The recent launch of ERC404 tokens has led to a frenzy of speculative trading, despite not following official ERC standards. ERC404 tokens pose unique risks and should be treated with caution.
ERC404 is a hybrid token that blends elements of the ERC-20 and ERC-721 token standards. Despite co-opting the ERC name, it is an experimental token specification that has not been subject to the rigorous reviewal and comment process as official ERC token standards. This article covers what 404 tokens are, why they appear to be gaining popularity, and the DN404 token specification launched in response.
What are ERC404 tokens?
ERC404 tokens act as a fungible token like ERC-20 tokens, which are considered equal to one another and any ERC-20 can be exchanged for any other like-for-like, but also mint a non-fungible token (NFT) that acts much like an ERC-721 when transferred to a new wallet. This NFT is burned if the fungible token is transferred again.
The github page defining ERC404 explicitly states that “these two standards are not designed to be mixed”, referring to ERC-20 and ERC-721, and that the “nature of overlapping standards, however, does imply that integrating protocols will not fully understand their mixed function”, which has been raised as a concern where a protocol not configured for ERC404 may allow depositors to withdraw an NFT which they do not own.
Pandora ERC404 token
The first token to launch using the term ERC404 was Pandora. Receiving a Pandora token will mint an NFT called a Replicant - an image of a box in different colors - and these NFTs are in various colors, each of which corresponds with a different grade of scarcity.
If the Pandora token is transferred or exchanged, the Replicant is destroyed (burned), and a new Replicant NFT is minted at the recipient address.
A lot of the trading volume seen in recent days has been attributed to traders selling Pandora in an attempt to destroy minted NFTs with low scarcity, in the hope that the next token they buy will mint a more rare NFT.
Other 404 tokens
Several ERC404 tokens have been launched in an attempt to win a share of Pandora’s popularity. Some use recognizable names which reference other successful projects, such as Punks derived from Crypto Punks, Defrogs from Bitcoin Frogs, Ether Rocks 404 from Ether Rocks, and so on. As hype around 404 propagates, we will no doubt see a flood of tokens deployed with 404 token mechanics.
While experimentation is a mainstay of DeFi, it is notable that the first name in that list, 404 Punks, was rugpulled within hours of the token’s inception. Using an exploit that uncapped the supply, the token deployer minted thousands of 404 Punks and sold them at once, crashing the price from over $10,000 to $5.50 and walking away from the project with 42 ETH profit ($100,000).
ERC404 tokens are not exclusive to Ethereum, with the first 404 token on Arbitrum L2 having launched recently, and more likely to follow.
Competing project DN404
The controversy raised by ERC404 failing to adhere to EIP conventions has led to the creation of another experimental token specification, DN404 (Divisible NFT 404). This proposed standard attempts to work in a similar way to ERC404, where each full token unit mints a mirrored NFT, while directly addressing the issues listed in this article- namely that DN404 does not modify ERC-20 or ERC-721 implementations and is better optimized for gas usage, according to the project's founders.
No official tokens have been launched by the DN404 project developers, but given the widespread excitement over ERC404 there will no doubt be many tokens launched using the DN404 specification or name. These should be treated with the same high amount of scrutiny as ERC404. Be aware that there are already impersonators creating unofficial DN404 ENS addresses and tokens using this standard.
ERC404 is not an official ERC standard
The so-called ERC404 standard is currently unreviewed by Ethereum contributors and has not been audited. That means that it has been launched without knowing the potential risks that face users who interact with the contracts.
ERC404 claims to have been built by merging two widely-used standards, ERC-20 and ERC-721, but has in fact made changes to ERC-721 in its implementation. As per the specification, the “ERC721 implementation here is a bit non-standard, where tokens are instead burned and minted repeatedly as per underlying / fractional transfers.”
If ERC404 does choose to become a legitimate ERC through the conventional EIP review process, the standard is likely to change along the way, meaning any finalized standard may look quite different.
What is an ERC and why does it matter?
ERCs are application-level standards and conventions that provide a common framework for things like tokens and smart contract development on Ethereum. ERC is an acronym for Ethereum Request for Comment, and refers to the process a technical standard must go through to ensure compatibility between tokens and applications on the Ethereum protocol.
An ERC standard is set by the Ethereum community following multiple rounds of assessment through an Ethereum Improvement Proposal (EIP). ERC404 has not been through the Ethereum Improvement Proposal (EIP) process, which is essential in identifying vulnerabilities and for evaluating the impact of changes implemented within the network’s ecosystem.
EIPs involve the community in a multi-stage process: a draft is proposed for public review, given a last call period, and finally accepted. This ensures proposals are secure, useful to Ethereum, and compatible. The EIP process is critical to Ethereum's development, and ensures its integrity and forward progress; bypassing it shows disregard for the risks the contracts may pose to users.
Trading 404 tokens
404 tokens have seen a surge in trading volume since they launched a week ago. Compared to standard NFT tokens, there is much higher incentive to trade the tokens, as each transfer is another opportunity to mint an NFT with different attributes, some of which are more sought-after than others.
ERC404 transfers are not optimized for gas, so transfers have a gas cost several times higher than that of a regular ERC-721 NFT transaction and, since they change hands more often with 404 traders looking to reroll their NFTs, this has wider implications for the health of the Ethereum network as gas prices have become inflated.
404 tokens are new and not in wider use, so there are few places where they can be traded. Some are currently available for trading NFT marketplaces like Opensea and Blur, and also on decentralized exchange (DEX) Uniswap, which means they can also be found on Matcha as it aggregates Uniswap liquidity, without paying the Uniswap frontend fee.
Remember that 404 tokens are experimental, do not conform to Ethereum ERC standards, and the standard implementation has not been audited against vulnerabilities. Trading ERC404 tokens is highly speculative and comes with unique risks that should be carefully considered.