ERC-6551 NFT Standard: Exploring Token Bound Accounts

Since their creation back in 2014, non-fungible tokens (NFTs) have remained largely the same. The majority of NFTs still run on the ERC-721 standard. While this older method can be useful in certain situations, many innovators are looking for newer and more effective ways of managing NFTs. The ERC-6551 standard proposes a new way of handling NFTs through token bound accounts (TBAs). What is ERC-6551, and how does it work? Keep reading to learn about this exciting new project, and how it can change the way people use NFTs.

Key Takeaways:

• ERC-6551 is an Ethereum standard that creates token bound accounts. Its smart contract makes a unique wallet for each NFT.
• A token bound account links an individual NFT to a proprietary wallet that holds all sorts of digital assets, such as cryptocurrency and proof of attendance protocols.

What Is ERC-6551?

ERC-6551 is an Ethereum standard that creates token bound accounts. This new protocol is a smart contract that makes a unique wallet for each NFT. The wallet is linked to the NFT, and can store digital assets related to that NFT.

What Is a Token Bound Account?

A token bound account is essentially a type of NFT wallet. With the ERC-6551 standard, a new or existing NFT can get a smart contract account that’s linked to it. The account can hold all sorts of digital assets, such as cryptocurrency and proof of attendance protocols (POAPs). Token bound account contracts also include records of all transactions associated with the individual NFTs.

Whenever the NFT is sold or transferred, the token bound account moves with the NFT. The new owner of the NFT receives access to all blockchain-based digital assets inside the NFT wallet, and can review the transaction history for the NFT.

Why Was ERC-6551 Created?

The ERC-6551 standard was created as a response to modern NFT culture. Its creators noticed that NFTs were increasingly placed in scenarios where they needed to hold assets. For example, an NFT character in a game might need to hold tokens they earned in the game, or an NFT membership card might need to hold a record of which events the member has attended. However, the original ERC-721 standard only creates single tokens that can’t associate with other blockchain assets or act as standalone agents.

ERC-6551 was designed to allow NFTs to function as individual agents, with their own transaction records and assets. The creation of token bound accounts gives users a convenient way to transfer all items related to the NFT at one time. ERC-6551's creators hope that their protocol makes it more convenient to handle modern NFTs.

How Does ERC-6551 Work?

Token bound accounts might sound fairly straightforward, but behind the scenes, there’s a lot going on. In order to create a wallet account that’s bound to a non-fungible token, the ERC-6551 protocol needs to follow this process:

1. All projects that want to create a token bound account start by using the
2. The registry then uses the read-only "account" function to compute a unique account implementation address for the token bound account.
3. The new account attached to the implementation address deploys as a minimal proxy with immutable constant data, as designated by
4. Each new account implements a variety of other Ethereum standards, such as ERC-165 and ERC-1271, that allow it to detect interfaces and validate smart contracts.
5. The token bound account is then able to receive ETH, execute calls and limit or grant call execution to other accounts.

Use Cases of ERC-6551

The main reason people are so excited about these smart contract accounts is that they make it a lot easier to use NFTs. With a token bound account, NFTs become more than just a simple digital image you can transfer back and forth. ERC-6551 has a lot of useful applications for decentralized finance (DeFi) and blockchain projects.

NFT Composability

NFT composability essentially means bundling multiple on-chain assets into a single NFT. Users can purchase an NFT that includes unique tokens associated with the NFT project. Due to the way ERC-6551 is designed, composable NFTs are also very adjustable. Users can choose to keep all assets associated with the NFT or sell some of the assets and keep others. They can even add additional assets to it. Composable NFTs are highly popular for things like experimental art projects and NFTs designed as investments.

NFT Identities

One of the main reasons NFTs are so popular lately is that they can function as a sort of digital identity. However, a standard NFT can’t function as an independent agent on a blockchain. For instance, if a user wishes to send money to another entity, they need to enact a separate smart contract with the owner of the NFT. ERC-6551 simplifies things quite a bit. The NFT itself can make smart contracts with accounts, or hold ownership of digital assets. This allows the NFT to function like an actual person, so people can use or transfer NFT identities without getting their actual identity involved in the transaction.

Gaming

When it comes to gaming, the uses for an ERC-6551 smart contract wallet are almost endless. Many games focus on minting NFTs with special attributes, such as sneakers that can help you run faster, or pets that can battle other animals. Trading these sorts of NFTs gets a lot easier with an ERC-6551 token bound account. 

Having a wallet attached to the NFT lets gamers bundle multiple game-related assets for sale, so you can purchase both the fantasy animal and the crypto tokens that let you "feed" the animal. Since a token bound account can hold POAPs, it can also let you show that an NFT has taken part in special game activities or participated in other events that may provide the NFT with extra features or game-related assets.

Provenance

In addition to letting you hold on-chain assets, smart contract wallets are also valuable because they hold a record of past transactions. New owners can see when an object originated, who owned it before and how many times it's been sold. This is useful for NFTs sold as collectibles. Owners can use the smart contract account to verify the provenance of a piece. They can make sure the item is exactly what it claims to be, so they can prove its history and its worth.

Dependency

ERC-6551 also increases NFT dependency. This means that the NFT can independently interact with other items on the chain. It can directly own things like tokens, which can then be used to adjust the NFT itself. For example, a creator could make an NFT that changes color as more tokens are added to its wallet. