In-depth Analysis of ERC404: An Innovative Attempt with Both Potential and Risks

ERC404 is an experimental token standard that combines NFTs and FTs, achieving a corresponding conversion relationship between NFTs and FTs at the protocol level. This design endows assets based on ERC404 with new characteristics such as native liquidity and variable attributes, and is considered a type of semi-fungible token (semi-fungible tokens).

Main Features of ERC404

1. Fragmentation and native liquidity at the standard level: The FT part of ERC404 can directly provide liquidity on DEX while automatically generating the corresponding NFT.

2. The inherent "drawing card" logic in the NFT series: By applying a hash function to the Token ID, NFT attributes can be generated based on pseudo-random numbers.

3. Value distribution of different asset attributes: FT reflects the "floor price" of the entire series, while NFT embodies the premium of additional attributes such as rarity.

Differences Between Traditional NFTs and NFTFi

Compared to traditional ERC721 standard NFTs, ERC404 assets have significant differences in the following aspects:

• Native fragmentation and liquidity support
• NFT attributes can dynamically change through protocols.
• Pricing power is clearly divided between the FT and NFT layers.

Compared to mainstream NFTFi projects, ERC404 directly addresses the liquidity issue of NFTs at the standard level, eliminating the need for complex third-party protocols.

Pandora Case Study

Pandora is the first project based on the ERC404 standard, issuing 10,000 FTs corresponding to 10,000 NFTs. Its main features include:

• FT can be traded on DEX, and NFT can be traded in the NFT market.
• Achieving pseudo-random generation of NFT rarity by applying hash functions to TokenID
• Trading FT will trigger the destruction and re-minting of NFTs, thereby refreshing NFT attributes.

As of March 2, Pandora's DEX trading volume reached 870M, while the NFT trading volume was only 6.6M, indicating that its core liquidity mainly comes from AMM.

Potential Risks

1. The ERC404 standard has not been validated over a long period and may have security vulnerabilities.

2. Currently, there are issues such as uncontrollable NFT destruction and high Gas fees.

3. As an experimental standard, whether ERC404 can be formally incorporated into the Ethereum standard remains uncertain.

4. Pandora, as the first project launched on ERC404, relies more on the continuous operation of the project team for its development.

Future Outlook

ERC404 has brought a new direction for the NFT field, and breakthroughs may occur in the following areas in the future:

• A new "blue chip" NFT series has emerged
• Generate innovative applications in fields such as GameFi
• Provide new value empowerment methods for functional or tool-type NFTs

Overall, ERC404, as an innovative attempt, although there are certain risks, also shows great potential. Its future development is worth continuous attention.