Nonfungible tokens are capturing immense attention from different industries, creating an innovative approach to ownership and value. And with ERC 6551, NFTs are expanding their functionalities to provide exciting use cases to users.
What is the ERC-6551?
ERC 6551 is an Ethereum standard that helps NFTs expand their functionalities by providing smart contract accounts. Developed by the Future Primitive team, ERC 6551 enhances the utility and adaptability of NFT to strive as a strong digital asset. Designed to solve the limitations of ERC-721, ERC-6551 provides token-bound accounts (TBAs) compatible with existing ERC-721 NFTs.
Created using a permissionless registry (nobody can prevent from using it) and functioning as a smart contract wallet with all the features of an Ethereum account, it allows seamless and user-friendly interactions. The integration of ERC-6551 enables non-fungible tokens (NFTs) to own assets and directly interact with applications.
What is ERC-721, and how does ERC-6551 address its limitations?
ERC 721 is a token standard that helps to build NFT assets on the Ethereum blockchain. It provides rules and guidelines for creating NFTs helping developers and traders to seamlessly integrate their assets into the Ethereum platform.
However, NFTs created under ERC-721 can’t be integrated with other on-chain assets, and this created difficulty in making digital assets representing real-time value. These assets can only be owned and transferred, smart contract interaction or adaptability to changes were not included in their features. ERC-721 was not compatible with decentralized apps and smart contracts that run on the Ethereum blockchain network.
To tackle the issues of ERC-721 and to offer more utility, ERC-6551 was introduced on May 7, 2023. It enhanced the functionalities of NFT allowing flexibility, composability, asset holding, and many more.
Advantages of ERC-6551
1. Authenticity
Traditional NFTs only provide a limited history of transactions. ERC-6551 smart contract wallets solve this issue by providing a mechanism to track previous transactions. It tracks ownership and history which is important for applications in supply management and digital collectibles. Users can prove the origin of the assets, the number of times they were sold, the previous owners, etc.
2. Interoperability
ERC-6551 can be operated with other NFT standards seamlessly. It works on existing ERC-721 and ERC-1155, making it easy to expand the use case and applications. Interoperability allows users to maintain all NFT assets, and sell chosen assets while retaining others.
3. Dependency
ERC-6551 allows NFTs to interact with other entities of the blockchain. It owns tokens directly and then utilizes them to modify the NFT itself. Dependence on NFT enhances the involvement of every entity participating in the process.
4. Scalability
ERC-6551 has the potential to create a large number of NFTs. The number of NFTs created doesn’t affect the performance of ER-6551.
5. Metadata flexibility
ERC-6551 is capable of managing more flexible data than any other NFT standard offer. A user can store a large set of information in their NFTs including images, videos, and texts. This increases the value of NFTs.
6. Composability
By using ERC-6551, NFT bundling is made possible. It can be combined with assets including tokens or other NFTs to convert to a single profile, making it easy to manage the asset.
How does ERC 6551 work?
ERC-6551 utilizes a permissionless registry compatible with existing ERC-721 tokens. The registry is a smart contract and serves the purpose of creating a hub and management tool for TBAs. Creating a TBA is not difficult, anyone can create a TBA for an ERC-721 token, initiate a registry function, and pay a small fee. The registry creates a proxy contract that functions as the token’s TBA and has characteristics similar to those of the ERC-721 token.
Through the implementation of the ERC-721 standard, the proxy contract allows TBA to sign messages and validate signatures on behalf of the non-fungible token. This process allows TBA to engage with other smart contracts and accounts contained in the Ethereum network. The interactive platforms include decentralized exchanges, gaming platforms, lending environments, and more. TBA has the potential to hold other assets like tokens and NFTs, which can be transferred to or from TBA by using function calls in the proxy contract.
Use cases of ERC-6551
ERC-6551 gives a new landscape for the use of NFT. The token-bound account allows for owning assets, interacting with applications, and more.
1. Gaming
ERC-6551 smart contracts are used for gaming activities. Many games are available on online platforms that use NFTs with unique characteristics. These unique NFTs can be easily traded using an ERC-6551 token-bound account. An NFT-linked wallet allows gamers to combine different in-game assets to buy in-game characters or crypto tokens. Since the token-bound accounts are POAP retained, it helps to show that an NFT is utilized in special gaming activities or events, giving NFT additional features or in-game assets.
2. Digital collectibles
The ERC-6551 allows NFTs to own more assets, opening a gateway for trade. In the digital industry, ERC-6551 allows many artists to collaborate to combine their NFTs into innovative art. Digital collectibles like art and music are stored in NFTs, the collectors can sell or trade these items easily.
3. DeFi
By utilizing ERC-6551, Defi applications allow users to store tokens in NFTs, making Defi asset management easy. It also provides Defi platforms with an added layer of security. Creating an NFT and using it to access Defi applications, makes the lending and staking process easy like never before.
4. Supply chain management
ERC-6551 can be applied to supply chain management to monitor asset ownership. Examining the actual assets’ history and validity is beneficial. By creating an NFT, a company can track the movement of assets from producer to consumer.
5. Digital identity management
The identity management system can be implemented using ERC-6551. It helps to store the personal information of users in NFTs, allowing users to control their data and prevent unauthorized access to information. When a user creates an NFT containing their name, mobile number, and other personal details, the NFT will utilize the information to verify the user’s identity with online services.
6. DAO
ERC-6551 can be used to identify DAO members. Since all the information is placed in a single NFT, segregation of history is not required, providing DAO members with the full power of signing contracts, voting, and enjoying other services.
Limitations of ERC-6551
- One of the major challenges faced by ERC-6551 is their lack of adaptability with other NFT projects. Different NFT projects use different methodologies to improve their functionalities, some may be compatible with ERC-6551 while others may not be. Crypto punk, an NFT project that doesn’t follow the ‘OwnerOf’ method can’t get synced with ERC-6551.
- Another challenge lies in the lack of integration of some NFT platforms. This can be due to technical challenges or business reasons. This in turn limits access to ERC-6551 among collectors and developers.
- Hacks and scams are prominent on NFT platforms. ERC-6551 could be more secure and offer safety against potential hacks. ERC-6551 NFTs own and transfer assets and also interact with other decentralized applications, making them more prone to threats. The platform should be protected from loopholes and vulnerabilities.
How to overcome the existing limitations of ERC-6551?
ERC-6551 requires a more user-friendly and straightforward interface to engage with. The introduction of ERC-6551 has opened broad functionalities to NFTs, but they are complex, making it difficult for users to understand. By deploying more measures to improve security and enhance seamless operation, the platform can be made adaptable to more users.
Bottom Line
ERC-6551 has the potential to revolutionize the nonfungible token industry. By providing smart contracts to ERC-721 tokens, ERC-6551 provides ownership of assets and interaction with decentralized applications. It can create an impact in the world of gaming, metaverse, and collector industries, leading to a surge in NFT initiatives. This won’t happen within a day, month, or year; it can take longer sometimes. Implementing ERC-6551 takes time, and their complex nature makes users difficult to interact. However, by overcoming the existing challenges, many NFTs may adopt ERC-6551 to their platform in the coming years.
