What is ERC-6551? One barrier less to enter Web3
A brief dive into token standards
Token standard refers to a guideline on creating tokens’ smart contracts, encompassing functions and data storage options to implement, so that crypto wallets, decentralised applications (Dapps) and platforms could work with them efficiently. They are referred to as ERC.
For example, ERC-20 is the most popular token standard for fungible token smart contracts. These store two values – addresses of token holders and the number of fungible tokens they own.
The second most popular token standard is ERC-721 used for non-fungible tokens (NFTs). These smart contracts are able to store addresses, token numbers and unique token IDs.
If you are a frequent reader, you probably remember that we wrote about token standards a while ago. To gain a deeper understanding of this concept, we suggest reading this article: ‘What are token standards?’.
However, since their creation back in 2014, the non-fungible token (NFT) concept has remained mostly the same. A majority of NFTs run on the ERC-721 token standard. While this method may be substantial and useful in particular situations, the crypto community started looking for an improvement.
The ERC-721 token standard for creating unique digital assets on the Ethereum blockchain lacked certain features. For example, NFTs created using this standard cannot act as agents or associate with other on-chain digital assets. This limitation makes it hard to represent a lot of real-world non-fungible assets as NFTs.
The birth of a new token standard
The ERC-6551 token standard proposed a novel manner of handling NFTs through token-bound accounts. It stems from an Ethereum Improvement Proposal (EIP) created in February 2023 by a team of developers and individuals from the Web3 venture studio Future Primitive and NFT creator platform Manifold.
The new standard was created as a response to the modern NFT movements since its creators noticed that NFTs were placed in scenarios where they needed to hold assets. For example, an NFT character in a game needs to hold tokens earned in the game.
The original ERC-721 standard wasn’t able to support this since it only created single tokens that couldn’t associate with other blockchain assets or act independently as agents.
The idea behind the ERC-6551 standard was fueled by the desire to refine the infrastructure of digital ownership within the Web3 environment. This vision inspired Future Primitive's founders, Benny Giang and Jayden Windle, to create it and provide new possibilities within the Web3 ecosystem.
What is the ERC-6551 standard?
The ERC-6551 token standard refers to an Ethereum standard that creates token-bound accounts and addresses the limitations of the previous ERC-721 standard. Basically, ERC-6551 is a smart contract that creates a unique wallet for each NFT which is linked to the non-fungible token itself and enables the storage of digital assets related to it.
Serving as smart contract wallets, NFTs can hold other NFTs as well. Having its own wallet and account address means that an NFT could be a signer on a multi-sig or participate in voting on proposals. It is like giving an NFT a passport without requiring changes to existing smart contracts or infrastructure.
The new standard is able to overcome a number of challenges faced by its predecessors such as a lack of interoperability, scalability and security. All of these are resolved by giving NFTs smart contract capabilities, allowing tokens to own other on-chain assets, interact with Dapps and explorers, execute arbitrary operations, along with the opportunity to evolve over time and control multiple independent accounts.
What are token-bound accounts?
Simply put, a token-bound account is a type of NFT wallet. Due to the ERC-6551 standard, a novel or existing NFT can get a smart contract account which can hold all kinds of assets such as cryptocurrency or Proof-of-Attendance protocols (POAPs).
Additionally, token-bound smart contracts encompass records of all transactions associated with an individual NFT. A token-bound account can be illustrated as an inventory system that holds different sorts of built-in logic ranging from automatic staking of NFTs to collecting POAP rewards.
Therefore, whenever an NFT is traded or transferred, the token-bound account moves along with it. The new owner of the token gets access to all blockchain-based digital assets inside the NFT wallet, along with a transparent listing of the transaction history. It serves as an interface and registry for smart contract accounts owned by ERC-721 tokens.
Key benefits of ERC-6551
The novel token standard encompasses a number of benefits for the further development of NFTs and the Web3 ecosystem. Let's check them out.
Composability
Composability is an evident upper-hand that ERC-6551 brings to the NFT table. In simple terms, NFTs can be bundled into a universal profile with related assets, including tokens and other NFTs. When a single NFT is being traded, all digital assets contained within it are smoothly transferred as well. The composability feature is amplified by token-bound accounts.
This perk amounts to improved asset management and digital ownership as well as the development of the Web3 gaming space. Additionally, it provides simplified asset transactions; trading all assets associated with a single NFT in a bundle simplifies the process of transferring entire collections without sacrificing integrity.
Identity management
This perk refers to another important aspect addressed by ERC-6551. Each NFT possesses its own independent identity and the capability to interact with Dapps seamlessly.
Due to the identity not being linked solely to the smart contract wallet that holds it, users may utilise several useful applications such as in-game rewards or loyalty programs based on a token’s past conduct.
Identity management is linked to an NFT's reputation. In other words, token-bound accounts could be utilised in systems such as airdrops driven by behavioural economics, leading to the potential development of credit ratings.
Immutable activity record
To provide a high degree of transparent ownership and transaction history, token-bound accounts laid down by ERC-6551 maintain a permissionless registry containing all on-chain activities.
This feature provides a comprehensive provenance of transactions and ownership details. Traditional NFTs lack detailed insights into an NFT’s past transactions. The new structure instils trust in the NFT space.
Interactivity
The interactivity feature refers to the ability of an NFT to independently interact with other on-chain assets and platforms. This perk expands the NFTs’ value and utility.
Having its own on-chain identity adds up to the creation of new use cases, specifically in the area of on-chain gaming and inventory management. More interactive NFTs amount to seamless trading, customization and upgrading of in-game assets and characters.
