ERC-404 vs. Pandora: NFT Revolution or Scam?

ERC-404 Give Pandora

ERC-404 is an experimental token standard that has not passed the ERC standard protocol review and was released on Github on February 2, 2024 by @0x acme (Acme), a self-proclaimed former software engineer at Coinbase. Pandora is the first token built on the ERC-404 token standard, built by self-proclaimed Syndicate angel investor @maybectrlfreak (ctrl) and anonymous developer @searnseele (Searn).

If you want to become an Ethereum ERC standard protocol, such as ERC-20, ERC-721 and ERC-1155, you normally need to go through processes such as EIP proposals, experiments and demonstrations, review and review, community participation, documentation and specifications, plus the actual , ERC-404 and Pandora should belong to the same team, and it may be more accurate to call ERC-404 the Pandora protocol.

Pandora is offering 10,000 ERC-20 tokens and 10,000 related Replicant NFTs. If a user purchases 1 full PANDORA token on an exchange, 1 Replicant NFT will be minted in the user’s wallet. If a user sells 1 PANDORA token, its associated NFT will be burned.

Therefore, from an NFT perspective, Pandora is a collection of Replicant NFTs with a total amount of up to 10,000, which can be traded on the NFT Marketplace supported by Blur and OpenSea; from a token perspective, Pandora is a collection with a maximum supply limit of 10,000 PANDORA tokens can be traded on Uniswap.

It is worth noting that the Pandora protocol only supports integer numbers. For example, if a user purchases 1.5 PANDORA on Uniswap, only 1 Relicant NFT will be newly minted and generated; if a user purchases less than 1 PANDORA, there will not be any newly minted NFT. ; If the user holds 2 PANDORA and sells 1.5, both Relicant NFTs will be destroyed.

On the other hand, when a user purchases 1 Relicant NFT from a seller on NFT Marketpalce, in addition to receiving the NFT, he will also receive 1 PANDORA token. This token is ERC-20 standard and can be traded directly on Uniswap. ; When a user sells 1 Relicant NFT on NFT Marketplace, the 1 PANDORA owned by the user will also be transferred to the buyer.

Each time a Replicant NFT is minted, it appears with a unique rarity. As shown in the picture below, there are five rarity levels in this series, which are distinguished by color. The most common is green, while the rarest is red. Therefore, the rarity of a Replicant NFT can be refreshed by trading PANDORA tokens.

The initial price of the PANDORA token was US$200, and now it has risen by more than US$30,000. The exaggerated increase has made people exclaim “NFT revolution”. So whether the Pandora protocol is a revolution, let’s first talk about the liquidity problem that NFT has always suffered from.

NFT liquidity dilemma

NFT has always been an important asset type in the encryption field. After experiencing the high point in 2021, in the bearish environment of the encryption market, the overall market size of the NFT market shrank by 41%. The top 15 NFT markets account for the vast majority of the global NFT market, but their total trading volume is less than 2% of decentralized cryptocurrency exchanges.

The main reason for the sluggishness of the NFT market is the lack of NFT liquidity. There are many reasons for the low liquidity of NFT. The main reasons are the lack of counterparties, difficulty in valuation, the inability to be split, and insufficient underlying technical support.

1. Few buyers: What distinguishes NFTs from fungible tokens is their rarity and utility. Investors in fungible tokens can easily trade through decentralized/centralized cryptocurrency exchanges, but the pool of buyers for NFT trading is much smaller, and therefore the trading volume is relatively smaller;
2. Difficulty in pricing: The lack of historical data points and widely accepted valuation analysis of NFT is a key reason why it is difficult to speculate and difficult to price. Due to differences in rarity and subjective opinions, even NFTs in the same series can have significantly different prices. This results in low liquidity and unsatisfactory capital efficiency.
3. High prices: Similar to real estate such as real estate, the average price range for blue-chip NFTs is between $11K-120K, even in a bear market. High barriers to entry have caused many investors to lose their interest.

The easiest way for NFTs to increase liquidity is to convert them into ERC-20 assets, of which the most typical solution is NFT fragmentation.

NFT fragmentation

The NFT fragmentation track was once booming, and market discussions remained high. Established platforms include Fractional, Unic.ly and NFTX, and emerging solutions include Flooring Protocol.

