How does the Pandora Avatar Project utilize ERC404 to integrate NFTs into the Uniswap liquidity pool?
Headshot NFT Project Pandora
Based on ERC404, Pandora is designed to bind homogeneous tokens with NFT, allowing users to trade NFT using Uniswap. As an economic experiment to improve NFT liquidity, it has successfully attracted market attention. (This article is not investment advice)
Table of Contents
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What problem does ERC404 want to solve?
Liquidity fragmentation due to asset types
Inability to fully utilize NFT liquidity
Introduction to ERC404: NFT binding tokens
Optimizing NFT liquidity
Potential issues with ERC404
Introduction to Pandora Replicants: Headshot Collectibles
Economic experiment brought by Pandora
What problem does ERC404 want to solve?
ERC404 is an experimental NFT standard proposed by former Coinbase employee 0xacme, aiming to optimize the liquidity problem of cryptocurrencies. There are two main forms of assets in the crypto community: fungible tokens (FT) and non-fungible tokens (NFT). Almost all contracts need to consider the differences between these two asset types in their design.
For example, Uniswap is designed entirely based on fungible tokens, and NFT cannot benefit from its secure AMM trading contract. On the other hand, OpenSea can only be designed using NFT. NFT and tokens are incompatible.
Due to the existing contract design, the liquidity of NFT cannot be fully utilized. The mainstream method is still using listing and trading forms, while NFT lending and fractionalization protocols have not become mainstream, resulting in a lack of liquidity.
(Blur launches NFT sustainable lending protocol Blend! Understand how to use it and its special liquidation mechanism in one article)
Introduction to ERC404: NFT binding tokens
In order to improve the liquidity and composability of cryptocurrencies, especially NFT, 0xacme proposed a new token standard – ERC404. Unlike other liquidity solutions, ERC404 combines ERC20 and ERC721, allowing tokens that comply with ERC404 to be traded on both Uniswap and OpenSea.
In terms of design, each token corresponds to an NFT. When a user sells an NFT, the token will be automatically transferred, and when a user sells a token, the corresponding NFT will be burned. The NFT will be re-minted when the token is purchased by another user. By representing both types of assets, assets that comply with ERC404 can interact with contracts that accept ERC20 and ERC721, maximizing the composability and liquidity of assets.
The ERC404 protocol provides a way to optimize the liquidity issue of NFT.
With ERC404, users can sell their NFTs to Uniswap’s liquidity pool without having to wait on platforms like OpenSea.
However, fundamentally, the original designs of these two token standards were not intended to be used together, so there are still usage scenarios that need to be clarified.
For example, what happens when a user sells only 0.5 tokens? What should be done with the NFT in that case? When a user holds more than two NFTs, which NFT should be destroyed when selling the token? NFT itself has low liquidity, and putting it in the Uniswap AMM model will result in significant slippage. How can this be resolved? These details have room for improvement.
The community has also discussed whether TokenScript introduced by Smart Layer can be used as a solution.
(What is Smart Layer? How to combine Web3 with real-life scenarios?)
On the 2nd of this month, Pandora, a team led by 0xacme, launched Pandora Replicants, a headshot NFT project that adopts the ERC404 standard, as the first experimental project using ERC404.
There are a total of 10,000 Pandora Replicants. The project also issued 10,000 tokens named PANDORA, which are tied to the NFTs. The price of both the token and NFT is 4.1 ETH, approximately $11,000. Since its launch, it has increased by about 20 times.
Price changes of PANDORA token
(Data source)
According to the team’s introduction, Pandora Replicants have five rarity levels, and it is expected that the rarity of NFT will change with the re-minting of tokens. The blind box images have not been revealed yet.
Interestingly, the NFTs in this project can be obtained by purchasing PANDORA tokens from the liquidity pool.
Pandora collectibles can also be traded on the secondary market of OpenSea
(Data source)
By combining NFT with tokens, Pandora has successfully revitalized the fragmentation of NFTs and improved liquidity. The potential applications in the future are full of imagination. For example, NFTs can be better integrated into the DeFi lending market, used for collateral, or even for derivative products, maximizing the liquidity and capital utilization efficiency of NFTs.
However, compared to fungible tokens, NFTs have lower liquidity. Is this due to limitations in contract design or other reasons? If the market’s answer is the latter, it will greatly affect the development of ERC404 and Pandora.
As for the answer, we look forward to more insights from the future development of Pandora, this experimental project.
In addition, the Pandora project is currently in an experimental stage. Besides market risks, the contract security has not been fully verified, so it is still a high-risk product, and participants need to be cautious.
(This article is not investment advice)
0xacme
ERC404
NFT
Pandora
Pandora Replicants
Fractionalized NFT
Further reading
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