Security through multiple layers
Since ERC-6551 provides individual wallets for each NFT, security and trust are distributed across multiple layers. Instead of storing assets on a Web3 wallet, ERC-6551 enables the user to manage NFT wallets through token-bound accounts; all of these wallets are stored and managed inside one main wallet.
The new token standard supports software and hardware crypto wallets-based methods users can adopt to maintain a substantial level of security.
Key limitations and challenges
The ERC-6551 is a novel concept that needs to overcome several challenges to function properly. At the time of writing it is still in the proposal phase.
One of the main challenges tied to the new token standard is getting support from existing NFT projects and platforms. At the moment, some of the most popular NFT collections cannot enjoy the token-bound accounts’ perk.
Therefore, integration with some NFT platforms is a challenge that needs to be resolved. Due to technical or business-related difficulties, some platforms may not be able yet to integrate with the ERC-6551.
Even though ERC-6551 provides security across multiple layers, its ability to interact with applications and own assets can make it an attractive target for malicious actors. Since perpetrators are always working on exploiting vulnerabilities and loopholes in the original design, the ERC-6551 concept needs to be secured.
The novel standard is associated with potential issues related to recursivity. For example, what would happen if an owner transfers an ERC-721 NFT into their own token-bound account?
At the time of writing, both the NFT and all associated assets within the account could end up locked in ownership cycles, making them inaccessible. Since only the owner of the account can transfer the account, the problem with declaring an NFT as the owner arises. Even though this is a potential issue that could emerge, it can be mitigated by a careful set-up or usage of the token-bound account.
The final limitation is related to an improved user experience. To obtain massive adoption, ERC-6551 needs to provide a user-friendly experience. Users need to be educated on how to create and manage token-bound accounts; since it provides a novel layer of complexity, users need to gain a new level of understanding.
How does ERC-6551 work?
The technical side of ERC-6551 is based on token-bound accounts that enable ERC-721 NFTs to own a variety of digital assets due to independent wallets and the interactivity feature without the need to modify smart contract technology or the underlying infrastructure.
The architecture of ERC-6551 encompasses three main components – the ERC-721 smart contracts, standard implementation interfaces and the registry. While ERC-721 contracts represent smart contracts for tokens, the registry serves as a point of entry for projects that want to implement token-bound accounts. The standard interface ties the knot by implementing token-bound accounts within the smart contract technology.
Therefore, an NFT project interested in this token standard can start by using the registry and the related account function to compute a unique account implementation address for a token-bound account.
The new account becomes attached to the implementation address and deploys a minimal proxy with immutable constant data; each account needs to implement several Ethereum standards such as ERC-165 and ERC-1271 to validate smart contracts and detect interfaces.
The extended utility of ERC-6551
The ERC-6551 and token-bound accounts opened up a wide array of potential use cases for NFT creators, Web3 enthusiasts, and game developers could successfully implement. Also referred to as the ‘backpack wallet’, token-bound accounts levelled up the notion of digital ownership across the Web3 space.
According to the creators, a lot of blue chip crypto projects already started experimenting with the new standard.
The impact on the Web3 environment
The new token standard emerged as a concept compatible with the Web3 ecosystem. The ERC-6551 was first used by Future Primitive when the core team attempted to build the technology stack to support on-chain avatars owning digital fashion items. The idea was to provide a seamless Web3 experience by enabling avatars to own and trade items. That’s how it got its ‘backpack wallet’ name.
Therefore, one of key elements of the ERC-6551 proposal is associated with the Web3 user experience. This improvement could be valuable for newcomers to the crypto space since it simplifies asset management and storage by eliminating the need to create separate crypto wallets or manage complicated seed phrases.
Enhancing gaming experience
When it comes to adopting the ERC-6551 proposal, gaming is one of the forerunners. The gaming industry has a lot to gain from the new standard. For example, gaming characters would be enabled to collect crypto assets throughout the entire game and store them in their wallets.
Additionally, the integration of token-bound accounts could help in the emergence of so called ‘Network Playable Characters’, a concept that could aid the monetization of in-game assets and provide a variety of new opportunities.
Basically, network playable characters could travel through multiple gaming environments, own digital items and customise their looks. The extended ability to create NPCs, game developers have an opportunity to unlock a wide range of new possibilities for gamers and NFT creators.
Enabling NFT co-creation
An interesting use case presents the capability for co-creation on NFT projects. Within the sphere of digital fashion, this could amount to various artists contributing NFTs to an on-chain garment.
The co-creation of unique digital fashion items could be done by showcasing the transparent attribution of each artist involved. This use case opens new possibilities for the creation of collaborative digital fashion and art, expanding creativity within the crypto industry.
Diversifying DAOs
The ERC-6551 standard could enhance the operation of decentralised autonomous organisations (DAOs). Token-bound accounts can be utilised within DAOs to represent the identity of their owners. Instead of a DAO member being separated by an NFT and a wallet, it can be placed into the NFT itself.
By doing this, DAOs could take advantage of all features provided by the novel token standard and enable DAO members to perform multiple roles such as accessing services, voting and signing contracts.
A look into the future
Once ERC-6551 goes from the proposal phase to the legitimate token standard, new use cases and examples of utility shall likely emerge; then the true potential of ERC-6551 and token-bound accounts would be fully available for assessment.
The potential of ERC-6551 is more than just digital art and collectibles. Due to its asset management features, it could enhance a wide array of industries such as gaming, intellectual property, decentralised governance and digital economy.
Therefore, the new token standard represents a major step forward; due to addressing several limitations of previous token standards and bringing to the table new utilities, the proposal could lead to a more interesting and complex concept of NFTs.