token contract was changed repeatedly. The team is still working hard to fix it. Pandora was inspired by Emerald. Its three founders optimized the Emerald contract into the current ERC-404 token standard. ERC-404 attempts to bridge the gap between the traditional ERC-20 and ERC-721 standards by allowing unprecedented symbiosis between the two through a creatively encoded approach.

ERC-404

The core innovation of this "dual fungibility" design lies in lossy encoding. ERC-404 cleverly enables the quantity information of fungible tokens and the ID identifiers of non-fungible tokens to be stored using the same data structure, while ensuring their differentiation. This is like a magician identifying specific cards without changing the number of cards.

The mapping mechanism brought by ERC-404 is another highlight. It allows natural conversion between fungible tokens and their mapped non-fungible tokens. When you sell a token, the corresponding NFT will be automatically burned, and vice versa. This not only greatly improves the liquidity of NFTs themselves, but also inspires endless trading creativity. Users can even DIY choose which NFTs to prioritize burning or retaining.

Of course, as an experimental standard, ERC-404 still has some technical flaws at this stage, mainly reflected in the inability to explicitly specify the object when destroying NFTs. However, this can be mitigated through some tokenomics designs such as adding rarity mechanisms.

Current Status

Pandora is the first token based on the ERC404 token standard, with a total supply of 10,000. Since its launch on February 2, its market value is close to USD 100 million. On February 6, Pandora transitioned to 2/4 multi-signature. When it comes to NFTs, rarity and fragmentation are inevitable issues. Pandora is no exception. Every time it mints a new NFT, it is assigned a different rarity. Its rarity has five levels, which allows possibilities for arbitrage to promote liquidity.

In addition to Pandora itself, there are now many tokens minted under the ERC-404 standard. The OKX Web3 Wallet even has a separate column to classify them.

Source: OKX web3 wallet

Author's Perspective

In the author’s opinion, ERC-404 is a highly pioneering experiment. Its emergence outperforms many NFT Fi projects. The liquidity problem of NFTs has always been an issue that many have been working hard to solve. ERC-404 directly solves this problem by making it a token standard, successfully bridging the gap between the two previously incompatible standards, and opening up new opportunities for the digital asset field, which is likely to give rise to more dazzling innovations.

Of course, as an unofficial standard, it also implies certain security risks. We will have to wait and see how it evolves going forward.