NFTs can be sold or traded, but not shared. They are - as the name suggests - non-fungible. However, there is a growing demand in the market for more flexibility and greater liquidity. Do we need a new token standard?
"My NFT Belongs to Me!"
Those who own an NFT can be very sure they are the sole owner—and will remain so. Since NFTs cannot be divided, this notion may seem acceptable when we only consider digital trading cards and figures. However, if we view NFTs as certificates or contracts, shared ownership becomes the next step in advancing the decentralized market. For example, my partner could also become an owner of our house, or equally own the digital art object as an investment. This is not possible with the official Ethereum ERC-721 NFT standard.
NFTs Are Tied to the Market.
For instance, if one wishes to sell their ERC-721 token for financial reasons, they must find a buyer in the market and will receive ERC-20 tokens in exchange. These are fungible tokens, which, unlike ERC-721, are interchangeable. This process makes NFT owners quite financially inflexible. If no buyer is found for the NFT, owners have no further options.
The Solution: ERC-404 and DN404
The new token standard, ERC-404, was designed to address this issue. This experimental token serves as a bridge between ERC-20 and ERC-721. When minting ERC-404, one automatically receives an ERC-20 token that can be divided into parts. The two tokens are linked: if the ERC-20 is divided, the NFT goes into a pool, and one can only retrieve it after reassembling the complete ERC-20 token. Thus, no buyer is needed for the NFT; it can be exchanged in a liquidity pool. However, ERC-404 became obsolete within a week due to various security risks and exchange errors, such as NFTs being trapped in the pool.
This led to the development of DN404—standing for Divisible NFT 404. This token enables safer fractionalization, or breaking down an NFT into parts. Like with ERC-404, minting automatically results in an NFT when a certain amount of base tokens are accumulated, and one automatically loses the NFT when they have fewer base tokens.
DN404 is still an experimental token. It has been tested several times but has not been fully audited (as of March 25).
Why Is This Exciting From Our Perspective?
DN404 represents a step forward in the functionality and usability of NFTs. This development brings more liquidity to the market, making it more interesting for businesses and consumers alike. Moreover, the promotion of shared ownership brings exciting new applications, which we are keen to observe and explore.
Even though DN404 is not yet an official token standard, we believe it holds significant potential and that the divisibility of NFTs will play a major role in technological advancements moving forward.
