Exploring the Depths of the ERC-404 NFT Standard

Introduction to ERC-404: A New NFT Standard

The ERC-404 NFT standard is hot right now. So just what is it, and why is everyone excited about it? Well, to start with, this experimental token is ‘semi-fungible’. ERC-404 marries the best of fungible and non-fungible properties to create an NFT with native liquidity and fractionalisation. What this means is unlike current NFTs which can only be held in one wallet, ERC-404 enables a single NFT to be held across multiple wallets.

In this article, we provide a brief comparative overview of the ERC-404 NFT standard, and its significance on how it might reshape the NFT landscape.

In order to explain fully this experimental token, let’s first explore the meaning of fungible and non-fungible tokens:

Fungible tokens, ERC-20 for example, behave just like money in that they have markets of buyers and sellers. Frequently termed ‘coins’, they’re divisible, interchangeable (like currencies), and listed and traded on exchanges. Due to this divisibility, fungible tokens are inherently liquid and fractionalised.

Non-fungible tokens, ERC-721 for example, a standard interface for NFTs, can only be held as a complete token in a single wallet. Each ‘token’ is unique and non-divisible making them illiquid, as they can only exchange ownership in their entirety. Since NFTs can be worth millions, this provides a use case for shared ownership.

ERC-404 is meeting the need for fractional ownership by leveraging ERC-20 and ERC-721 standards in a single contract. Since the mechanics of this are complex and long, we have included some links for those wishing to take a deeper dive.

Goals and uses of ERC-404

One of the aims of ERC-404 is managing shared ownership of NFTs whilst doing away with any third party solution for achieving it. ERC-404 enables a single NFT representing a high value digital or real-world artwork, real estate, collectible, or other asset, to be split into tokens representing fractions of the total. These tokens can then be held by multiple wallets whilst linking back to the original NFT.

Like a bridge between the fungible and non-fungible worlds, ERC-404 promises a frictionless way to bring a typically illiquid asset class inside liquid token markets. This functionality allows for fractional ownership of expensive and unique NFTs reducing the barrier to entry and increasing liquidity – more participants means greater liquidity.

Key Features of the ERC-404 Standard

ERC-404 brings its unique attributes and technical improvements to NFTs by building upon existing standards; a feature responsible for the token creating a buzz even while in the experimental phase. By being immediately compatible with a wide range of existing platforms and wallets, participation and adoption of the new token is sure to accelerate.

Five Innovations Introduced by ERC-404:

Inherent fractionalization – ERC-404 avoids the need for solutions which abstract the NFTs. Instead, ERC-404 has the NFT fractions relate directly to the original NFT.
Native liquidity – By fractionalization, ERC-404-based NFTs can participate in markets as a new asset category of ‘semi-fungible tokens’, or SFTs, with high liquidity.
Broadens market appeal – ERC-404 provides access to luxury/high value goods expanding the retail market. Shoppers can enjoy shared ownership of otherwise unattainable goods, or something like a ‘hire purchase’ agreement where full ownership occurs upon collecting all the fractions (payments) of the complete NFT.
Enhanced Characteristics – ERC-404 creates a type of NFT which can be liquidated in a flexible manner for collateralization in cases such as credit and loans.
Shared Ownership – Multiple parties can own pieces of one NFT, expanding the ways ‘RWAs’ (Real World Assets) can be represented on-chain.

Comparing ERC-404 with ERC-721 and ERC-1155

ERC-404 is experimental, though there are positive signs that it might soon be officiated. Whilst ERC-721 and ERC-1155 began as experimental, they are now recognized standards.
ERC-721 is the dominant NFT standard in use today, but caters to ownership of ‘whole’ NFTs only. One NFT can only exist in one wallet at a time. ERC-1155 is more focused on a single NFT collection marketplace, for instance as used in a game, and enables large batches of NFTs to be minted in a single transaction, saving gas fees.
ERC-404 utilizes ERC-721 as one of its underlying interfaces, combined with ERC-20 tokens to perform the fungible elements of liquidity and fractionalization. ERC-404 utilizes a technique called ‘pathing’ to combine the ERC-20 and ERC-721 tokens in an efficient manner.
Neither ERC-721 or ERC-1155 NFTs account for divisibility; ERC-404 does so by combining ERC-20 and ERC-721 into a single contract.

Potential Impact of ERC-404 on the NFT Ecosystem

ERC-404 could change the way artists, creators, traders, and collectors interact with and collect NFTs and digital assets because of its ability to form shared ownership. Previously, if a collector wanted to own an NFT, they would have to be able to afford the NFT in its entirety, which is not always possible given that NFTs can be very expensive, especially the popular and most successful projects. Allowing for a way to buy fractions of these pieces opens new and innovative market possibilities.

How to Implement ERC-404 in Your NFT Projects

Implementing ERC-404 as part of a project is still in the experimental stage. However, being based directly upon the established ERC-721 and ERC-20 standards makes things easier, and ERC-404 may soon see more generalized implementation. Implementing ERC-404 will require some in-depth reading of the token mechanics and development process. Fortunately, this is well documented. Here’s a detailed guide on how to create and deploy an ERC-404 token. You might also want to dive into the GitHub repository and explore the NFT project which pioneered ERC-404, Pandora.

Future Prospects: The Evolving Landscape of NFT Standards

Whilst we’ve gasped at multi-million dollar NFT sales resulting from this technology, (Beeple’s $69M NFT sale, for instance), most of us choose to own NFTs we can actually afford. Could ERC-404 be the NFT innovation that will enable the affordability of pricey artworks? Or the evolution that allows fractional ownership of prized pieces? Time will tell. As the future of NFT standards and blockchain technology emerges, ERC-404 makes for several new use cases across artwork, gaming, and investment markets, especially RWAs.

Multichain NFT portfolios and collections are set to benefit from this experimental standard as they could store and showcase both fully-owned and partially-owned NFT artworks in a single portfolio, broadening the diversity and appeal of such a collection. Likewise, the potential for fractional ownership of highly-valuable items could evolve the NFT landscape further into real-estate, physical artwork, luxury items and more. ERC-404 holds potential to both diversify investment possibilities and create new user experiences for interacting with NFT technology.

Conclusion

Advantages of ERC-404 over previous NFT standards are clear. Making NFTs divisible and able to be easily and quickly liquidated is desirable, potentially replicating the liquidity dynamics that fungible markets have long enjoyed.

At Ilunafriq, we’re always on the lookout for up-and-coming standards that could soon appear on our multichain NFT aggregation marketplace. The option for NFT HODLers to display NFTs in which they have fractional ownership will broaden appeal. Likewise, artists have the option to democratize ownership of their works, by offering them up for shared ownership to a set limit of HODLers.

We’re excited about this standard and the promise it holds for art ownership and valuation, and look forward to its continuous development and application in the ever-evolving art scene.

Tags: Digital assets on blockchain, ERC-404 features, ERC-404 NFT standard, Implementing ERC-404, NFT standards comparison