What are ERC-404 and ERC-1111? What difference does this new standard bring to the NFT market?

1. What is ERC-1111?

ERC-1111, also known as the REDT Protocol, is a novel token standard that inherits characteristics from two existing standards in the market, namely ERC-20 and ERC-721. Developed by the PFPAsia project and backed by Haskey Capital, ERC-1111 introduces innovative features to the NFT ecosystem.

Under the ERC-1111 standard, collections associated with the PFPAsia project utilize a fractionalization mechanism where 1 NFT is equivalent to 10,000 ERC-20 tokens. This mechanism operates as follows:

When swapping from 1 NFT to 10,000 tokens:
- The NFT is locked in the REDT1 locker.
- 10,000 tokens are sent to the user's wallet from the REDT0 locker.
Conversely, when swapping 10,000 tokens to 1 NFT:
- The 10,000 tokens are locked in the REDT0 locker.
- The REDT1 locker unlocks 1 NFT and sends it to the user's wallet, with the NFT possessing randomized characteristics within the REDT1 Locker.

This unique mechanism enables users to seamlessly interchange between NFTs and ERC-20 tokens, providing flexibility and liquidity within the ecosystem. As a result, ERC-1111 offers a promising solution for enhancing the functionality and utility of digital assets in the NFT market.

*ERC-1111 integrates features of ERC-20 and ERC-721*

2. Distinguishing Characteristics of ERC-404 and ERC-1111

Upon examining the ERC-404 standard introduced by Pandora and the emerging ERC-1111 standard, it's evident that both standards share similarities and differences in their approach to tokenization and fractionalized NFTs (F-NFTs).

One significant difference lies in how they handle the rarity of NFTs. ERC-404 employs a randomization method, meaning the rarity of NFTs is determined randomly during the minting process. On the other hand, ERC-1111, developed by PFPAsia, introduces a unique concept called Floor-up, which assigns certain NFTs a higher rarity, equivalent to a value surpassing 10,000 tokens. This incentivizes collectors to pursue these rare NFTs, thereby enhancing trading activity and liquidity for ERC-1111 tokens.

Additionally, ERC-1111 utilizes the REDT protocol for converting between tokens and NFTs. This protocol ensures secure depositing and withdrawal of tokens and NFTs, reducing the risk of unauthorized access or loss. In contrast, ERC-404 relies on automated minting and burning processes, potentially posing risks to users' assets.

Moreover, ERC-1111 demonstrates improved gas fee management compared to ERC-404. ERC-1111 allows for token-NFT conversion through designated lockers, whereas ERC-404 requires burning and minting of NFTs alongside token transactions, resulting in higher gas fees.

In essence, both ERC-404 and ERC-1111 introduce fractionalization mechanisms for NFTs, but with different token representations. μtoken, used by the Flooring protocol, represents NFTs within the platform and is solely used for trading purposes. Meanwhile, ERC-1111 and ERC-404 tokens are integral components of their respective projects, entailing associated project benefits.

While these new standards offer enhanced functionalities and application possibilities for tokens and NFTs within the market, their impact on existing solutions, such as those offered by Flooring, remains significant. However, Flooring's direct association with renowned NFTs like BAYC and Pudgy, which are inherently ERC-721 compliant and cannot be converted to ERC-1111/404 standards, ensures its continued relevance in the market landscape.

3. Development Potential of ERC-1111 and ERC-404 in the Market

The ERC-1111 and ERC-404 standards, integrating features from both ERC-20 tokens and ERC-721 non-fungible tokens (NFTs), offer promising prospects for NFT projects seeking to incorporate DeFi applications. These standards enable NFT projects to:

Facilitate Instant NFT/Token Swapping: By fractionalizing NFTs into tokens, users can swiftly trade their assets on decentralized (Dex) or centralized (Cex) exchanges supporting project tokens.
Integrate Derivatives: ERC-1111 and ERC-404 tokenization mitigates the risk of asset liquidation in derivative platforms by reducing exposure to sudden NFT price fluctuations.
Enhance Lending Platforms: Similar to derivatives, lending dApps benefit from reduced liquidation risks amid sharp drops in NFT floor prices.

Moreover, the primary advantage of these technologies lies in enhancing NFT liquidity. By enabling seamless conversion of NFTs into tokens and facilitating trading on Dex platforms, ERC-1111 and ERC-404 attract a broader user base, thereby boosting NFT liquidity and market participation.

Despite the significant benefits offered by these standards, they are currently in the experimental phase and have yet to receive official recognition on the Ethereum network. Consequently, security risks and Smart Contract optimization concerns remain, necessitating further development and testing.

4. Conclusion

In conclusion, ERC-1111 and ERC-404 represent promising advancements in the NFT space, offering enhanced liquidity and functionality for NFT projects. While ERC-1111 demonstrates superior transaction fee management compared to ERC-404, both standards hold potential for driving innovation and growth in the NFT market. However, readers should approach these assessments as informative rather than investment advice.