DN-404: a new twist in the ERC-404 saga

DN-404 is a new way to combine ERC-20 and ERC-721 features to create fractionalized NFTs that can be traded on both DEXes and NFT marketplaces. It builds on ERC-404, and while it’s unaudited, Shiba Inu and Trader Joe have already issued DN-404 tokens.

From ERC-404 to DN-404

In a previous blog post, we told you about ERC-404 — a new “standard” that merges the properties of ERC-20 and ERC-721 tokens and allows for permissionless NFT fractionalization. The first ERC-404 project, Pandora, made headlines after its token skyrocketed over 12000%.

The idea is that each ERC-20 token issued by the project is tied to an NFT. If you buy a full ERC-20 token, an NFT automatically lands in your wallet; and vice versa, if you buy a Pandora NFT on OpenSea, you’ll find a corresponding ERC-20 in the wallet. Selling the NFT means you’ll lose the ERC-20, too. But if you sell only a fraction of the ERC-20, the NFT is burned — and won’t be minted again until a single wallet collects enough ERC-20 fractions to form a full token.

An interesting strategy is to buy, sell, and buy full ERC-20 tokens again to force new NFTs to be minted every time you buy — because the new NFT can be rarer and more valuable than the old one.

ERC-404 makes truly on-chain NFT fractionalization possible, because all PANDORA ERC-20 PAWell, the way crypto works is that any innovation spurs a wave of improvements, variations, and copycats. Indeed, just a week after the launch of Pandora and ERC-404 it was challenged by a new “standard”, DN-404.

By the way, we put “standard” in quotation marks because neither technology has gone through the stage of EIP yet. Normally creators need to publish their EIP code and the proposal on a special EIP portal, after which it is discussed on the forum known as the Fellowship of Ethereum Magicians. Once all issues have been resolved and the community-appointed reviewers are satisfied with the results, the EIP is considered final and can be called a standard.

An ERC that concerns a token type doesn’t have to become a universally accepted standard: projects can choose to use it or not. As for ERC-404, its pseudonymous creators 0xctrl and 0xacme are working hard to submit an EIP for review. A v.2.0 of the protocol is also available, where NFTs don’t have to be burned and can be transferred instead.

Meanwhile, Binance and OKX announced support for ERC-404, and over a dozen projects launched collections similar to Pandora’s. But at the same time, a new hybrid contender has emerged and attracted lots of media attention: DN-404, where DN stands for “Divisible NFT”.

What is DN-404 and how is it different from ERC-404?

DN-404 was proposed by a pseudonymous developer known as 0xCygaar together with a team of collaborators (he himself acknowledged having written around 1% of the code).

Like ERC-404, it combines the features of ERC-20 and ERC-721 to enable native NFT fractionalization. But it also claims to fix the former’s issues. Here are the key differences:

• ERC-404 was implemented in the Pandora collection from the start, but DN-404 is bare open-source code: 0xCygaar stressed that it’s not a project and it doesn’t sell any tokens. Instead, any developer can use it to launch a project.
• ERC-404 requires just one contract with hybrid ERC-20 and ERC-721 code, while DN-404 uses two contracts, where the ERC-20 contract serves as the base and the NFT part as a “mirror”;
• In DN-404, individual ERC-20 tokens for fractions of NFTs and not for whole NFTs (as in Pandora); NFTs are minted and burned based on the ERC-20 balance in a wallet.
• As a consequence, you can trade NFT fractions by trading ERC-20 tokens. However, you need to accumulate at least 10¹⁸ tokens (called a base unit) for an NFT to be minted. If you sell some of those ERC-20 tokens, the NFT will be burned.
• Like ERC-404, DN-404 remains unaudited, little-tested, experimental, and thus potentially unsafe. Any protocols that implement it should be cautious and ready for unexpected consequences.
• Protocols (lending platforms etc.) need to specifically implement ERC-404 in order to support projects like Pandora; but any protocol can directly interact with a DN-404 project, because its ERC-20 and ERC-721 contract work in a regular way.

This is the biggest difference: there’s no need to tweak an existing dApp to have it support DN-404.

SHEboshis and SHOE: two of the first implementations of DN-404

A pioneering project made with DN-404 is SHEboshis, an offshoot of the popular Shiboshis collection which, in turn, is part of the Shibaswap ecosystem. Thus, SHEboshis have a somewhat official status as part of the grander Shiba Inu memecoin project.

Shiboshi NFT holders could claim SHEboshi DN-404 for free, and the resulting hybrid assets are now traded on Uniswap (the ERC-20 part) and Shibaswap (the NFT part). The sale is ongoing, and the images haven’t been revealed yet.

Soon, another DN-404 project, called SHOE, popped up on Avalanche. Remember that anything that can be coded on Ethereum can be ported to any other EVM chain, too. SHOE was introduced by the team of the Trader Joe marketplace and distributed for free to the users of the Joepegs marketplace and to selected NFT holders.

Will DN-404 catch on as a real new standard? Possibly — or perhaps we’ll see another, even more efficient technology that builds on DN-404. On-chain NFT fractionalization is an important use case, so we at XP.NETWORK will be following this story closely — and reporting on it in the blog.