In-depth analysis of the internal logic of cryptocurrency hybrid protocols such as ERC-404

On the eve of the Spring Festival, the concept of ERC-404 surged in popularity, with related token prices skyrocketing, triggering FOMO sentiment within the community. Among them, the first token to adopt the ERC-404 standard, Pandora, soared from an opening price of $212 to a peak of $31,401, an increase of about 148 times. However, after a month of development, trading of Pandora NFTs has almost come to a standstill, with only 7 transactions on Blur in six days (March 2 to March 7). The market for other similar 404-like products has also shown mediocre performance.

A hybrid protocol is a new token standard that combines the functions of traditional homogeneous tokens (such as Bitcoin, Ethereum, etc.) and non-fungible tokens (such as artworks, collectibles, etc.), allowing both divisible and indivisible token forms within the same token system. Its purpose is to provide native liquidity and divisibility to tokens, offering users more flexible ways of utilization.

Current progress of major agreements:

In the race for hybrid token protocols, the main focus currently lies on the Ethereum and Solana blockchains. The specific team behind the inception of this concept remains uncertain. However, rather than determining who was the first mover, what may be more crucial is which team can truly innovate and lead this race forward. Here are the progress updates on several key protocols:

ERC-404 Pandora

The ERC-404 contract aims to create a bridge, combining the divisibility of ERC20 tokens with the uniqueness of ERC721 tokens, forming a hybrid token that can function both as a standard fungible token and as a non-fungible token.

Pandora is the first project built on the ERC-404 token standard, launched on February 2nd. It surged from an opening price of $212 to a peak of $31,401, approximately a 148x increase.

Currently, the project’s NFT market appears to be in a state of stagnation (possibly due to the high floor price, which was 4.99 ETH on March 8th), with the V2 version undergoing code review.

Tiny SPL NUTS

The original goal of Tiny SPL was to eliminate the storage costs of tokens on Solana, allowing large projects to distribute tokens directly to users at extremely low costs. However, its popularity mainly stems from the fact that the first token issued, NUTS, can be traded as both a regular token and an NFT, providing trading versatility. Tiny SPL launched on January 27th, with the first token, NUTS, reaching a peak price of 2.694 (Free Mint).

Currently, the project aims to establish itself as a platform capable of facilitating hybrid tokenization. It recently announced a partnership with LIGMA and is set to launch a launchpad. However, the project has not yet been open-sourced, which has led to skepticism among many community members.

DN-404

DN404 is another hybrid token protocol on Ethereum. It prioritizes enhancing the liquidity and accessibility of NFTs, providing a more adaptable and efficient structure for asset tokenization. It combines the characteristics of fungible and non-fungible tokens, innovating the interaction and management of NFTs, reducing transaction costs, and optimizing data storage.

In the short term, projects like Pandora utilizing ERC-404 may not have significantly improved NFT liquidity issues. However, understanding the inherent logic of hybrid token protocols reveals their broad applications, which could potentially enhance the development of various industry tracks.

In the Blockchain gaming scene, strengthening asset liquidity aims to facilitate the cross-game circulation of assets.

Currently, blockchain gaming may indeed represent the largest application market for hybrid token protocols. In the context of blockchain gaming, NFTs issued using the ERC-721 protocol serve as carriers for rare in-game assets, while tokens issued using ERC-20 serve as the circulating in-game currency. Previously, most blockchain games adopted either a dual-token model or a tri-token model combining these two types of tokens. However, due to the one-time minting and single-order circulation characteristics of NFTs, many in-game items are difficult to circulate beyond rare items with good prices. Additionally, even for highly scarce items, their lack of universality can slow down their circulation.

The introduction of ERC-404-like hybrid token protocols will lead to significant changes in blockchain gaming. For example, ordinary NFT items can be decomposed into in-game circulating currencies through hybrid token protocols. This conversion may provide a more practical value anchor for NFTs, potentially increasing their store of value and reducing the significant fluctuations in the NFT market. From another perspective, these protocols may break down the boundaries between different blockchain games and even enable the cross-game circulation of assets.

Real World Assets (RWA) scene, hybrid token protocols can create a new paradigm for bringing physical assets onto the blockchain.

