In-depth Analysis of the ERC404 Standard: The Liquidity Revolution of Semi-Fungible Tokens?

1. Overview of ERC404

ERC404 is an experimental standard that combines the features of ERC20 and ERC721, achieving native liquidity and fragmentation of tokens. It allows the same asset to be traded as a fungible token (FT) and to hold unique properties as a non-fungible token (NFT).

Main Features:

• The corresponding conversion between FT and NFT
• Protocol-based variable NFT attributes
• Native AMM Liquidity Support

2. Technical Implementation Principles

ERC404 adopts a lossy encoding scheme, using the same data structure "AmountOrId" to store the amount of ERC20 tokens and the ID of ERC721 tokens. By comparing "AmountOrId" with the number of minted NFTs, the contract can distinguish between operation types.

During the transfer, the NFT will be destroyed and re-minted. Each new NFT has a uniquely incrementing ID. This mechanism enables the corresponding interchange between FT and NFT.

3. Differences from Traditional NFTs

1. Native Fragmentation and Liquidity: 404 assets can directly provide liquidity on DEX.

2. Endogenous draw card mechanism: ID-based pseudo-random numbers can achieve changes in NFT attributes.

3. Value diversion: FT reflects the base price of the series, NFT reflects the rarity premium.

4. Comparison with NFTFi

ERC404 has significant differences from traditional NFTFi solutions in terms of asset issuance and liquidity provision:

• Fragmentation can be achieved without additional protocol layers.
• Provide native liquidity using existing DEX infrastructure
• Simplified the user participation threshold

5. Potential Application Prospects

• Full-chain GameFi: Variable attribute NFTs are suitable for game items
• Functional/Utility NFTs: Native fragmentation facilitates complex pricing and financialization

6. Existing Risks

• The standard has not yet been formally included in EIP.
• NFT destruction is uncontrollable
• Complex logic leads to higher Gas costs
• Potential security vulnerability risks

7. Summary

ERC404, as an innovative asset standard, has unique advantages in NFT liquidity and programmability. However, it is still in the early stages and requires further verification and improvement. In the future, it is expected to bring new development directions to the NFT ecosystem.