ERC-404 represents a significant innovation by amalgamating two widely used Ethereum standards, ERC-20 and ERC-721, which are renowned for token issuance and non-fungible tokens (NFTs) respectively. This integration enables developers to craft fractionalized NFT collections that are freely tradable and can be utilized in the open market.

Unlike tokens, NFTs in their typical form are one-of-a-kind assets, lacking divisibility. While fractionalized NFTs do exist, they often rely on an intermediary entity that locks up the NFTs in a wallet and issues tokens representing fractional ownership. However, the value of these fractionalized tokens may not precisely mirror the locked NFT’s inherent value.

ERC-404 addresses this challenge by allowing multiple wallets to directly own a single NFT. Furthermore, it envisions a future where this specific exposure can be tokenized, unlocking potential use cases such as taking out loans or staking holdings. By tackling the hurdles associated with fractionalized NFTs, ERC-404 introduces a versatile and innovative approach to tokenizing and trading NFTs in the crypto market.

According to ctrl, one of the developers behind Pandora and ERC-404, individuals in the crypto community strongly dislike friction. In a message to CoinDesk via Telegram, ctrl emphasized that previous solutions before ERC-404 often introduced too much friction, particularly through wrapping solutions that abstracted the original NFT, making fractionalization or liquidity efforts cumbersome. This complexity led to dissatisfaction among collectors, resulting in limited adoption. In contrast, ERC-404 incorporates these functions by default, eliminating the need for confusing third-party protocols and solutions.

The developers of ERC-404 acknowledge on their GitHub page that while the two standards it combines, ERC-20 and ERC-721, were not originally designed to be mixed, their project aims to achieve this integration robustly while minimizing tradeoffs. They explicitly state that ERC-404 is an experimental and unaudited standard, and although testing has been conducted to ensure accuracy in execution, the nature of overlapping standards implies that integrating protocols may not fully comprehend their mixed functionality, as noted by developer 0xacme on GitHub.

EIP in play to become official

It’s crucial to note that ERC-404, despite its significance and innovation, has yet to gain official recognition as an Ethereum token standard. Ethereum token standards are sets of rules and protocols that establish how digital tokens should function and interact within the Ethereum blockchain ecosystem.

The ERC-404 development team is proactively addressing this by actively working on an Ethereum Improvement Proposal (EIP) for the token standard. EIPs are the formalized process within the Ethereum community for proposing and implementing improvements, new features, or functionalities to the Ethereum network. However, the EIP process is known for taking time and not being swift, emphasizing the meticulous and comprehensive nature of protocol changes within the Ethereum ecosystem, as highlighted by the developers.

Ctrl, one of the developers behind ERC-404, emphasized the need for precision and a meticulous approach in developing the Ethereum Improvement Proposal (EIP) for the token standard. In recognition of the unique and informal origins of ERC-404 within the nascent and evolving aspects of the market, the team is committed to crafting a bulletproof proposal. This underscores the developers’ dedication to ensuring the thoroughness and reliability of the proposed standard, acknowledging the importance of getting it right in a space that is still emerging and evolving.

In the event that the Ethereum Improvement Proposal (EIP) for ERC-404 receives approval, the standard will attain the status of being an “official” one recognized by the Ethereum Foundation. The Ethereum Foundation, a nonprofit organization dedicated to maintaining the Ethereum blockchain, plays a crucial role in endorsing and supporting standards for use within the Ethereum ecosystem. Once recognized, ERC-404 will become an agreed-upon framework, ensuring compatibility with Ethereum-based applications and enhancing its acceptance and integration within the broader Ethereum community.