ERC404 - From Underground to the Stars
Have you ever seen a project initially associated with fraud (rugpull) transform into a significant innovation?
What's more, ChatGPT plays a significant role at the heart of this fraud. Today, I'll talk about ERC404, a project with a fascinating story not only due to its technical innovations and innovation in NFTs but also because of its inception.
You might have heard about the ERC404 protocol that gained prominence on Twitter recently, particularly with the PandoraNFTs. But the story actually begins before Pandora.
Before Pandora, there was a project called $EMERALD. Its founder, a developer, attracted attention by introducing a novelty that combined the ERC20 and ERC721 token standards. For those unfamiliar, the ERC20 token standard represents tokens on the Ethereum network, while ERC721 represents non-fungible tokens (NFTs) on Ethereum.
One of the main characters in this story, @maybectrlfreak, was impressed by this innovation and bought $EMERALD tokens. However, due to poor coding of the $EMERALD contract, the project was hacked, leading to a significant drop in token value and investors realizing they had been scammed. @maybectrlfreak, despite losing $30k, admired the project's concept and wanted to meet the developer. To their surprise, they discovered that the person they met wasn't a developer but had written the code with the help of ChatGPT.
Subsequently, @0xacme, a former Coinbase employee, offered to rescue the failing project along with @maybectrlfreak. However, the owner of the $EMERALD project opted for a quick fix to make money fast and then return to serious work, leading to a parting of ways. It was at this point that two more people joined the team, giving rise to the PandoraNFT project. Following Pandora, a series of projects emerged, generating excitement and gaining listing on major exchanges under the ERC404 category within a week.
Now, let's delve into what ERC404 is and the innovations it brings:
"ERC404 is an experimental application that combines its liquidity and fractionalization (splitting a fund's assets into smaller tokens); it's a mix of ERC20/ERC721." - 0xacme (Founder of ERC404) 
While ERC20 tokens can be traded through liquidity pools on Uniswap and other DEXes, ERC721 tokens (NFTs) can be bought and sold on NFT marketplaces like Opensea, Blur, and LooksRare. However, ERC404 tokens can be traded on both types of platforms.
This new standard aims to solve liquidity issues in NFTs, allowing even small amounts to own expensive NFTs. Taking Pandora as an example:
- Pandora is released with 10,000 NFTs and 10,000 tokens.
- When you buy 1 PANDORA token on Uniswap, you pay the token's price and receive 1 PANDORA token in your wallet, which mints 1 Pandora NFT.
- The minted NFT may have any rarity, and by chance, you could mint one of the collection's rare pieces.
- When you sell your PANDORA token on Uniswap (and other DEXes with liquidity), the Pandora NFT in your wallet is burned simultaneously.
- Alternatively, you can list your Pandora NFT for sale on NFT marketplaces, and upon sale, the corresponding token is also sold.
The term "Floor Price," familiar to those trading NFTs, determines the market price of ERC404 tokens, at least for now. While this practice is experimental and only a week old, it's uncertain if there will be a price difference between the token and NFT in the future. However, if there's a price difference between the token and the NFT's floor price, would it still matter? Only time will tell.
There are nuances to consider for collections issued under ERC404:
- For instance, purchasing 0.9 PANDORA tokens doesn't mint a Pandora NFT. However, upon a second purchase of 0.1 PANDORA token, totaling 1 in your wallet, you mint a Pandora NFT.
- You can sell a portion, not all, of your tokens on DEXes. By adding or removing liquidity and trading tokens, you can continuously mint new NFTs, albeit with the risk of losing rare ones.
- Furthermore, minting a rare NFT allows you to sell it on marketplaces, potentially engaging in arbitrage by buying tokens again.
- Transferring an NFT from one wallet to another doesn't affect the NFT itself, but transferring tokens leads to burning the NFT in your wallet and minting a new one in the recipient's wallet.
- In scenarios like having 3 PANDORA tokens and wanting to sell one, if done via Uniswap, the specific NFT being burned is uncertain. To mitigate risks, selling as an NFT might be preferable over token sales.
- If you wish to sell, say, 0.5 PANDORA tokens, transferring your rare NFT to another wallet before the sale could streamline the process.
In my opinion, ERC404 represents a significant innovation, and I feel fortunate to witness its inception. While the potential for massive gains and the possibility of overvalued projects exists, I believe it will evolve over time, albeit contingent upon the reduction of high fees on the Ethereum network.
Many NFT projects have issued their tokens recently, some merely for promotional purposes, while others serve practical purposes. Following ERC404, I wonder if NFT collections will continue to issue tokens. While there are discernible differences between currently issued tokens and ERC404 tokens, I anticipate a convergence of various use cases under ERC404 in the future.
Moreover, thanks to this innovation, you can swiftly sell your NFTs at the floor price without waiting for a direct buyer. Additionally, you're not obliged to sell the entirety of your holdings.
Imagine owning an NFT worth $1000:
- If you need money, you can sell this NFT and acquire liquidity.
- You could pledge your NFT as collateral on NFT lending platforms to borrow money, although this method carries inherent risks.
- Alternatively, instead of selling the NFT directly, you can sell a portion of the token on a DEX, maintaining a stake in the collection's value.
Both newly launched collections and existing ones can transition to ERC404. Libertas Omnibus NFT collection native to the zkSync network has also joined this transformation by introducing the LIBERTAS token. This allows you to partially own the Omnibus by acquiring LIBERTAS tokens and not missing out on its rise.
Where might this lead?
Predicting the future at such an early stage is challenging. Nevertheless, the simultaneous listing of ERC404 tokens on several centralized exchanges, significant price surges of Pandora NFTs and subsequent projects (although there's a possibility of being overhyped), the addition of the ERC404 category in the Binance Web3 Wallet, and the adoption of ERC404 beyond the Ethereum network indicate significant developments.
In the crypto market, where almost everything is experimental and risky, ERC404 might be one of the earliest innovations we've witnessed. I'd like to congratulate Sezo, one of the first to mention Pandora NFT.
I'll also announce that Emre Kaya will delve into the technical details of ERC404 soon. If you find any inaccuracies in this article, feel free to correct them in the comments, and share your thoughts on ERC404 . I'm curious about your opinions on this development.
Until the next article, if you found this useful, you can support it by minting on Mirror (Turkish version).
DISCLAIMER: This article does not contain any financial advice or recommendations. It is purely educational.
Sources:
https://www.blocmates.com/research-reports/erc404-everything-we-know-about-pandora-so-far
https://github.com/0xacme/ERC404
