ERC404 is a new and experimental token standard on the Ethereum blockchain that combines the features of both fungible and non-fungible tokens. In this tutorial, you will learn:

• What are fungible and non-fungible tokens, and how they differ
• What is ERC404 and how it bridges the gap between fungible and non-fungible tokens
• What are the benefits and challenges of using ERC404 tokens
• What are some examples of ERC404 projects and how to get involved

Fungible vs NFTs (Non-Fungible Tokens): A Brief Overview

Before we dive into ERC404, let’s first understand what are fungible and non-fungible tokens, and why they are important.

Fungible tokens are tokens that have the same value and properties as each other. They can be easily exchanged, divided, and transferred without losing their identity or utility. For example, fiat currencies, cryptocurrencies, and utility tokens are all fungible tokens. You can swap one dollar for another dollar, or one ether for another ether, and they will still have the same value and function.

Non-fungible tokens, or NFTs, are tokens that have unique characteristics and values. They cannot be exchanged, divided, or transferred without altering their identity or utility. For example, digital art, collectibles, and property are all NFTs. You cannot swap one Mona Lisa for another Mona Lisa, or one CryptoKitty for another CryptoKitty, and they will still have the same value and function.

Fungible and non-fungible tokens have different use cases and advantages. Fungible tokens are ideal for creating cryptocurrencies or utility tokens that can be used as a medium of exchange, store of value, or unit of account. Non-fungible tokens are ideal for creating digital assets that can represent ownership, authenticity, or scarcity.

However, fungible and non-fungible tokens also have some limitations and challenges. Fungible tokens are prone to inflation, volatility, and regulation. Non-fungible tokens are faced with issues such as liquidity, fractionalization, and interoperability.

What is ERC404 and How it Works

ERC404 is an experimental token standard that aims to overcome the limitations and challenges of fungible and non-fungible tokens by combining them into a single standard. ERC404 tokens are also known as semi-fungible tokens, or SFTs, because they can be either fungible or non-fungible, depending on the context or use case.

ERC404 tokens work by bonding an ERC20 token to an ERC721 token, creating a one-to-one relationship between them. An ERC20 token represents a fungible token that can be divided, exchanged, and transferred. An ERC721 token represents a non-fungible token that can be unique, indivisible, and owned.

The key feature of ERC404 tokens is that they can switch between being fungible and non-fungible through a mint-and-burn mechanism. When an ERC404 token is whole, it acts as an NFT and has a corresponding ERC721 token. When an ERC404 token is split, it acts as a fungible token and has a corresponding ERC20 token. The ERC721 token is burnt when the ERC404 token is split, and minted when the ERC404 token is whole.

For example, let’s say Alice owns one PANDORA token, which is an ERC404 token. PANDORA is a project that creates dynamic digital art using ERC404 tokens. Alice’s PANDORA token is linked to an ERC721 token that represents a unique piece of art. Alice can view, display, or sell her PANDORA token as an NFT.

However, Alice decides to split her PANDORA token into two fractions: 0.6 PANDORA and 0.4 PANDORA. When she does that, the ERC721 token that represents her art is burnt, and she receives two ERC20 tokens that represent her fractions. Alice can now trade, swap, or lend her fractions as fungible tokens.

Later, Alice buys back 0.4 PANDORA from Bob, who had acquired it from another trade. Alice now has 1 PANDORA again, which is a whole token. When she does that, a new ERC721 token is minted, and she receives a new piece of art. Alice can now view, display, or sell her PANDORA token as an NFT again.

Benefits and Challenges of ERC404 Tokens

ERC404 tokens offer several benefits and opportunities for both creators and users of digital assets. Some of the benefits are:

• Increased liquidity: ERC404 tokens can be easily traded and exchanged as fungible tokens, increasing the market size and demand for NFTs.
• Native fractionalization: ERC404 tokens can be naturally divided and combined as fungible tokens, enabling partial ownership and access to NFTs.
• Enhanced functionality: ERC404 tokens can be integrated with other protocols and platforms, such as decentralized exchanges, lending platforms, or gaming platforms, expanding the use cases and value propositions of NFTs.
• Innovative concepts: ERC404 tokens can introduce new concepts and features, such as dynamic assets, conditional assets, or programmable assets, that can enrich the creativity and diversity of NFTs.

However, ERC404 tokens also face some challenges and risks that need to be addressed and resolved. Some of the challenges are:

• Unverified code: ERC404 tokens are still experimental and not officially recognized as an Ethereum standard. The code and logic behind them are not fully tested and audited, which could lead to potential security vulnerabilities or bugs.
• Lack of integration: ERC404 tokens are not widely supported or compatible with existing tools and platforms, such as wallets, explorers, or marketplaces, which could limit their adoption and usability.
• Market uncertainty: ERC404 tokens are not well understood or accepted by the market, which could affect their valuation and demand. There is also a lack of clear regulations and standards for ERC404 tokens, which could pose legal and ethical issues.

Examples of ERC404 Projects and How to Get Involved

Despite the challenges and risks, ERC404 tokens have already attracted significant attention and interest from the crypto community. There are several projects and initiatives that are experimenting with ERC404 tokens and showcasing their potential and possibilities. Some of the examples are:

• PANDORA: PANDORA is a project that creates dynamic digital art using ERC404 tokens. Each PANDORA token represents a unique piece of art that changes every time it is split or combined. PANDORA aims to explore the concept of impermanence and randomness in digital art, as well as to increase the liquidity and accessibility of NFTs. You can learn more about PANDORA and buy or sell PANDORA tokens on their website.
• DeFrogs: DeFrogs is a project that creates collectible frogs using ERC404 tokens. Each DeFrog token represents a unique frog that has different attributes and traits. DeFrogs aims to create a fun and engaging experience for users, as well as to integrate with other platforms and protocols, such as gaming, lending, or staking. You can learn more about DeFrogs and buy or sell DeFrog tokens on their website.
• Monkees: Monkees is a project that creates social avatars using ERC404 tokens. Each Monkee token represents a unique avatar that has different features and styles. Monkees aims to create a community and network for users, as well as to enable them to customize and monetize their avatars. You can learn more about Monkees and buy or sell Monkee tokens on their website.

If you are interested in ERC404 tokens and want to get involved, you can follow these steps:

• Learn more about ERC404 tokens and how they work.
• Get some ERC404 tokens and experiment with them. You can buy or sell ERC404 tokens on supported platforms, such as [OpenSea], [Uniswap], or [SushiSwap]. You can also create your own ERC404 tokens using the [Pandora Factory] or the [ERC404 Factory].
• Join the ERC404 community and contribute to the development and adoption of ERC404 tokens.

Conclusion

ERC404 is a new and experimental token standard that combines the features of both fungible and non-fungible tokens. ERC404 tokens offer increased liquidity, native fractionalization, enhanced functionality, and innovative concepts for digital assets.