Good day everyone,
I hope you are all well and having an excellent week, welcome to CryptoGod-1’s blog on all things crypto. In this post I will be looking at ERC-404 Tokens, what they are and how they have taken off recently along with their impact on Ethereum Gas Fees.
ERC-404 Tokens
The commonly known tokens within the Ethereum world include fungible ERC-20 tokens and non-fungible ERC-721 tokens. The ERC-721 tokens are known as NFT's, or non-fungible tokens, but a new experimental and unofficial new token standard known as ERC-404 has emerged to combine elements of both ERC-20 and ERC-721 tokens into a single "semi-fungible" digital asset.
This new token standard for digital assets on the Ethereum blockchain was developed by pseudonymous creators "ctrl" and "Acme." The ERC-404 token standard was created in a rush, mainly due to the fact they were rugged by a previous project which had claimed to provide the same functionality but failed to deliver. In general token standards are a formal set of rules and protocols which determine the function and behaviour of a token on the blockchain. The new ERC-404 token standard will combine the original features of the standards and allow for new tokens which employ features from fungible and non-fungible tokens.
Consider an NFT as a unique and indivisible item. It is non-fungible, meaning it cannot be broken down into smaller pieces, or fractions. With ERC-404 the creators have managed to circumvent this limitation through token mint and burn mechanics. This enables the 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.
Thanks to the ERC-404 standard, NFT's can be fractionalised and this in turn allows the creation of new primitives and new mechanics to be built atop them. This will result in experimentation with NFTs and new ways to trade them. The creators have suggested the new token standard allows the creation of NFTs with "native fractionalization, liquidity and encourages some aspects of trading/engagement to farm unique trait sets."
The ERC-404 token is "experimental" and unofficial, unlike both ERC-20 and ERC-721. This means it hasn't been submitted for review as an Ethereum Improvement Proposal (EIP) or undergone a full external audit and it could have undiscovered flaws, introducing a significant risk to token holders. The creators have been clear 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 trade-offs," though they concede it is a "non-standard" implementation of ERC-721.
A lot of NFT platforms and marketplaces do not support the ERC-404 token standard by default as it is an unofficial token standard. The team behind the token standard do have plans to submit it as an official Ethereum Improvement Proposal but that is a potentially lengthy process.
ERC-404 Projects
There are a couple of current ERC-404 projects making use of this new token standard, and included among the more notable of them are:
- Pandora: Pandora was one of the first projects to employ the ERC-404 token standard. It makes use of comprising 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 team behind Pandora have claimed that the ERC-404 token standard basically allows 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." There is no single counterparty required to purchase an entire NFT for a transaction to take place, meaning holders of ERC-404 projects are potentially able to sell at a time of their choosing if there is a liquidity pool available. There is also no need to rely on third-party protocols and solutions to fractionalise an NFT, nor would users need to lock up or wrap NFTs and issue shares against them. Pandora also claimed that gaming NFTs which incorporate randomization into the destroying and reminting of NFTs is another use case for the ERC-404 tokens.
Ethereum Gas Crisis
On the 9th of February 2024 the price of gas for Ethereum hit an average peak of 70 gwei, equivalent to $60 for a standard transaction, and peak gas costs even reached as high as 377 gwei, a level not seen since the 12th of May 2023. There have been several factors which have contributed to the heightened gas fees, but one primary cause was due to the hype surrounding the ERC-404 token standard. The excitement which generated from the token led to a substantial increase in trading activities, especially with the likes of Pandora and DeFrogs.
These ERC-404 initiatives, among others, have generated over $600 million in trading volume in the past week alone and Pandora has seen a remarkable growth with over 6,100% increase in value and trading volume's which exceeded $474 million. The ERC-404 standard has garnered significant attention within the crypto community and the developers behind Pandora are actively working on optimizing gas costs associated with ERC-404 transactions.
“We’re trying to optimize for gas because that’s a big part of adoption and protocols wanting to integrate… So in certain cases, we’re able to potentially reduce gas fees by like 300% to 400%.”
According to PopPunk, co-founder of Gaslite, an ERC-404 token consumes approximately three times more gas than an average NFT transaction.
Much of the surge in activity on the Ethereum network on the 9th of February was associated with an increase in usage of the decentralized exchange protocol Uniswap. The data indicates that a significant portion of the Ethereum burned during this period resulted from activities on Uniswap. Back on the 10th of January 2024 Ethereum co-founder Vitalik Buterin noted during a Reddit ask-me-anything (AMA), organised by the Ethereum Foundation’s research team, that the gas limit had not been raised in almost three years. He noted it was the longest period without an increase in the protocol’s history. He also claimed that a modest gas limit increase was reasonable even at that time, and that an increase could lead to a limit of around 40 million.
ERC-404 Hype Falling
While there was huge initial hype surrounding the experimental ERC-404 token standard, that has since calmed down and the prices of tokens built using it have dropped in recent days. Pandora saw its peak market cap of $324 million from the 9th of February 2024 drop to $150 million, with the price of each token falling below $15,000. DeFrogs, the second biggest, only reached a peak of $38 million in market cap and has since seen a 68% decline in price.
The mash-up of ERC-20 tokens and NFTs basically means when someone owns less than a whole NFT, the NFT disappears and the user only owns a fraction of a token. Many have been quick to criticise the inefficiency when it comes to transaction fees, and that issue arose partly due to the fact the burning and re-minting of NFTs is expensive to do on the Ethereum mainnet. There are also claims that the implementation itself was written in an inefficient way. By providing an alternative implementation with more efficient code, this could allow for more ERC-404 tokens without clogging up the network.
While the original developers of the ERC-404 work on ways to improve their produce, a rival group of developers are currently working on an alternative implementation of the same idea and is due to be released immediately. Their equivalent version of the ERC-404 token will be known as the “Divisible NFT,” shortened to DN-404, according to a pseudonymous developer known as cygaar. He posted on X that they were working around the clock to get the DN404 (divisible NFT) code ready.
Tensions have also rose between both the Pandora team and the group of developers working on the rival version. Initially they held discussions between both groups but ultimately they could not come together on a solution to work together. Therefore the two will be going against each other in the area, and considering how the Web3 space works I expect similar tokens to appear in this new type of token market. Whether any will take off and have real success remains to be seen.
Have a great day.
Peace. CryptoGod-1.
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