A new token standard emerged in crypto four days ago. The new standard, ERC404, has since garnered outsized attention and could begin a new narrative trade. This new token standard marries the ERC20 and ERC721 standards to bake fractionalization directly into an NFT contract. As such, the first ERC404 project, Pandora, has both a $PANDORA token and a collection of NFTs.
ERC404 seems simple; ERC404 deployments have a fungible token and an NFT. The $PANDORA token, for example, has a supply of 10K, paired with 10K NFTs (Pandora Boxes). The standard automatically links and transfers these tokens and NFTs based on each other’s ownership – like quantum entanglement. For example, if a user buys one full PANDORA token, the contract automatically mints a Pandora Box NFT and sends it to the purchasing address. If they sell the Pandora Box NFT, one token is deducted from the owner and goes to the purchaser. Meanwhile, if they send a full $PANDORA token somewhere, the contract mints a new NFT to the new address and burns the NFT in the old one.
A Pandora Box
ERC404’s are still new, unaudited, and incautious use can lead to a burnt NFT, but they are exciting and open up an entirely new way for NFTs to launch and create liquidity for their owners.
Unsurprisingly, I Have Thoughts
ERC404’s, although pretty simple, are super exciting and seem to lead to some compelling market behaviors:
- The mechanics of ERC404 encourage volume and speculation, which is a massive boon to platforms that support them. Each time a full token moves, the contract burns an NFT and then mints a new one with new rarity traits. The standard encourages holders to move those tokens around to get better traits – it takes an already speculative investment and amps the speculation up to 1000 – probably one reason why Blur moved quickly to support them.
- Linking the token and NFT gives the NFT more access to liquidity. Holders and devs can quickly put the linked token in AMMs where trading is smoother. The fungibility may remove friction around NFT auction trading and make NFTs even more popular.
- The overnight success of PANDORA and ERC404s is a strong endorsement from the market that there is some speculative desire and interest for new and unique token standards, even on a chain like Ethereum. ERC404’s give me early BRC20 vibes.
- ERC404 is a narrative in a vacuum. Solana went down today, the SOL ‘shitcoin’ season is seemingly over, BRC20s and inscriptions have cooled off, the BTC ETF has come, the market has probably priced in the BTC halving already, and it looks like rate cuts are farther out than the market thought initially. There is always some speculative fever ready to pounce on a new trend, and ERC404s could very well experience a wild surge from both token and NFT speculators looking for a new rotation. This seems to already be occuring in some manner as PANDORA has done a x13 in four days or so.
Unsurprisingly, I Have Concerns
There are three significant concerns for me right now around ERC404s:
- ERC404s have some gas optimization issues that make them wildly expensive to use.
- The entire standard is unaudited, and some bugs could break the whole thing.
- Unscrupulous projects that leverage the hype to get and run off with people’s funds will emerge.
404s are brand new, untested, unaudited, and unproven. There will be scams, rugs, and bugs. People should be cautious when they interact with these new tokens. But all that was true of early BRC20s, inscriptions, NFTs, and crypto. In that regard, ERC404s look like something people should watch, even if it is risky. Without a doubt, I will be exploring and watching this space now.
Here are some awesome tweets and articles for further reading:
https://twitter.com/0xQuit/status/1754853866120835239
https://twitter.com/rickawsb/status/1754934916624875828
https://www.blocmates.com/research-reports/erc404-everything-we-know-about-pandora-so-far
