Blockchain community divided over new ERC-404 tokens

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A new Ethereum token standard that has taken the blockchain sector by storm is drawing praise and criticism from industry veterans.

Dubbed ERC-404, the standard mixes the technology behind ERC-20 tokens with that of ERC-721, which is used in the creation of nonfungible tokens (NFTs). One such use is in the realm of fractionalized NFTs, where the ownership of one NFT, such as Bored Ape Yacht Club, is divided among multiple wallet holders under the ERC-404 standard. 

ERC-404 was created earlier this year by pseudonymous developers only known as “ctrl” and “Acme” under a project called Pandora, which also happens to have issued the first namesake ERC-404 token on Feb. 6. Since then, Pandora ERC-404 tokens have returned a stunning 530% and currently trade at $23,484 with a market cap of $235 million. For the next steps in its roadmap, developers plan to reduce protocol gas fees by 28% to 50%. 

Not all are enthusiastic about ERC-404’s prospects, however.

“The negative feedback focuses on [ERC-404] not following standard ERC procedures and thus, technically, it not being an ERC token,” said Miguel Prada, co-founder and tech lead at Diva Staking. “While there is a lot of excitement around this, it is uncertain what this ERC-404 can do for Ethereum.” He added:

“The fact it is not a standard is a significant limitation that means it will be constrained by those who integrate it independently. It could become a de-facto standard with time, but nobody knows if any DeFi project or exchange will ever accept such a token.”

While Prada acknowledged the value of ERC-404 tokens to bring liquidity into a highly illiquid NFT market, he warns of significant limitations. “For NFTs that represent RWA (Real World Assets), it is clear that you cannot exchange a fraction of a token that represents different asset classes,” Prada said.

Ryan Lee, chief analyst of Bitget Research, agrees. Although Lee notes that most ERC-404 tokens have surged in value soon after their creation, he warns that its path to widespread adoption may be difficult.

“According to the introduction in the ERC-404 code repository, the protocol is currently experimental,” said Lee. “ERC-404 is currently not formally included in the Ethereum Foundation’s ERC standard.” He continued:

“It must be emphasized that within the ERC standard, there are already many similar protocols that merge Fungible Token and NFT, such as ERC3475, ERC3525, etc. The current speculation around Pandora can be seen as the market’s desire for innovative things and new types of assets on the Ethereum network, but its longevity still needs time to be tested.”

But for Akash Mahendra, head of developer relations at layer-1 blockchain Haven1, the new standard is a “game changer.” Mahendra stated:

“This new, experimental standard has the potential to turn the world’s second-largest blockchain into a leader in real-world asset tokenization and opens up a wide variety of new avenues for utility.”

Mahendra explained that for the first time, users can purchase and own tokens that adhere to both ERC-20 and ERC-721, equivalent to owning an “exchange-traded fund in the decentralized finance world.”

“If a user purchases a full ERC-404 token, the NFT gets minted to their wallet, but if they elect to hold a fraction of the NFT as an ERC-20 token, they gain exposure to price movements without minting rights,” said Mahendra.

Although momentum is growing, ERC-404 has yet to be officially accepted by the Ethereum Foundation and is still pending review as an Ethereum Improvement Protocol. Even Mahendra warns of the risks of the standard lacking an official approval stamp:

“This is a risk investors must be mindful of before allocating to new ERC-404 projects,” he said. “Without an audit, there is always a greater risk of bugs and, therefore, a greater potential for losses. So tread carefully as we await the verdict on this exciting innovation.” 

Related: Ethereum gas fees hit 8-month high amid ERC-404 craze