What is a “semi-fungible” token?
Tokens on Ethereum are issued according to token standards, or the rules and protocols governing their characteristics and behaviors. The most well-known and popular token standards are ERC-20, a standard for fungible tokens, and ERC-721, a standard for non-fungible tokens (NFTs).
One of the properties of fungible tokens is fractionalization, enabling people to trade a fraction of a whole token. In contrast, NFTs cannot be fractionalized and can only be transferred in their entirety. To create a fractionalized NFT based on existing token standards, someone needs to lock up the NFT asset and mint tokens representing it, which can then be traded. However, since they are freely tradable on the market, the value of these tokens may not accurately replicate the value of the NFT fraction.
The ERC-404 standard addresses this gap through “native fractionalization.” This involves issuing the NFT and corresponding fungible token representing its value, effectively mixing the ERC-721 and ERC-20 token standards. ERC-404 then uses a mint-and-burn protocol to maintain the balance.
So, in a scenario where one NFT is equal to one fungible token, the NFT is minted at the point that the user’s wallet contains one full fungible token. The NFT is burned when a fraction of the fungible token is sold or otherwise transferred from the wallet.
Similarly, if user A buys the NFT from user B, the rights to the accompanying full fungible token will transfer to user A along with the NFT as part of the transaction.
What are the use cases for ERC-404?
The ability to fractionalize NFTs enables multiple users to own a single asset. Although ERC-404 is still a very new token standard, it’s thought that this feature may help to improve the liquidity of NFTs. The ERC-721 standard means that NFT markets have evolved around an auction model where the asset is sold as a whole item to the highest bidder, but this can mean they suffer from illiquidity if there are no bidders.
With a corresponding fungible token, projects can operate liquidity pools, making it easier for a seller to dispose of their collections in fragments via a decentralized exchange - DEX. It also lowers the barrier to entry for buyers who may only be able to afford a fraction of a given asset.
What does it mean that ERC-404 is an “experimental” token standard?
The Ethereum Foundation and the broader Ethereum community play a governing role in determining the token standards in use for Ethereum, as for any other upgrade or change to the Ethereum protocol. As such, new token standards must go through a formal Ethereum Improvement Proposal (EIP) governance process to become accepted and adopted by the Ethereum community.
ERC-404 emerged in early 2024 as an unofficial new token standard, meaning it hasn’t yet been submitted as an EIP or undergone any audits or testing involved in becoming an official Ethereum token standard. The GitHub repository for the project acknowledges this, stating:
“This standard is entirely experimental and unaudited, while testing has been conducted in an effort to ensure execution is as accurate as possible.”
The protocol could still turn out to be flawed in a way that puts users’ funds at risk. Due to its experimental status, many exchanges and marketplaces do not support the ERC-404 standard.
Who is behind ERC-404?
It’s not known exactly who is behind ERC-404, and the GitHub repository shows activity from several developers. Two team members operating under the pseudonyms 0xacme and ctrl have publicly associated themselves with the project.
Implementations of ERC-404
ERC-404 is still a new token standard, so only a small number of projects are currently using it. However, this is likely to change if the standard becomes more popular and undergoes the full EIP governance process.
Pandora
Pandora is the first and most popular ERC-404 project so far. It consists of 10,000 PANDORA fungible tokens and 10,000 “Replicant” NFTs. Anyone who purchases a full PANDORA will receive the corresponding Replicant NFT.
DeFrogs
DeFrogs is also a collection of 10,000 tokens and corresponding NFTs. However, DeFrogs are profile picture (PFP) NFTs featuring Pepe the Frog.
Monkees
Monkees is also a PFP collection consisting of 100 NFTs based on combinations of ten attributes and six traits.
Future outlook
The developers behind the project have indicated that they intend to lodge an EIP for the new standard. However, the process for passing an EIP is slow and likely to take several months, if not years. As a new project, it’s also too early to determine if there may be hidden flaws that could derail the initiative.
However, EIP approval heavily depends on another factor – popularity and demand for the idea within the Ethereum community. The more demand there is for the native fractionalization feature, the more likely the Ethereum community will collaborate to overcome any issues that may block ERC-404 from becoming a formal token standard.
ERC-404 essentials
- ERC-404 is an experimental token standard that combines fungible ERC-20 tokens with non-fungible ERC-721 tokens to produce a “semi-fungible” token.
- ERC-404 introduces the ability to fractionalize NFTs so a single asset can be owned by multiple wallets, opening up new possibilities, such as liquidity pools for NFTs.
- As an experimental token standard, ERC-404 is not supported by all exchanges and platforms and is not an “official” Ethereum token standard that has undergone formal governance approval.