With the launch of the experimental hybrid token Pandora on Feb. 2, a new and unaudited mixed ERC20/ERC721 implementation has taken the non-fungible token (NFT) world by storm.
Called the ERC-404 standard, this unofficial Ethereum standard mixes two well-established Ethereum standards to introduce fractional ownership to NFTs and potentially solve the liquidity problem facing NFTs today.
In essence, Pandora's ERC-404 combines the fungibility of the ERC-20 standard that governs token issuance on the Ethereum blockchain, with the uniqueness afforded by the ERC-721 standard to provide a new standard for creating semi-fungible tokens that support NFT fractionalization.
As a result, this ERC-404 standard could potentially spur the financialization of NFTs in the future, especially if existing ERC-721 NFT collections can be wrapped into ERC-404 interchangeable wrapped tokens.
The Promise Of Semi-Fungibility: The Pandora project that has led to the creation of a new class of ERC-404 tokens in turn uses two assets: the ERC-20 token (PANDORA) and an ERC-721 token representing unique NFTs in the Replicants collection.
For every PANDORA ERC-404 token purchased, buyers automatically receives a Replicants NFT in their wallet, with each NFT also having a rarity depicted by the color of the NFT box (red being most rare and green being most common).
When the PANDORA token is sold, the mint-and-burn feature ensures that the associated NFT is burned, with buyers also having the option to store rare NFTs that they do not wish to burn when transferring PANDORA.
On the other hand, when selling or transferring an NFT, only the fungible part of the PANDORA token is moved to the buyer's wallet along with the Replicants NFT, keeping the PANDORA token unaffected.
The mint-and-burn feature allows for fractional purchases of the PANDORA token, automatically minting an NFT to the buyer's wallet if he/she owns enough fractions of the token to form a whole NFT.
Thus, Pandora's ERC-404 standard can expand the use of tokens on the Ethereum platform to facilitate the exchange of non-fungible tokens and provide developers with a revolutionary new way of integrating NFTs into token projects.
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A Look At The Competition And The Future: Ever since the launch of the Pandora project, several competitors like the Divisible NFT standard (DN-404) and Injective Protocol's CW-404 standard have emerged to cash in on the hype surrounding ERC-404.
In the same vein, Solana's SOL/USD SPL-20 tokens mimic ERC-404 tokens in terms of functionality to redefine the NFT experience on the Solana blockchain.
Creators and developers are understandably excited by the potential for further innovation with the ERC-404 standard, opening up opportunities for integrating NFTs with the DeFi ecosystem as well as tokenizing in-game assets through native fractionalization to introduce new monetization models within the Metaverse.
Still, as with every new innovation, there are certain risks surrounding the ERC-404 standard that need to be understood before investing in associated tokens.
Foremost of them all is the fact that this new standard hasn't been recognized by the Ethereum ETH/USD Foundation and is yet to be taken up for vetting through an Ethereum Improvement Proposal, underscoring the potential of exploitation by bad actors.
Secondly, the standard is at an experimental stage with a new v2.0-beta version still being tested by Pandora to eliminate bugs, introduce numerous logical optimizations and reduce gas costs.
That said, recognizing ERC-404's immense potential in unlocking NFT liquidity and other collaborative applications within the Web3.0 ecosystem, investors should watch out for developments that could establish this experimental token standard as the blueprint for creating digital assets on the Ethereum blockchain.
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