In the Real World Assets (RWA) domain, there is also significant demand for hybrid token protocols. The characteristics of physical assets themselves are more similar to the attributes of NFTs, while the best way to lower the investment threshold for a high-value asset is through the token model of ERC-20. With the introduction of hybrid token protocols, more physical assets can be easily brought onto the blockchain, and high-value physical assets can also be more easily fractionally owned and partially circulated through tokenization, even enabling on-chain settlement of asset-derived income.

Taking the fractionalization of a property as an example, here is how hybrid token protocols could operate in the RWA domain:

Asset Evaluation and Tokenization: First, the property undergoes evaluation to determine its market value. Then, based on this value, a corresponding quantity of ERC-20 tokens is issued to represent ownership shares of the property. Simultaneously, an ERC-721 token is created as the unique digital certificate for the property. Both of these actions can be completed through a hybrid token protocol.

Fractionalized Asset Sales: Investors can purchase ERC-20 token shares of the property, enabling small-scale investment. The liquidity of ERC-20 tokens allows investors to easily buy and sell their shares on the secondary market.

Ownership Changes and Recording: When actions such as renting out the property, maintenance, or re-evaluation result in changes to ownership income, the allocation of ERC-20 tokens is automatically adjusted through smart contracts.

Further Financialization of Assets: Leveraging the characteristics of ERC-20 and ERC-721 tokens for the property, further financial products can be developed. For example, using ERC-20 tokens as collateral to issue stablecoins or creating derivative products based on property income.

NFTfi Market: Make NFT as liquid as Defi

In the NFT domain, there have been previous attempts at fractionalization, but they haven’t had significant market impact. The main reason for this is that previous fractionalization models essentially involved issuing a separate set of tokens outside of the NFT asset itself, resulting in poor scalability in interacting with the NFT and inadequate asset ownership protection for users.

Applying hybrid token protocols like ERC404 in the NFT market can promote a series of innovations, truly expanding the scope and depth of NFT applications. Here are several possible innovative directions and their potential impacts:

Enhanced Liquidity Protocols: By combining the liquidity of ERC20 tokens with the uniqueness of ERC721 tokens, new liquidity pools can be created, allowing users to collateralize NFTs or their fractions for liquidity mining.

Cross-chain Asset Interoperability: Design cross-chain asset conversion mechanisms using the ERC404 protocol to map and exchange assets on different blockchains, such as mapping ERC721 tokens to corresponding tokens on other chains.

Decentralized Lending Platforms: Develop decentralized lending platforms that support hybrid tokens of ERC20 and ERC721 as collateral, enabling users to collateralize NFTs or their fractionized tokens to obtain loans.

Other tracks: Economic models with high thresholds and poor liquidity have opportunities

In addition to the evident changes in the mentioned sectors, there are many other areas where the application of hybrid token protocols could lead to significant transformations. Summarizing, domains with the following characteristics are almost suitable for innovative attempts using hybrid token protocols: 1. High investment thresholds. 2. Lack of asset liquidity. 3. Generally adopting a dual-token economic model.

Metaverse and Virtual Worlds: Applying ERC404 protocols in metaverse platforms and virtual worlds to facilitate the fractional ownership and trading of virtual assets (such as virtual land, buildings, artworks, etc.), while maintaining the uniqueness and scarcity of assets.

Social Media and Content Creation: Utilizing ERC404 protocols to provide content creators with new business models, allowing them to sell their works through fractional sales or profit directly from unique content.

Financial Derivatives and Synthetic Assets: Creating fractional and unique derivatives based on physical assets, crypto assets, or other financial indicators using ERC404 protocols, such as synthetic tokens representing the performance of different assets.

Data Ownership and Personal Privacy: Leveraging ERC404 protocols to provide users with a new data ownership and privacy protection mechanism, enabling users to control and trade their personal data.

Overall, hybrid token protocols are still in a very early stage, with no unified industry term to define this model. However, based on the innovative demands we can observe, the maturity of such protocols could lead to significant changes in multiple cryptocurrency domains. If the DeFi sector ignited the revival of the Bitcoin ecosystem, the widespread adoption of hybrid token protocols might ignite even more dormant sectors.

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1. This article is reprinted from [marsbit]. *Forward the Original Title‘深度分析ERC-404等图币混合协议的内在逻辑’. All copyrights belong to the original author [Frank]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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