SPL20 SPL22 ERC404

NFT Revolution – SPL20, SPL22 and ERC404

(Discussion draft February 9, 2024)

Updated 2/24/2024: Mutantmon released SPL404, likely making SPL20/22 obsolete.

Updated 2/21/2024: both SJ741 and ERC20721 released launchpad.

Update 2/16/2024: after DN404 was out, SJ741 was also published yesterday.

Update 2/10/2024: A loophole was discovered in ERC404, which results in duplicate NFTs such as Defrog. It seems Pandora is working on a v1. In the meantime, Cellmates is promoting ERC 20721, which seems to be a reasonable alternative to ERC404. The market continues evolving.

Although the crypto market was busy in the last several weeks evaluating the introduction of the bitcoin spot ETFs, the most exciting trend is the hybrid NFTxToken structure introduced under SPL20, SPL22, and ERC404. The NFT world has suddenly found a solution to the liquidity problem, which will stimulate demand and likely introduce another round of rampant speculation.

This article summarizes the recent events related to NFTxToken and is not a financial advice. I wrote this in an hour, so errors may exist.

NFT Problem

An NFT, or Non-Fungible Token, is a blockchain token representing a unique piece or art, typically a picture. After creating the artwork, creating NFTs on blockchain does not have much cost: the creator will deploy a contract, waiting for users to mint those NFTs. The users will pay the following costs, which is minimal on many chains:

Blockchain network transaction fees, or gas: this is minimal except on Ethereum
Minting fee charged by the website offering mint (I do not even know what is on Ethereum. On Solana, one is T22.io)
Royalty fee paid to Metaplex
Royalty fee paid to creator

The pricing of NFTs is a myth, driving by supply and demand and other unknown factors, which is a reason that I have not paid attention to the NFT market. Nevertheless, NFTs occupy headlines from time to time due to high valuation for certain issuers, such as bored ape NFTs fetching more than $1 million. We all need to create a meaning for our life, and it seems owning an NFT may help.

Back to the NFT topic! One major problem about NFTs is the lack of liquidity. Many NFT markets exist, such as Opensea or Magic Eden, but there is no market maker. An NFT seller must list their items and wait for a buyer, which sometimes take months.

Tokens, on the other hand, can be very liquid. Other than centralized exchange such as Binance for tokens or Opensea for NFTs, there is a long list of decentralized exchange (DEXs) or automatic market makers (AMMs) such as Uniswap, and price aggregators such as 1inch. AMMs functions like a two-way ATM machine: as an example, a USD-JPY AMM will return JPY every time we send it some USD, and will return USD every time we send it some JPY. The exchange rate depends on the market rate and the size of the AMMs. The AMMs charges 0.3% for each transaction.

SPL20 and NFTxToken

NFTs are typically stored off-chain. Solana Program Library-20 (SPL20) provides a new token format on the Solana blockchain, allowing on-chain storage of digital art. This is inspired by BRC-20, which I did not notice. SOLS is first token issued under SPL20, but it has not drawn wide attention.

Bozo.finance created Bozo Hybrid in January 2024, which is a revolutionary moment. It introduced a hybrid NFTxToken structure:

A total of 1,000 NFTs can be created, with each one convertible to 800,000 tokens. If all NFTs are converted to tokens, there would be 800 million tokens
Bozo offers a frictionless two-way bridge between the NFTs and the tokens
Bozo then created a liquidity pool on Raybeam for tokens and listed the NFTs on Magic Eden
From that point forward, if any NFT holders want to sell, they can either list the NFT on Magic Eden, or convert tokens and sell directly to the liquidity pool (LP). As mentioned, LP is like an AMM that functions 24-7
This introduced an interesting theoretical arbitrage opportunity: if the token price is high and the NFT price is low, a user can buy an NFT, convert to tokens and sell it.

The first several weeks went by without fanfare, since Bozo did not have any true utilities. It may be fun to convert back and forth, but does not serve any purpose. However, a coincidental or intentional design attracted speculators, and put it in the spotlight of the Solana universe: the LP was tiny. Even as of today, it has a market cap of $19 million, and a LP of only $188K. Anyone spending $10K will move the price significantly.

Why does that matter?

Since the LP is tiny, the first batch of speculators may not be aware of this NFTxToken structure, and began to bid up price fast
Since each NFT has 800,000 tokens, any knowledgeable user that want to buy a large quantity will look at the NFT market. They found out the implied price is much cheaper than the token market, so they bought the NFTs
Since the LP is tiny and each NFT has 800,000 tokens, anyone wanting to sell an NFT seems to be much better off setting the NFT on the NFT market
Therefore, there was a moment when the token market has minimum sellers. Buy orders kept coming in, driving the Bozo market cap from $1M to $50M in days before it dropped to $20M

SPL22 Arrived

gh0stc0in.xyz created this term SPL22 to mean SPL20 plus token-2022. The token-2022 uses a different NFT standard that is much more cost effective than SPL20. T22.io is the primary site offering SPL22 minting, fully automating the LP creation. For example, a creator can charge a $0.02 SOL minting fee, and direct a portion or all of the minting fees to a LP. After all NFTs are minted, an LP pool is automatically created. Since creating SPL22 is simple and cheap, the market is quickly flooded with SPL22 issues. Some are deflationary, such as vice, de or gem.

The SPL22 standard is new, so many normal crypto apps cannot handle it: charting tools such as Dexscreener cannot show the name and shows “unknown” for a few weeks until early February; wallets does not recognize it – Phantom just upgraded it; Fluxbeam.xyz is the only AMM that supports it; Jupiter Exchange still has not integrated it, making purchasing any SPL22 tokens extremely difficult.

And Pandora Ignited ERC404.

ERC404 and L2s

pandora.build is the first token built on ERC404, which is similar to SPL20/SPL22. There are slight differences:

In SPL20/SPL22, a user can have the NFT or the token, but not both at the same time, and can convert both ways through a bridge. The token may have a tax during convertion, but the bridging is free
In ERC404, a user has the NFT and the token at the same time. For an NFT with 1,000 tokens, if a user has 600 tokens and decide to buy 400 tokens, he will receive the 400 tokens, and an automatically distributed NFT
ERC404 tokens can be traded like normal tokens and listed on all DEXs

Over a week from February 2, 2024 to February 8, 2024, pandora exploded from zero to more than $300 millions, although it was launched without any real use. ERC404 tokens began pouring out, spreading to all other L2 and chains: arbitrum, avax, base, to name a few.

So what is next?

The two separated segments of the crypto market began to converge.

For every NFT issuer, having this structure automatically solves the liquidity problem, and enables fractional ownership. It is similar to the significance of buying an oil ETF vs. buying oil directly
For every token issuer, having an NFT creates a lot of engagements with users at a minimal cost

It is uncertain whether existing NFTs or tokens will be migrated to this structure, but new NFTs and tokens are likely to follow this trend.

As discussed in prior articles, the crypto market has the highest risk among all alternatives, with changes of a full loss due to technical reasons. Instead of chasing hot projects, we may consider reviewing the related apps providing tools to enable this trend. T22 does not have a token, but all existing NFT marketplaces such as Blur may benefit.

Wish you a happen lunar new year!