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A Lifeline in the Wild West: ERC-7265 and DeFi Security in a Bull Market

A Lifeline in the Wild West: ERC-7265 and DeFi Security in a Bull Market

The world of Decentralized Finance (DeFi) feels a lot like the Wild West these days. It’s a land of wide-open opportunity, where you can control your own financial destiny and cut out the middleman. But just like the Wild West, it’s also a place fraught with danger. Hackers are circling DeFi like vultures, waiting to exploit any weakness they can find. Billions of dollars have been lost to attacks in recent years, leaving a trail of heartbroken investors in their wake.

This is where ERC-7265 comes in, not as a sheriff cleaning up the town, but as a clever security invention. I first looked into this standard in October 2023, I did not write anything about it but since there are more malicious activities during the bull market, I have decided to pen some thoughts on this.

The DeFi Security Challenge: A Bullish Target for Hackers

The DeFi market is experiencing a surge in activity, fueled by rising cryptocurrency prices and the potential for high returns. However, this bull market also attracts malicious actors. According to Chainalysis, DeFi hacks resulted in a staggering $5.6 billion stolen in digital assets in 2021 and 2022. These attacks exploit vulnerabilities in DeFi smart contracts, the self-executing code governing protocols. Common attack methods include flash loan attacks, re-entrancy attacks, and manipulation of oracles – data feeds that provide DeFi protocols with external information.

The decentralized nature of DeFi complicates the process of recovering stolen funds. Unlike traditional financial institutions, there’s no central authority to intervene. This makes DeFi a lucrative target for hackers, with the potential for high payouts and minimal risk of prosecution.

How ERC-7265 Aims to Mitigate Risks: A Circuit Breaker for DeFi

ERC-7265 proposes a novel solution: a “circuit breaker” mechanism for DeFi protocols. Similar to the circuit breakers used in electrical systems to prevent overload, it would automatically halt token transfers when suspicious activity is detected. This “red alert” provides a window for developers and the community to investigate and address the potential threat before attackers can exploit the vulnerability and make away with user funds.

Here’s how ERC-7265 works:

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  1. Threshold Definition: Developers define specific thresholds for various metrics like token transfer size or withdrawal frequency.
  2. Monitoring: The standard continuously monitors these metrics.
  3. Triggering the Circuit Breaker: The circuit breaker is activated if a pre-defined threshold is breached.
  4. Action: Depending on the implementation, it can either:
  • Delay Settlements: Transactions are placed on hold for a predetermined period, allowing for investigation and potential resolution.
  • Revoke Outflows: Suspicious attempted withdrawals are reversed, preventing stolen funds from leaving the protocol.

By providing this critical pause button, it offers DeFi protocols a valuable tool to mitigate losses and protect user funds.

The Pros and Cons: A Measured Approach

While ERC-7265 holds significant promise, there are advantages and disadvantages to consider.

Pros:

  • Enhanced Security: The circuit breaker mechanism offers a much-needed layer of security for DeFi protocols, potentially deterring attacks and preventing significant losses.
  • Increased User Confidence: It can boost user confidence in DeFi protocols by mitigating risks, potentially attracting more investors and fostering wider adoption.
  • Flexibility: The standard allows for customization, enabling developers to tailor the circuit breaker to the specific needs of their protocol.
  • Standardization: It can streamline the development process for secure DeFi protocols by creating a common framework.

Cons:

  • Potential for False Positives: If thresholds are set too low, the circuit breaker could be triggered by legitimate activity, causing unnecessary disruption.
  • Centralization Concerns: While remaining decentralized at its core, implementing a circuit breaker introduces a degree of centralized control that could be misused.
  • Network Disruption: In extreme cases, a widespread triggering of circuit breakers across multiple protocols could potentially disrupt the entire DeFi network.
  • Development Considerations: Adds complexity to the development process, requiring additional effort from developers.

These considerations highlight the importance of careful implementation and ongoing evaluation of this standard.

