The ERC-6551 token standard, explained.
What is ERC-6551?
ERC-6551 adds smart contract functionality to NFTs, enabling them to own assets, interact directly with applications, hold tokens, and create on-chain identities.
ERC-6551, a token standard introduced on the Ethereum mainnet on May 7, 2023, aims to enhance the functionality of NFTs by adding smart contract capabilities. Implementation of this token standard assigns an Ethereum identifier to an NFT, creating a Token-Associated Account (TBA). Thanks to ERC-6551, a non-fungible token (NFT) can hold assets and interact directly with applications.
With TBAs, developers can build a smart contract wallet for each ERC-721 token, which can facilitate transactions, interact with other decentralized applications (DApps), act as an on-chain identity, or hold a token. As TBAs are backwards compatible with the ERC-721 standard, ERC-721 tokens can issue the ERC-6551 standard without any major modifications.
How is ERC-6551 an upgrade over ERC-721?
NFTs integrated with ERC-6551 improve on ERC-721 NFTs in several parameters, such as metadata flexibility, traceable history, scalability and on-chain interoperability.
The purpose of the ERC-721 token standard was to implement a minimum standard interface for NFTs. However, NFTs created with ERC-721 cannot be linked to other assets on the chain, making it difficult to create digital assets that represent multiple real-world assets.
The standard was incompatible with DApps and smart contracts in the Ethereum ecosystem. The ERC-6551 standard is intended to enable NFTs to perform arbitrary transactions, hold other NFTs and assets, use accounts in multiple chains, and manage multiple independent accounts.
Metadata flexibility
Immutable JSON metadata makes ERC-721 tokens flexible in terms of uniform identifiers (URI), efficiency, and security. The standard addresses the flexibility problem in ERC-721 NFTs, where once the data is created, it cannot be changed by accommodating additional data and values.
A trackable story
Another area where the ERC-6551 token standard provides a major advantage over ERC-721 is that it provides more detailed information about the asset's service and transaction history, allowing for a better understanding of NFT value and past interactions.
More flexibility
ERC-6551 supports combining NFTs with related assets such as other NFTs and other tokens in a single TBA. Integrating NFTs, tokens and assets enables direct asset transfers and consistent switching between platforms, resulting in greater integration.
Interaction on the chain
Implementing ERC-6551 allows one to use an NFT address as their on-chain identity, allowing interaction with on-chain smart contracts. and DApps.
How do ERC-6551 NFTs work with existing ERC-721 tokens?
The integration between ERC-6551 NFTs and existing ERC-721 tokens works through a proxy contract, imitating the properties and metadata of existing ERC-721 NFTs.
The ERC-6551 standard uses an open registry system in sync with existing ERC-721 tokens. For TBAs, this registry acts as both a creative hub and a management tool. Individuals are required to initiate a transaction on the registry and pay a fee to create an ERC-721 token TBA. The registry now sets up a proxy contract simulating the metadata and attributes of the original ERC-721 token.
The proxy contract facilitates TBAs to verify signatures and sign messages on behalf of the NFT. Thanks to this feature, TBAs can participate in various smart contracts on the network.
What are the use cases of ERC-6551?
ERC-6551 tokens are used in many domains such as fashion, gaming, B2C commerce, and decentralized autonomous organizations (DAOs).
Let's understand how ERC-6551 improves the NFT technology stack and enables several use cases:
Fashion
The ERC-6551 was introduced by the developers of Future Primitive when they were looking for a way to allow on-chain avatars to hold their digital wearables. With ERC-6551, NFTs can hold more assets, which opens up trading features.
For example, an NFT profile with a wallet can trade it or get as many caps as they want. The process technology, where multiple artists collaborate to combine their NFTs into a new work of art, is more suited to digital fashion.
Moreover, the part NFTs in the composite piece are still identified by their creator. This new opportunity encourages more creative collaboration between artists, which gives rise to digital fashion.
Game
ERC-6551 adds another frontier to the game, allowing avatars to store assets and cryptocurrencies and securely store them in their wallets. It also allows game characters to exchange their accumulated assets and crypto for other assets, giving players another reason to play the game.
The token level also takes character customization to the next level. TBAs allow developers to create “Network Playable Characters” that help monetize in-game assets. It also creates open opportunities for NFT creators to earn rewards.
B2C business
ERC-6551 provides developers with deep insight into asset transaction history, equipping them with clear information about past users' interactions with NFTs. A business-to-consumer (B2C) organization can draw on this data to generate in-game rewards, loyalty programs, and airdrops. Retail firms can link NFTs to their products and use ratings based on the new functionality these NFTs generate.
The Daos
TBAs can be a tool to identify DAO members. All details can be saved to a single NFT, eliminating the need to split DAO member history between the NFT and the wallet. It allows people to enjoy full functionality as DAO members and sign contracts, access services and vote.
What are the limitations of ERC-6551?
The methods used by many NFT projects may not be compatible with the ERC-6551 token standard. These signals can also be a target for hackers.
Whenever a new technology is released, a critical challenge is gaining adoption from existing projects. Different NFT projects use different methods for their implementation, some of which may not be compatible with the ERC-6551 token standard. For example, projects such as CryptoPunks that do not follow the “ownerOf” method cannot synchronize with ERC-6551. The ownership mechanism in ERC-721 standard NFT contracts identifies the current owner of a particular NFT by returning their Ethereum address.
CryptoPunks, a predecessor of ERC-721, lacks this mechanism, complicating integration with newer standards such as ERC-6551. There will also be a learning curve for developers on how to effectively use the new token.
Some platforms may not want to integrate with the ERC-6551 standard for commercial reasons. Therefore, despite the introduction, not all collectors and creators may have ERC-6551 NFTs.
Since ERC-6551 tokens are in vogue, they are also likely to be targeted by hackers. When NFTs integrate with the ERC-6551 standard, assets are owned and linked to applications, so hackers are eager to exploit vulnerabilities.
