ERC404 is causing trouble in the community these days. When I first encountered it, I thought it was quite boring, but after doing more research, I discovered many interesting things.
First a little about ERC404, you can understand it as combo (nft + token). When mint/buy/sell/transfer one thing, the other thing will also be affected.
Specifically like this, let's start with something simple:
When minting an NFT, you will receive 1 corresponding token.
When you buy 1 token on dex, you will also receive 1 nft in your wallet. This NFT was created via a new mint command with completely new traits.
When you sell a token, your nft also disappears. More specifically, that nft was burned.
When transferring a token to another wallet, the nft will not be transferred but burned, then minted a new nft with new traits in the receiving wallet.
Then a bit more complicated, if you have 2 nft in your wallet, when you sell 1 token on the dex, which nft will be burned. The answer is random.
There is no anchoring mechanism between fungible tokens and nft. Because tokens cannot be identified. So when you have many nft in your wallet and sell a token to the AMM side, one nft will be randomly selected to burn. So the necessary thing to do to store rare nft is to transfer it to another wallet before releasing the tokens. I have read some solutions to these problems, but they are not clear so I don't include them here.
Finally, the most confusing part for most newbies is what if they buy/sell an odd number of tokens?
The ERC404 mechanism automatically detects the integer and remainder. When the transaction order is an integer, the mechanism is as above. When there is a decimal part, for example buying/selling 1.5 tokens, it will automatically be divided into 2 parts.
The first part handles the integer part = 1 as usual including buy/sell/mint/burn. The decimal part 0.5 will be treated as a fungible token, meaning the token/ETH pair will be exchanged as usual.
In addition, ERC404 also automatically detects the balance in the wallet. If you collect enough integers, it will also automatically mint new nft into the wallet. On the contrary, if the balance decreases, it will also burn the corresponding amount of nft.
And the ERC404 games start from here. Not counting the hype in recent days, ERC404 is increasing NFT liquidity many times over.
It's even more magical than the fragmentation solution. Floor traders who don't care about trait don't need to wait days to clear their NFT inventory. What you need to do is simply dump fungible tokens straight into the Pool. The MM team that makes the price is the same, pumping up nft is no different from a token.
But the special thing I see in ERC404 is the renewal of trait, it can give birth to a new subject that I don't know the name of yet. Temporarily called "NFT Mining".
As analyzed above, in addition to buying/selling/transferring directly, NFTs maintain their rarity. For the remaining activities related to the fungible token side, the NFT will be refreshed. This creates an open mechanism for users to "mine" new traits. Both trait tokens to make a profit and mine rare nft, a double job.
Projects can take advantage of this to encourage users to continuously trade to “mine” rare NFTs.
Overall#ERC404is a very good new and liquidity enhancing solution for the NFT market. NFTFi contexts can be strongly opened from here.
With ERC404, those who love profit can come to #FungibleToken, but those who love art can come to #NFT 🫡
However, currently ERC404 is still a test version, so in the near future there may be many other things that will be completed.