WTF is ERC-404?

Standards on Ethereum have distinct characteristics and applications, but they have conjunctively laid the foundation for what we know as Ethereum nowadays. As some of the most well-known standards like ERC-20 and ERC-721 have been around for a good amount of time, there has been the initiative to improve them to amplify their functionalities.

What is ERC-404?

To explain this standard, it is important to understand the ERC-20 and ERC-721 standards, as ERC-404 was conceived as a combination of these two.

• ERC-20 is a standard that is used for the creation of fungible tokens. Fungible tokens have the same value and properties as every other token of the same type which makes it ideal for use as currencies, shares, or other units of value that require uniformity and divisibility.

• ERC-721 was later introduced as a standard for non-fungible tokens (NFTs) which are unique digital items that can prove ownership of digital or real-world items, such as artwork, collectibles, or even real estate. Unlike ERC-20 tokens, each ERC-721 token is different, with individual characteristics and value. 

Now that we clearly understand what these two standards are, let’s dive into ERC-404.

The ERC-404 standard is born as a combination of the two most well-renowned standards to change the paradigm of separated fungible and non-fungible tokens. With ERC-404, developers are able to link an NFT to every minted fungible token.

But, Why? The main reason to create this new standard is to solve the current limitations of NFTs based on mainstream standards. NFTs based on current standards have limited use cases and they are not as flexible, resulting in hindered potential and utilization in the real world market.

Why is ERC-404 a big deal?

In short, the ability to have a contract that is able to have the functionality of a “normal” token and an NFT is a big deal.

• ERC-404 can solve the issue of fractionalized assets, as instead of having to lock NFTs in order to fractionalize them, developers could allow several wallets to own a single NFT by dividing NFTs into smaller and more affordable units (fungible tokens), making it possible for multiple stakeholders to own part of an NFT.

ERC-404’s Issues

Nevertheless, ERC-404 is facing some backlash as the standard that is initially perceived as innovative, there are aspects that can set it back from its potential:

• It is an experimental and unofficial Ethereum token standard created with the objective of combining the features of fungible and non-fungible tokens. This means it is that it is not compatible with other standards due to not following existent standards.

• It caused a surge in gas fees, the highest gas fees in the last 8 months.

• There are also threats regarding the security of this token standard due to it not being fully tested for flaws, exploits, and breaches which is vital to complete before its full adoption and real-world use cases.

Enter DN-404

So what now? Will ERC-404 fade forever? The answer is not necessarily, and “failures” almost always foster innovation. The DN-404 token standard was created to address the inefficiencies and concerns that revolve around ERC-404.

Short for "Divisible NFT-404", the DN-404 standard was created to solve the issues with ERC-404. It does so by adopting a “two-contract” system with a more streamlined approach than ERC-404. A quick summary of DN-404’s explanation by one of its creators, @0xCygaar:

• Their approach utilizes a base ERC-20 token with a “mirror” ERC-721 token.

• Most operations are still performed with the ERC-20 token.

• The ERC-20 token contract manages the tracking of balances and the minting/burning of the mirrored NFTs.

• The “mirror” ERC-721 contract remains treated as any other ERC-721 token, meaning they can still be used in any protocol that supports ERC-721.

DN-404’s main selling point is its ability to reduce transaction fees on Ethereum by up to 20% in comparison to ERC-404. But simultaneously:

• It will continue to allow fractional ownership of NFTs, enabling users to trade fractionalized portions of their NFTs without intermediaries;

• Its design allows the integration of functionalities seen in both ERC-20 and ERC-721 standards; and

• While it is still experimental, it has gained recognition and support from the community.

As a conclusion, the combination of the well-known ERC-20 and ERC-721 can open up a new array of utilities for the Ethereum ecosystem. This is due to each of these standards leveraging the flexibility and liquidity of ERC-20 and the uniqueness and provenance of ERC-721.

This hybrid approach definitely holds great potential, mainly in the realm of asset tokenization as it allows the creation of unique investment products that combine the divisibility of ERC-20 tokens with the distinct ownership records of ERC-721 tokens.

Albeit its great in-paper potential, both ERC-404’s and DN-404’s fates are still subject to time and improvements. Developers will continue to explore this opportunity for the Ethereum ecosystem, but we are likely to be experiencing the emergence of a new standard that can unlock new business opportunities on Ethereum.