Fractional It is a pure NFT fragmentation protocol built on Ethereum. NFT holders can lock one or more NFTs into smart contracts to create fragmented and homogeneous ERC-20 tokens. The issuance quantity and symbol of Token are set by the creator. In addition, the creator also sets the starting price and buyout price for the locked NFT for other NFT collectors to bid. Creators need to use third-party AMM platforms such as SushiSwap and UniSwap to form a liquidity pool of fragmented ERC-20 tokens and ETH for other buyers to trade.

Unic.ly NFT holders can create uToken by depositing and locking the NFT in a smart contract. uToken is an ERC-20 token with a issuance amount set by the creator. A uToken contains one or more NFT collections. . Buyers can obtain partial ownership of the NFT collection based on the number of uToken holdings. NFT collectors can bid for individual NFTs in the NFT collection, with uToken holders voting on whether to accept the highest bid. When the number of votes that agree to accept the highest bid reaches a certain proportion, the NFT will be unlocked. The highest bidder can claim the NFT, and uToken holders can receive the proceeds from the sale of the NFT in proportion.

NFTX It is not entirely an NFT fragmentation project. Depending on the type of collection, NFT is divided into different collection pools. Anyone can lock the NFT belonging to the collection category into the smart contract and obtain the corresponding pool at a ratio of 1:1. vToken. vToken holders can pay 1 vToken to redeem a random NFT in the corresponding collection pool, or they can pay 1.05 vToken to purchase a designated NFT in the pool. vToken is a fungible token based on the ERC-20 standard. The first issuance of vToken requires adding currency pairs and injecting liquidity into the SushiSwap AMM built into its platform for trading.

Flooring ProtocolIt is an NFT liquidity solution created by NFT OG player FreeLunchCapital and launched on October 15, 2023. Prior to this, FreeLunchCapital was a mysterious whale address 0x66666f that still holds over $1.1 million worth of NFTs. Based on different user needs, Flooring Protocol divides the fragmentation mode into Vault and Safebox. When a user deposits an NFT he holds into Vault, he will receive 1 million μTokens and give up the NFT. of ownership. If users want to retain ownership of the NFT after fragmentation, they can choose to deposit the NFT into Safebox. Before depositing into Safebox, users need to choose a storage time and pledge a certain amount of Flooring Protocol platform currency FLC. The user will then receive 1 million μTokens and a Safebox Key to verify ownership of the NFT. Safebox Key can be traded through auctions and other vehicles, and it has a value independent of the NFT collection floor value.

As the overall NFT market cools down and activity declines rapidly, the fragmented NFT track is no longer what it used to be. The price drop of FLC tokens even caused the blue-chip NFT market to collapse for a time. However, the root cause is still the majority of NFT collectibles on the market. Projects cannot build consensus and will quickly become worthless when the market suffers a blow. Fragmentation can be said to be a “crime without war.”

What problem does the Pandora protocol solve?

Going back to the Pandora protocol, many articles believe that the Pandora protocol is a new paradigm of fragmentation and solves the liquidity problem of NFT. This is completely incorrect. The Pandora protocol is not NFT fragmentation at all, and it cannot add liquidity to existing NFTs. .

A more accurate definition of the Pandora protocol should be a new way of combining graphics and coins with native liquidity. The graphics and coins are combined into one, but they can be bought and sold separately at the same time.

There are still some obvious shortcomings in the current Pandora protocol:

1. From a transaction level, if a user holds 1 rare Relicant NFT and 1 common Relicant NFT, when selling 1 PANDORA token on Unisawp, the user cannot choose which one they hold to sell;
2. The rarity determination algorithm used in the contract is open and predictable, and the rarity refresh can be manipulated through off-chain calculations, simulated transactions or rollback transactions, which also causes rarity to lose its “rare” nature.

Conclusion

The Pandora protocol is still in a very early experimental stage. The new gameplay of combining graphics and currency has brought a certain degree of innovation to NFT, but it cannot solve the problem of NFT liquidity.

In addition to the risk of short-term speculation, PANDORA tokens also have a major security risk: the contract code is not open source, and the github warehouse (https://github.com/0xacme/pandora) currently only has five GIF images of the box, which contains potential vulnerabilities. and the possibility of the project party doing evil.

I vaguely remember the craziness of NFT fragmentation in 2021, but it is now a thing of the past, and the tea is gone. Will the ending of the Pandora protocol be like this?

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