Why ERC-7265 is Crucial Now: A Bull Market Necessity

The current DeFi bull market presents a unique opportunity for ERC-7265 to make a significant impact. With increased activity attracting both legitimate users and malicious actors, the need for robust security measures is paramount.
Here’s why ERC-7265 is particularly important now:

  • Heightened Attack Risk: The bull market creates a perfect storm for hackers. Increased liquidity and higher token values make DeFi protocols more lucrative targets. It’s ability to pause suspicious activity can buy valuable time for developers to respond and potentially prevent catastrophic losses.
  • Building Trust in Nascent Markets: DeFi is still a relatively young market, and user trust is essential for its continued growth. It can demonstrate a proactive approach to security, reassuring users that their assets are protected and fostering a more secure and stable DeFi ecosystem.
  • A Foundation for Future Innovation: By providing a standardized security framework, ERC-7265 can facilitate the development of even more secure and innovative DeFi applications, fostering a more robust and resilient DeFi landscape in the long run.

The Road Ahead: Adoption and Evolution

While ERC-7265 holds immense potential, it’s essential to acknowledge that it’s still a proposed standard. Widespread adoption within the DeFi community is crucial for its success. This requires ongoing discussions, collaboration among developers, and potential revisions to the standard based on real-world implementation experiences.

Furthermore, security in DeFi is an ongoing battle. Hackers constantly evolve their tactics, and new vulnerabilities may emerge. To stay ahead of the curve, this standard needs to be adaptable. This could involve developing additional functionalities or integrating with other security measures.

Conclusion: A Lifeline in the Wild West

The DeFi revolution is full of promise, but security concerns remain a significant hurdle. ERC-7265 offers a vital lifeline, providing a much-needed layer of protection against malicious attacks. While not a silver bullet, this standard has the potential to significantly improve DeFi security, boost user confidence, and pave the way for a more secure and prosperous future for decentralized finance.

As the DeFi ecosystem continues to evolve, the success will depend on its adoption, adaptability, and ongoing development. With careful implementation and a commitment to continuous improvement, ERC-7265 can be pivotal in building a more secure and trustworthy DeFi landscape, allowing this innovative technology to reach its full potential and revolutionize the financial world.

 

 

Source: https://za.investing.com/analysis/a-lifeline-in-the-wild-west-erc7265-and-defi-security-in-a-bull-market-200607770

 

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

ERC-404: Fad or Game-Changer?

ERC-404: Fad or Game-Changer?

Ethereum is a platform that enables developers to create decentralized applications (DApps) using smart contracts, which are self-executing code that can enforce rules and logic. One of the most popular types of DApps on Ethereum are those that deal with tokens, which are digital assets that can represent anything from currencies to collectibles.

There are different standards for creating tokens on Ethereum, such as ERC-20 for fungible tokens and ERC-721 for non-fungible tokens (NFTs). Fungible tokens are interchangeable and divisible, meaning that one token of the same type equals another. For example, one ether (ETH) is equal to another ether. NFTs are unique and indivisible, meaning that each token has its own identity and characteristics. For example, one CryptoKitty is different from another CryptoKitty.

However, there are some limitations and challenges with these existing standards. For instance, ERC-20 tokens lack NFTs’ metadata and customization features, while ERC-721 tokens suffer from low liquidity and high transaction costs due to their rarity and indivisibility. Moreover, there is no easy way to bridge the gap between fungible and non-fungible tokens or create hybrid tokens with both properties.

A New Standard

This is where ERC-404 comes in. This is an unofficial token standard proposed by the Pandora team, a group of developers who launched an NFT collection based on this standard. ERC-404 aims to combine the best of both worlds by treating tokens as fungible or non-fungible, depending on the context and the user’s preference. It also enables unique burn and mint mechanics, creating interesting dynamics and incentives for token holders.

One of the main features of ERC-404 is that it allows tokens to be fractionalized and merged. This means a user can buy or sell a fraction of a token instead of buying or selling the whole token. For example, if a user owns one Pandora token, an ERC-404 token, they can sell 0.1 of it to another user and keep the remaining 0.9. The 0.1 token will still have the same metadata and characteristics as the original token but not the corresponding NFT attached to it. The NFT will only be minted when the user owns a full token or merges their fractions to form a full token.

This feature can create more liquidity and accessibility for NFTs, as users can trade them in smaller units at lower prices. It can also create more diversity and variety for fungible tokens, as users can customize them with different metadata and attributes. For example, a user can create a token representing their favorite sports team and add their logo, colors, and stats. They can then trade it with other fans or use it to access exclusive content or rewards.

