Ethereum ERC404 tokens bring innovation — and some unwanted consequences

Less than a week since the creation of ERC404, trading volumes on Ethereum are now dominated by these hybrid tokens.

The top ERC404 collection, Pandora, has experienced over $230 million in total volume since launching on February 2.

The PANDORA/WETH liquidity pool on decentralised exchange Uniswap is now the number three pool by volume, only behind stalwarts USDC/ETH and USDC/USDT.

The top three ERC404 projects — Pandora, MNRCH and DeFrogs — have registered a combined $113 million worth of trades over the past 24 hours, accounting for 12% of Uniswap’s Ethereum trading volume.

ERC404 is a token standard on Ethereum that combines characteristics of both cryptocurrencies and NFTs. It greatly improves the liquidity — availability of funds — for NFTs, which are typically highly-illiquid assets.

When a user holds at least one token of an ERC404 project an NFT is automatically minted. The user can then either sell the token, thereby burning the NFT, or they can list the NFT on a marketplace like Opensea.

But the frenzied trading around ERC404 tokens comes with consequences.

There have already been a number of rug pulls — situations where the address that created a token pulls liquidity leaving investors with nothing — and rising gas costs on Ethereum mainnet.

The ERC404 frenzy

As traders flock to the ERC404 token standard, some have started to take advantage of the frenzy. On Wednesday, a token trading under the name Punks, rose from $350 to over $20,000 in just two hours. Now, it’s almost worthless.

That’s because the wallet that created the token used a malicious contract that allowed the creation of an infinite number of Punks tokens. Shortly after Punks hit $20,000, the wallet’s controller executed the contract, minting thousands of tokens which were then sold into the PUNKS/WETH Uniswap pool.

Users who invested in this token lost everything while the creator’s wallet walked away with a gain of 42 Ether — or about $100,000.

Similar incidents occurred with four other ERC404 collections using variations of the Punks name in the last two days.

ERC404′s are also contributing to rising gas costs on Ethereum. Given the standard is so new, it has not yet been optimised for gas costs.

Gas fees on Ethereum are payments made by users in order to send transactions. Ethereum is designed to increase the cost of transactions during busy periods to protect the network from spam attacks.

The founder of the Pandora collection recently stated in the project’s Telegram chat that the next ERC404 improvement should reduce gas costs by 300 to 400%.

This will likely be welcomed by Ethereum mainnet users. Gas fees on the network have averaged 53 gwei over the past 24 hours, while the average for the previous seven days was 29 gwei.

Ryan Celaj is DL News’ New York-based Data Correspondent. Reach out with tips at ryan@dlnews.com.