Discover how ERC-6551 is changing the game for NFTs. With smart contract capabilities, NFTs can now hold other assets, interact with smart contracts, and have their own on-chain identity.
ERC-6551 is a new token standard for non-fungible tokens (NFTs) that is tipped to become a game-changer for the scene. Very soon, NFTs may become more than profile pictures (PFPs).
Buckle up because your NFTs are about to evolve.
What Is ERC-6551?
ERC-6551 enhances the functionality and value of NFTs by giving them smart contract capabilities.
ERC-6551 tokens function as smart contract wallets. That means ERC-6551s can hold tokens and other NFTs just like a regular smart contract wallet can. The same applies to transactions. These so-called token-bound accounts (TBAs) are created and managed through a permissionless registry that is compatible with existing ERC-721 NFTs.
EIP-6651 is co-authored by Benny Giang, who was a founding member of Dapper Labs, which worked on the ERC-721 token standard and early projects like CryptoKitties.
What Is the ERC-721 Token Standard?
ERC-721 is a standard for creating unique digital assets on the Ethereum blockchain. These assets are called NFTs and are different from regular cryptocurrencies because each one is unique and cannot be exchanged for another one-to-one. NFTs can represent anything from art to virtual real estate, and their value can be determined by factors like rarity or utility. ERC-721 provides a set of guidelines for creating these tokens, making it easier for developers to create and trade unique digital assets on the Ethereum network.
How Does ERC-6551 Work?
The problem with regular ERC-721 NFTs is their limited scope. They can only be owned and transferred. They cannot own other assets, such as tokens or other NFTs. Furthermore, they cannot interact with other smart contracts or change or evolve over time based on external factors or user inputs.
ERC-6551s use a permissionless registry that is compatible with existing ERC-721 NFTs to remedy this problem. The registry is a smart contract that acts as a factory and a directory for TBAs. Anyone can create a TBA for any ERC-721 token by calling a function on the registry and paying a small fee. The registry then deploys a proxy contract that acts as the TBA for the token.
The proxy contract that represents the TBA inherits all the properties and metadata of the original ERC-721 token. It also implements the EIP-1271 standard, which allows it to sign messages and verify signatures on behalf of the token. This enables the TBA to interact with other smart contracts and accounts on the Ethereum network, such as decentralized exchanges (DEXs), lending platforms, gaming environments and more.
The TBA can also hold other assets, such as tokens or other NFTs. These assets can be transferred to or from the TBA by calling functions on the proxy contract.
Source: https://eips.ethereum.org/EIPS/eip-6551
What Are the Use Cases of ERC-6551 for the NFT Space?
Composability
Composability means you can bundle your NFT with its related assets like other NFTs and tokens into one profile. If you sell or transfer the ERC-6551 NFT, every asset in it will be transferred as well.
For instance, with TBAs, you can build "inventories" of game-related assets that can be stored in the ERC-6551 token and greatly improve the user experience of a Web3 game. Before TBAs, all assets (NFTs) collected within a game would sit as separate tokens in your wallet
Identity
Identity means each of your NFTs has its own identity and can interact with DApps independently. It does not rely on the wallet that holds it and can be associated with your on-chain identity.
This opens up new possibilities for loyalty programs or in-game rewards based on an NFT's past behavior. This could also have an impact on the value of your NFT, as platforms could use your NFT's identity and reputation to determine your creditworthiness or reduce counterparty risks.
Provenance
Provenance means that you can get a complete picture of the asset’s transaction history or utility beyond the proof of ownership. Currently, NFTs don't provide much information about what the NFT has done in the past or how it has been used.
If you sold your NFT over-the-counter, you usually don't have much info about the buyer or the price. With TBAs, you can get more insightful and specific information about the NFT's past transactions and interactions.
Dependency
Dependency means that your NFT can interact by itself with other on-chain assets or platforms, which enhances its functionality and value.
An ERC-6551 NFT can own other assets or tokens that can enhance its performance or appearance. It can also interact with other platforms or smart contracts. This is akin to the NFT having its own on-chain personality and story, which makes the NFT more interactive.
What Are the Challenges and Limitations of ERC-6551?
One of the main challenges of ERC-6551 is getting support from existing NFT projects and platforms. Not all NFT projects are on board with the ERC-6551 standard, especially those that don’t follow the ownerOf method, like CryptoPunks. This means that some of the most popular and valuable NFTs can’t enjoy the token-bound accounts feature.
Moreover, some NFT platforms may not be keen or able to integrate with the ERC-6551 standard, either due to technical difficulties or business reasons. So ERC-6551 NFTs may not be immediately available to all collectors and creators.
ERC-6551 also needs to be secured and could provide a greater attack surface for hackers as they become more prominent. ERC-6551 NFTs can own assets and interact with applications, which means they become more attractive targets for hackers trying to exploit vulnerabilities or loopholes.
Finally, ERC-6551s need to provide a user-friendly and intuitive experience. ERC-6551 introduces a new layer of complexity and functionality for NFTs. It also requires a new level of understanding and awareness from users who want to use them effectively. For example, users may need to learn how to create, access, manage, and transfer token-bound accounts and their assets.
Conclusion
ERC-6551 could revolutionize the world of NFTs. It gives every ERC-721 token a smart contract wallet that can own assets and interact with applications, making NFTs more dynamic and interactive than ever before.
This opens up new possibilities in gaming, art and identity but does not come without challenges, such as compatibility and adoption.
Maybe ERC-6551 could just be what is needed to revitalize the 2023 NFT market.
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