Another feature of ERC-404 is that it allows tokens to be burned and minted in different ways. This means a user can destroy their token and create a new one with different properties or create a new one from scratch. For example, if a user owns a Pandora token representing a dragon, they can burn it and mint a new one representing a unicorn. They can also mint a new token without burning an existing one, as long as they pay a fee to the Pandora contract.

This feature can create more innovation and experimentation for token creation, as users can explore different possibilities and combinations. It can also create more value and scarcity for tokens, as users can create unique and rare tokens with high demand and low supply. Another example is a user can create a token that represents a celebrity and add their signature, photo, and voice to it. They can then sell it to their fans or use it to access exclusive content or rewards.

Opening Pandora’s NFT

ERC-404 is a novel and exciting token standard that can potentially revolutionize Ethereum’s token economy. It can create more flexibility and functionality for both fungible and non-fungible tokens, and enable new use cases and applications for them. It can also create more opportunities and challenges for token creators and users, as they can experiment with different token designs and dynamics.

Remember that this is also a very experimental and risky token standard that the Ethereum community has not officially approved or adopted. As mentioned in my blog, it has not been thoroughly tested or audited, and it may have security vulnerabilities or technical issues. It may also face legal or regulatory hurdles, as it may violate intellectual property rights or other laws. Moreover, it may not be compatible or interoperable with other token standards or platforms and may face competition or opposition from other token projects.

Pandora is the first and most prominent token that uses ERC-404, and it has been experiencing a massive surge in popularity and price in the past few days. CoinMarketcap has a separate section called ERC-404 on its main page, with other trending categories such as Solana, Gaming, and DePin.

Pandora is a collection of 404 unique NFTs that represent different mythical creatures, such as dragons, unicorns, and phoenixes. Each Pandora token can be fractionalized and merged and can be burned and minted to create new NFTs. Pandora also has a governance system that allows token holders to vote on the future development and direction of the project.

It has attracted much attention and hype from the crypto community as it showcases the potential and innovation of ERC-404. It has also attracted a lot of speculation and investment from the crypto market, as it has seen a huge increase in its value and volume. According to CoinGecko, Pandora has a market cap of over $175 million and a price of over $16,000 per token as of February 7, 2024. It has also seen a growth of over 2000% in the past week, making it one of the best-performing tokens in the crypto space.

However, Pandora is also a volatile and speculative token that has not proven its long-term viability or sustainability. It has not established a clear vision or roadmap or delivered any concrete products or services. It has also faced much criticism and skepticism from the crypto community, as it has been accused of being a scam, a Ponzi scheme, or a copycat of other NFT projects. It has also faced much competition and pressure from other token projects, especially those that use official or more established token standards.

In conclusion, ERC-404 and Pandora are fascinating and controversial token projects that have generated a lot of buzz and debate in the crypto world. They have both demonstrated the power and potential of token innovation and experimentation and exposed token adoption and regulation risks and challenges. They have created much value and opportunity for token creators and users. Still, they have also created a lot of uncertainty and speculation for token investors and traders. They have both been bullish and excited in the short term but also uncertain and unproven in the long term.

My opinion on ERC-404 and Pandora is that they are worth watching and learning from but worth being cautious and critical of. I think they are both game-changers in the token space and both fads in the token market at this point in time. So, do you think it is a game-changer or a fad?

Source: https://www.blockhead.co/2024/02/17/erc-404-a-game-changer-or-a-fad/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

How ERC-404 Brings Fungible Tokens and NFTs Together

How ERC-404 Brings Fungible Tokens and NFTs Together

Non-fungible tokens (NFTs) have been one of the hottest trends in the crypto world, attracting millions of dollars and users to the digital art, collectables, gaming, and metaverse sectors.

However, NFTs also have some limitations, such as high transaction costs, low liquidity, and lack of interoperability. To address these challenges, a new token standard has emerged on the Ethereum blockchain called ERC-404. This standard combines the features of fungible tokens (FTs) and NFTs, creating a new type of token that can be both fungible and non-fungible, depending on the use case.

Today we explore what ERC-404 is, how it works, what are its benefits and drawbacks, and whether you should invest in it or not.

