ERC404: An Analysis of the Experimental Asset Standard Merging FT and NFT

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In-depth Analysis of ERC404: A New Asset Class with Both Potential and Risks

Introduction

Every round of the cryptocurrency bull market brings new asset issuance methods and technical standards. From Ethereum's ERC20 to ERC721, and now to the recent BTC chain inscriptions, the market continuously sees innovation. This article will introduce the experimental standard ERC404 on the Ethereum chain and its first asset, Pandora.

ERC404 implements a corresponding interchangeable relationship between FT and NFT, while utilizing the bilateral liquidity of ERC20 and ERC721. Each FT will automatically mint an NFT; if there is less than one, it will not be minted. Buying, selling, or transferring integer FT will trigger the destruction and re-minting of NFTs, randomly generating new NFT attributes. Users can also directly trade NFTs to retain specific NFTs.

It should be noted that ERC404 is currently still an experimental standard and has not yet been formally incorporated into the Ethereum standards. As the first ERC404 asset, Pandora carries a higher risk, and investment should be approached with caution.

In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?

Pandora Case Study

Project Introduction

Pandora was launched on February 2nd, issuing 10,000 PANDORA ERC20 tokens, corresponding to 10,000 "Replicants" NFTs. Pandora can be traded on platforms such as Uniswap and OpenSea.

NFTs are divided into 5 rarity levels, distinguished by colors. When trading FT, the NFT will increase or decrease accordingly. Each time an NFT is regenerated, the rarity is randomized. Directly trading NFTs will not change their rarity.

In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?

market data

As of March 2:

  • Market Cap: $340 million
  • Circulation: 6130 (61.3%)
  • Daily Trading Volume: $21 million
  • 67% of trading volume comes from Uniswap V3

On Uniswap V3:

  • WETH liquidity: 26 million USD
  • Total TVL: 44 million USD
  • 7-day trading volume: 90 million USD

In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?

Comparison of FT and NFT

The total trading volume on DEX is $870 million, while the NFT trading volume is only $6.6 million ### 10.7% (. The core liquidity of Pandora primarily comes from Uniswap V3 AMM pricing.

![In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?])https://img-cdn.gateio.im/webp-social/moments-cc648d2abcd45f74dcd20324b19904c4.webp(

) Coin Distribution

Among the top 10 addresses holding tokens, the top 3 are the official multi-signature wallet, Uniswap V3 LP, and Sablier V2 LockupLinea contract. The chips are relatively dispersed, mainly distributed in the range of 19000-27000.

![In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?]###https://img-cdn.gateio.im/webp-social/moments-36b6df99f7c41fb3f964b09d5e566a6e.webp(

ERC404 Technical Principles

) lossy encoding scheme

ERC404 utilizes a lossy encoding scheme to use the same data structure "AmountOrId" for the quantity of ERC20 tokens and the IDs of ERC721 tokens in contract storage.

![In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?]###https://img-cdn.gateio.im/webp-social/moments-2e0643004f9275e3090304914675a198.webp(

) main defect

  1. When burning multiple NFTs, it is not possible to control which specific NFT is destroyed; the last acquired NFT will be destroyed according to the LIFO mechanism.

  2. Due to the need to monitor multiple balances and NFT ownership, gas consumption is relatively high.

![In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?]###https://img-cdn.gateio.im/webp-social/moments-0373f69604480e1970ef331299476ad9.webp(

) Pseudorandom Number Design

Pandora uses NFT IDs as a source of pseudo-random numbers, granting different attributes and rarity. In fact, it is "drawing cards" in a preset order.

![In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?]###https://img-cdn.gateio.im/webp-social/moments-6d3ba22054d0aeb194cae8855756adcc.webp(

Difference from ERC721 NFT

  1. The standard layer achieves fragmentation and native liquidity
  2. Internal draw logic and interchangeability in the series
  3. Clearly define the value and pricing power of different attributes of asset segmentation.

![In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?])https://img-cdn.gateio.im/webp-social/moments-9bdd3259648029afe2b0a81f6742bd08.webp(

Comparison with NFTFi

ERC404 cleverly utilizes existing facilities of NFTs and FTs to establish bilateral liquidity, featuring new characteristics such as "card drawability", "native fragmentation", and "AMM liquidity", which significantly differ from mainstream NFTFi business models.

![In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?])https://img-cdn.gateio.im/webp-social/moments-31af9cf5c748b324cd60be2a020fb190.webp(

Risk Analysis

  1. The standard itself has issues such as uncontrollable NFT destruction and high Gas fees.
  2. There may be unknown security vulnerabilities that have not been verified over a long period.
  3. Experimental standard, not officially incorporated into EIP
  4. Pandora is only an initial offering and cannot capture actual value from standard development.
  5. The future development of Pandora still requires continuous operation by the project team.

![In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?])https://img-cdn.gateio.im/webp-social/moments-f39e37485527eac5f48796056a160b98.webp(

Other Similar Standards

  1. DN404: Use independent but related ERC20 and ERC721 contracts
  2. ERC-1111: User-led conversion between FT and NFT
  3. ERC-X: Supports multiple standards
  4. ERC-404+: Add NFT ID tracking for destruction

![In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?])https://img-cdn.gateio.im/webp-social/moments-e278eb011ae2ee058cbe3a2461506e3e.webp(

Summary and Outlook

ERC404, as a new asset class, cleverly combines the advantages of NFTs and FTs, establishing bilateral liquidity. In the future, it may be applied in scenarios such as full-chain GameFi and functional NFTs, but market validation is still needed.

![In-depth Analysis of ERC404: Pandora's Box or Liquidity Revolution?])https://img-cdn.gateio.im/webp-social/moments-513a9aac7efe50d8be1f604558c9b89e.webp(

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WealthCoffeevip
· 07-18 06:41
High risk high reward, enter a position first and then talk.
View OriginalReply0
0xDreamChaservip
· 07-17 14:32
It's just like seeing a new meme, just play around with it.
View OriginalReply0
StakeTillRetirevip
· 07-16 08:35
What a joke, the floor is too high.
View OriginalReply0
ValidatorVibesvip
· 07-15 07:54
*yawns* another protocol security nightmare waiting to happen tbh...
Reply0
AirdropHuntervip
· 07-15 07:46
Here comes the hammer, Be Played for Suckers again.
View OriginalReply0
FunGibleTomvip
· 07-15 07:31
Innovation is okay.
View OriginalReply0
GasFeeCryvip
· 07-15 07:29
Tsk, the code was really thrown out without any audit.
View OriginalReply0
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