ERC-721 is the standard that has made NFTs popular on the Ethereum network as digital assets that can be verified. Now, with a new standard called ERC-6551, NFT users can directly own assets, interact with Web3 applications, and serve as identities on the blockchain.
In the following article, Imota will explain in detail the concept of ERC-6551 and its benefits and applications in the future.
What is ERC-6551?
ERC-6551 is a new standard that expands the functionality of NFTs by linking each ERC-721 NFT to a unique Token Bound Account (TBA). The ERC-6551 standard was launched on the Ethereum main network on 07/05/2023, allowing for ownership of assets, interaction with applications, and operation on the chain without changing the existing infrastructure.
What are Token Bounded Accounts (TBA)?
Token Bounded Accounts (TBA) are contract accounts controlled by NFTs. TBAs can do everything a regular wallet can do and are compatible with any NFTs owned by users.
Each Token Bounded Account is considered an NFT account, allowing users to add any ERC-20, ERC-721, or ERC-1155 assets to their account. And because it is an NFT, TBA is unique and irreplaceable.
An example of TBA is illustrated by the image below:
Previously, the entire character was considered one NFT with non-detachable parts. Now, with TBA, one NFT can include multiple sub-NFTs such as accessories, clothing, shape characteristics, and background. These sub-NFTs can be changed, exchanged, bought, and sold in the market. Everything is like what you can imagine for a character in a traditional video game.
Benefits of ERC-6551 for NFTs
Below are some benefits of ERC-6551:
Enhanced NFT Functionality
NFTs under the ERC-6551 standard can own other NFTs, participate in DeFi applications, and interact with smart contracts. This creates more use cases for NFTs and makes them more valuable assets.
- Digital costumes and items (RTFKT - Clone X, Doodles)
- Earn token ERC-20 models (BAYC, Cool Cats, SupDucks)
- Poops or badges earned when participating (Azuki, FWB, Moonbirds)
- Trading multiple NFTs as one NFT (bulk buying and selling on OpenSea)
- NFT identity on the chain in Social Network models (CryptoPunks)
Improved Security
One of the important aspects of ERC-6551 is its focus on enhancing the security of NFTs. TBAs are safer than traditional wallets because they are protected by smart contracts. The ERC-6551 standard enables NFTs to interact directly with Web3 applications instead of going through a third-party application, reducing the risks for users' digital assets.
DeFi Applications
ERC 6511 NFTs can contain any assets, which can be another NFT or a type of cryptocurrency. By aggregating assets under a single address, more sophisticated financial transactions can take place.
For example:
Imagine an Azuki with a floor price of 10 ETH. Alice can't do much except sell or possibly lend it. So suppose Alice borrows 5 ETH, if the floor price drops to 6 ETH, Alice's NFT will be liquidated.
However, if Alice upgrades Azuki to the ERC-6551 standard and sends 7 ETH into the NFT, Alice won't have to worry about the NFT even if the floor price of Azuki drops to 0. Alice won't be simply liquidated because the collateral asset, Azuki is larger than the liquidation limit.
ERC-6551 NFTs can be used to create NFT-based lending protocols or allow users to stake NFTs for rewards.
On-chain NFT Identity
Each ERC-6551 NFT has its own identity and can interact with DApps independently. It is not dependent on a wallet and can be linked to the user's chain identity.
Therefore, ERC-6511 NFTs can open up new potential for areas such as mortgage lending, customer loyalty programs, or rewards for in-game behavior based on NFTs.
This can also impact the value of the NFTs that users hold because platforms can use the identity and reputation of the user's NFT to determine reliability or reduce the platform's risk for the platform.
Ability to Combine with Other NFTs
ERC-6551 allows NFTs to be combined with each other or with other content to create new and unique digital products. This can be used to create artwork, music, or NFT-based games.
Therefore, ERC-6511 can completely change the experience of playing Web3 games, simplifying everything and making it more immersive. For example, players can use their NFTs to buy items in the game or to customize their characters.
Challenges Faced by ERC-6551
However, there are still some challenges to applying the ERC-6551 standard to the NFT market.
Lack of Support
Currently, the ERC-6551 standard is not widely supported by NFT platforms and markets. This means that users interested in ERC-6551 NFTs may be limited in their choice of use.
High Costs
Creating and minting ERC-6551 NFTs may be more expensive than traditional ERC-721 NFTs. This is because ERC-6551 NFTs require creating a new smart contract account, which may require fees and resources to deploy.
Difficult Integration on Platforms
Some NFT platforms may not care or may not be able to integrate the ERC-6551 standard, due to technical difficulties or business reasons. Therefore, ERC-6551 NFTs may not be immediately available for all collectors and creators.
Security Issues
ERC-6551 NFTs are still new and have not been widely tested. This poses risks of errors and security vulnerabilities. As the ERC-6551 standard continues to develop in the future, it is hoped that these issues will be addressed.
Conclusion
Although there are still many challenges in terms of infrastructure and security, ERC-6551 is still considered an important step forward for NFTs, making them more useful for Web3 users than just a type of asset used for trading. Through the above article, Imota hopes you have somewhat understood ERC-6551 and the benefits it brings when applied to NFTs.
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