Key Takeaways

  • ERC-404 is an experimental token standard aiming to merge fungible and non-fungible tokens on the Ethereum blockchain.
  • It addresses NFT limitations like high costs and low liquidity and offers flexibility and enhanced interoperability, including features like fractional ownership.
  • However, it’s not yet an official standard and may lead to complexities and competition.
  • While ERC-404 brings innovation, some view it as over-hyped and potentially overshadowed by existing standards like ERC-1155.
  • Its true impact remains to be seen in both technology and market adoption.

What is ERC-404?

ERC-404 is an experimental token standard built on the Ethereum blockchain that aims to combine the functionalities of ERC-20 tokens (fungible tokens) and ERC-721 tokens (non-fungible tokens, or NFTs) into a single standard.

This means that ERC-404 tokens can be both fungible and non-fungible, depending on the specific implementation. For example, a token can start as an FT and be traded with other tokens of the same kind without losing any value, but once it is used or redeemed, it can become an NFT and gain unique characteristics and value. Alternatively, a token can start as an NFT and be fractionalized into smaller units that can be traded as FTs, but once the units are recombined, the token can regain its NFT identity.

The idea was proposed by the Pandora team, a project that is building a metaverse platform where users can create, explore, and trade digital worlds and assets. The first token to use this standard is the $pandora token, which represents a Pandora Box, an NFT that contains a Replicant, a unique digital creature that can evolve and interact with other Replicants. The $pandora token can be traded as an FT on decentralized exchanges (DEXs) like Uniswap, but once it is opened, it reveals the Replicant NFT inside, which can have different attributes and values.

How Does ERC-404 Work?

ERC-404 works by linking every issued token to an NFT, which acts as the source of truth for the token’s state and ownership. The NFT can have a base unit, which defines the minimum amount of tokens that can be transferred or exchanged.

For example, if the base unit is 100, then the token can be divided into 100 fractions, each representing 1% of the NFT. The token can also have a total supply, which defines the maximum number of tokens that can be issued for the NFT. For example, if the total supply is 1000, then the token can be minted up to 1000 times, each representing 0.1% of the NFT.

The standard defines four main functions for the token contract:

  • Mint: This function allows the token creator to issue new tokens for a given NFT up to the total supply limit. The function also checks if the NFT exists and if the token creator is the owner of the NFT.
  • Burn: This function allows the token holder to destroy tokens and reduce the total supply. The function also checks if the token holder owns enough tokens to burn and if the NFT exists.
  • Transfer: This function allows the token holder to send tokens to another address. The function also checks if the token holder owns enough tokens to transfer and if the NFT exists. Additionally, the function updates the ownership of the NFT according to the token balance. For example, if the token holder transfers all their tokens to another address, the NFT ownership is also transferred to that address. Conversely, if the token holder receives enough tokens to reach the base unit, the NFT ownership is also transferred to them.
  • BatchTransfer: This function allows the token holder to send multiple tokens to multiple addresses in one transaction. The function also checks if the token holder owns enough tokens to transfer and if the NFTs exist. Additionally, the function updates the ownership of the NFTs according to the token balances.

What Are the Benefits of ERC-404?

ERC-404 offers several advantages over the existing token standards, such as:

  • Increased liquidity: Being able to trade NFTs as fungible tokens on DEXs massively increases liquidity. This solves a major limitation with existing NFTs, which often suffer from low trading volume and high price volatility due to their uniqueness and scarcity.
  • Lower costs: Being able to batch transfer multiple tokens in one transaction reduces gas fees and saves time. This also solves another limitation with existing NFTs, which often incur high transaction costs due to their individuality and complexity.
  • Greater flexibility: Being able to switch between fungible and non-fungible modes gives token creators and users more options and possibilities. For example, token creators can use ERC-404 to create dynamic and interactive NFTs that can change their state and value based on certain events or actions. Token users can use it to access fractional ownership of NFTs, which lowers the barrier to entry and expands the potential market.
  • Enhanced interoperability: ERC-404 tokens can interact seamlessly with protocols and platforms in both the fungible token and NFT spaces, bridging these previously disconnected areas. For example, ERC-404 tokens can be used as collateral, governance, or utility tokens in DeFi protocols, or as assets, rewards, or currencies in NFT platforms.

