ERC-20z: Overview and Purpose
ERC-20z is a new Ethereum token standard introduced by Zora to address the persistent liquidity challenges in NFT (Non-Fungible Token) markets. Unlike traditional NFT standards, ERC-20z enables NFTs to be wrapped and unwrapped, allowing them to be traded as fungible tokens on decentralized exchanges (DEXs) like Uniswap.
How ERC-20z Works
- Extension of ERC-1155: ERC-20z builds upon the ERC-1155 standard, which already supports both fungible and non-fungible tokens. ERC-20z takes this further by allowing NFTs to be converted into ERC-20z tokens, making them fungible and tradable like standard ERC-20 tokens.
- Wrapping and Unwrapping: NFT holders can “wrap” their NFTs into ERC-20z tokens, which can then be freely traded on DEXs. These tokens can later be “unwrapped” to redeem the original NFT.
- Onchain Liquidity Pools: When an NFT collection is minted using ERC-20z, a portion of the minting fees is directed into a liquidity pool on platforms like Uniswap. This ensures that, even after the primary minting period ends, users can still buy or sell NFTs (via their fungible ERC-20z representation) on the secondary market.
- Royalties and Onchain Enforcement: ERC-20z enables creators and collectors to receive secondary market royalties directly onchain, addressing a common issue with offchain royalty enforcement on traditional NFT marketplaces.
Key Benefits
- Solves NFT Liquidity Problem: By making NFTs tradable as fungible tokens, ERC-20z injects liquidity into NFT markets, allowing for easier entry and exit for collectors and speculators.
- Secondary Market Access: Users who miss the initial minting window can still acquire NFTs through DEXs, thanks to the liquidity pool seeded by minting fees.
- Onchain Royalties: Creators and collectors can receive royalties automatically and transparently, without relying on offchain enforcement.
Real-World Example
The first major NFT collection to use ERC-20z was “Limitless” by Zora, which saw nearly 500,000 mints and raised over 54 ETH. This demonstrated the standard’s ability to facilitate high-volume, liquid secondary trading for NFTs.
Comparison: ERC-20z vs. Other Standards
| Feature | ERC-20 | ERC-1155 | ERC-20z |
|---|---|---|---|
| Fungible Tokens | Yes | Yes | Yes |
| Non-Fungible Tokens | No | Yes | Yes (via wrapping) |
| NFT Wrapping | No | No | Yes |
| DEX Tradability | Yes | Limited | Yes (for wrapped NFTs) |
| Onchain Royalties | No (native) | No (native) | Yes |
| Liquidity Pools | Yes | No | Yes (for NFTs) |
Summary
ERC-20z is an innovative token standard designed to make NFTs as liquid and easily tradable as ERC-20 tokens by enabling wrapping and unwrapping of NFTs, onchain royalty enforcement, and automatic liquidity provisioning on DEXs. This development represents a significant step toward solving the NFT liquidity problem and expanding the utility of NFTs in decentralized finance.