Opening PANDORA's Box
404 is exciting: a seamless blend of fungible and non-fungible tokens
Like many cool ideas in crypto, Pandora/ERC404 was born out of a rug.
It all started with a new token, EMERALD. This was conceptualized as a blend of ERC-20 (fungible) & ERC-721 (non-fungible) tokens but was exploited due to dev incompetency.
From the ashes emerged a determined trio: 0xacme (ex-Coinbase engineer), ctrl, and searnseele who took on the quest of bringing this idea to reality.
And they did it. Since its inception on February 2nd, Pandora (the first ERC404 token) has experienced meteoric growth, surging from obscurity to a market cap of $100+ million.
Its ascent has sparked a frenzy of interest in launching new 404 tokens. In just two weeks, I saw the emergence of other 404 token standards. For example, Cygaar, a notable developer in the space, introduced DN404, an enhanced and open-source token standard that shares similar characteristics to ERC404.
But why all the fuss?
(For simplicity's sake, I will refer to ERC404, DN404, and similar token standards as just “404”.)
NFT Fractionalization Has Failed
NFT fractionalization is not a new thing. We have been enamoured with NFT fractionalization for years.
The idea is simple: One CryptoPunk NFT is worth $150,000 today. Obviously, not many people can afford to buy a Punk.
What if you could acquire a 1/00th of that same Punk for just $1,500? Suddenly, the opportunity becomes far more accessible. And if the value of the Punk triples during the next NFT bull market, that $1,500 investment could balloon to $4,500+.
BUT, previous attempts at fractionalization have always struggled to gain traction:
NFTX tried to do this with fractional vaults for years (deposit Punk NFTs and get PUNK fungible tokens) but has no significant adoption.
Flooring Lab launched a couple of months ago with a similar idea: deposit an Azuki NFT and get 1,000,000 uAzuki tokens that can be traded like meme coins. It’s doing alright, largely because it’s using a new token FLC to incentivize liquidity and bootstrap the protocol.
In my humble opinion, despite the best of intentions, these types of protocols are pretty much DOA (dead on arrival)
To start using these fractionalization protocols, a user must approve multiple transactions. Every transaction incurs fees. This adds up quickly in terms of money spent and the mental effort required to grasp each step. The constant concern is that mistakes could lead to the loss of valuable NFTs. NFT perpetuals (nftperp or Tribe3) are probably a more efficient way for most people to capture upside from NFTs.
Here’s the difference: by making every NFT fractional by default yet seamlessly combinable, 404 addresses the UX issues associated with fractionalization.
Yes, it’s the old adage in tech: Fewer steps = More conversions.
I considered two complementary angles for the potential use cases of 404:
Can NFTs benefit from greater fungibility?
Can fungible tokens benefit from being NFTs?
1. Can NFTs benefit from more fungibility?
Liquidity reigns supreme in crypto.
Fractionalization can greatly enhance liquidity by allowing investors to buy and sell affordable fractions of an NFT and expanding the market of potential participants.
Fractionalization makes price discovery happen more quickly. In 2023, the sluggish downward trend experienced by many NFTs stemmed from their inherent illiquidity, prolonging the time needed for fundamentals to align with prices.
To illustrate how fungibility increases liquidity: just look at what happened with PANDORA. 99% of the trading volume was done via the fungible token rather than the NFT.
@Ctrl believes that by making NFTs fungible, increased capital flows can bring the valuation of NFT collections (~$1B at the top tier) closer to that of the top memecoins ($60B+).
This creates some interesting use cases for 404 tokens:
High-value Art and Collectibles are typically highly scarce and valuable. Paradigm-backed Tessera tried to do this with its fractional platform but had to shut down last year due to limited adoption. The key hurdle was effectively reconstituting NFTs after fractionalization for resale—a process often mired in complex DAO governance. 404 tokens mitigate this issue.
Real Estate is being tokenized on the blockchain, riding on the RWA trend. Various startups have explored different approaches, from using NFTs to directly represent properties (Roofstock) to leveraging fungible tokens for ICO-like fundraising to acquire properties (CitaDAO). 404 has the potential to amalgamate these approaches.
Palette is one example: a collection that introduces native fractionalisation to generative art using 404, with a “re-roll” feature for artworks in its collection. It makes collecting art more interesting with a new layer of interactivity.
2. Can fungible tokens benefit from being NFTs?
While much of the 404 spotlight has been around the greater fungibility of NFTs, there's another side to the coin: Fungible tokens can also benefit from transitioning into NFTs.
Here's how various types of fungible tokens can receive a significant upgrade with 404:
Governance tokens grant holders voting rights in DAOs. A new dimension of governance can emerge by enabling these tokens to become NFTs with varying reputation states (in the metadata) based on holders' contributions. Imagine a governance NFT that confers different levels of access to exclusive features based on the holder's historical engagement within the community. This incentivizes active involvement and fosters a more meritocratic governance model.
Utility tokens can incorporate unique traits to offer personalized experiences to users. For instance, a gaming platform’s token could be tied to an NFT with distinct in-game assets or abilities based on traits and rarities. This not only enhances community engagement around the token but also creates new utility for it.
Memecoins (think WIF, DOGE, PEPE), often associated with internet culture and viral trends, can use NFT mechanisms to engage better and grow their communities. They can gamify user interactions by introducing rarity traits and loot box mechanics. The 2021 NFT bull cycle showed how much we love “altcoins with pictures”. The fusion of memes and NFTs amplifies the fun factor and cultivates a stronger sense of belonging.
Aevo, an options and perp DEX, is a first mover in integrating 404 tokens. It uses the 404 mechanism at the backend to make DeFi yield farming more fun. As users farm the AEVO airdrop by trading on the platform, they can potentially get a 100x farming boost.
What lies ahead for 404
The 404 community will probably work to enhance their token standards and address issues like gas fees. Collaborating with protocols and ensuring exchanges and block explorers are informed about these standards will be key priorities. Open sourcing encourages a wider participation in 404 development.
However, it will take time for the real use cases to emerge. We’ve seen this story before with new token standards:
Ordinals (Bitcoin NFTs) launched in December 2022, but the number inscriptions only started going parabolic in April 2023, 4 months later.
Similarly, ERC-6551, a groundbreaking standard allowing NFTs to own wallets, seems to be gaining traction six months after its May 2023 launch.
Building new use cases and educating users about 404's potential will take time. However, these are essential steps towards realizing the long-term vision of 404.
But what about Pandora?
Pandora lacks any direct value accrual mechanisms despite creating the first 404 token. No fees are generated for using the 404 standard, which is intended to be open-source and accessible to all.
The market is realising this: after the initial run up in price to $32,000 on speculative fervour, PANDORA has fallen 60% to $12,600.
Yet, two compelling narratives may emerge for PANDORA in the coming days:
Memecoin: Being the inaugural 404 token, Pandora could attract significant attention if 404 tokens gain wider adoption, reminiscent of ORDI's staggering $1.5 billion market cap purely because it was the first BRC-20 token.
The “TIA thesis”: Similar to TIA's exponential price growth driven by stakers in anticipation of Cosmos protocol airdrops, new 404 projects might allocate drops to Pandora holders, given that its holders are probably staunch supporters of 404. Palette, for instance, plans to airdrop 5% of its tokens to Pandora holders.
Tokens enabling new functionalities are undeniably exciting. Innovations like these are exactly what we need for crypto to thrive.
As always, please do your own research.
Cheers,
Teng Yan