What Are the Drawbacks of ERC-404?

ERC-404 is not without its challenges and limitations, such as:

  • Experimental status: As mentioned above, the ERC-404 is not an official Ethereum standard yet, but rather an experimental one that is subject to change and improvement. This means that there may be bugs, vulnerabilities, or compatibility issues with the standard, which could pose risks for token creators and users. Moreover, there may be legal and regulatory uncertainties regarding the status and treatment of such tokens, especially in jurisdictions that have strict rules for crypto assets.
  • Complexity: It is a complex and novel token standard that requires a deep understanding of blockchain technology and smart contracts. As this is new, developers who want to create them need to study the standard and its functions. Users who want to interact need to have a clear grasp of the token’s behaviour and logic, as well as the risks and benefits involved.
  • Competition: ERC-404 is not the only token standard that aims to combine fungibility and non-fungibility. There are other standards that have similar or different approaches, such as ERC-998 and ERC-1155. These standards may offer different features, advantages, or disadvantages than ERC-404, and may attract more adoption or support from the crypto community. Time will tell.

Should You Invest in ERC-404?

The answer to this question depends on your risk appetite, investment goals, and research. ERC-404 is a new and innovative token standard that has a lot of potential but also a lot of uncertainty. Investing in them could be rewarding but also risky. Therefore, you should do your own due diligence before investing in any crypto asset and only invest what you can afford to lose. Here are some factors to consider before investing:

  • The token’s use case: What is the purpose and value proposition of the token? How does it benefit from the ERC-404 standard? What problem does it solve, or what opportunity does it create? How does it compare to other tokens in the same or similar sector?
  • The token’s performance: How has the token performed in terms of price, volume, and market capitalization? What are the factors that influence its demand and supply? What are the trends and patterns that indicate its future direction?
  • The token community: How large, active, and engaged is the token community? How do they support and promote the token? How do they interact with the token team and other stakeholders? What are their feedback and opinions on the token?

Looking Forward

Taking this opportunity, I spoke to people in the industry asking how they look at this new standard. The feelings on the ground are mixed.

Batulzii, former chairman of the board at Cryptocurrency & Blockchain Association of Mongolia highlighted that ERC-404 increased liquidity for NFTs: “By making NFTs divisible and tradable like tokens, it helps overcome the inherent illiquidity issue of traditional NFTs. This can attract more investors and boost the overall NFT market.

“Fractional ownership unlocks new possibilities for ownership and investment, as people can now access valuable NFTs they couldn’t afford entirely, opening up participation to a wider audience.”

Batulzii, who is also the technology lead and founder of Sanchirtech, also warned that this new standard is still experimental and untested and that its complex design could harbour security vulnerabilities that haven’t been fully explored.

Alex Atashkar, co-founder of Seed.Photo, articulated the vision of their platform as the NFT marketplace dedicated exclusively to photographers. He emphasized the significance of not just showcasing art but anchoring it in genuine ownership and said that Seed.Photo’s is integrating the ERC-404 standard

Atashkar highlighted the team’s excitement about the potential of the ERC-404 standard for its unique capability to enable shared ownership of a single NFT by multiple wallets, a breakthrough in the digital art space. This feature opens up myriad possibilities, including tokenization for diverse purposes such as securing loans, staking, and collective art ownership.

From a crypto exchange perspective, I have asked John Inzo, Social Media Manager at HTX to comment on the topic. “This will be an interesting experiment to see how this will help or hurt Ethereum long-term.”

The Bottom Line

To sum things up, ERC-404 is a hybrid token standard that combines the features of fungible and non-fungible tokens, creating a new type of token that can be both fungible and non-fungible, depending on the use case.

I must say that ERC-404 is an exciting and innovative token standard that is revolutionizing the NFT space, but it is not for everyone. To be very honest, I personally think that ERC-404 is more hype than reality. The previous ERC-1155 could almost achieve the main functions of ERC-404, and ERC-1155 is more mature than ERC-404. The latter now seems to be just a modified version of the former. But we shall wait and see how the technology — and market reaction — plays out.

 

 

Source: https://www.techopedia.com/how-erc-404-brings-fungible-tokens-and-nfts-together

 

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j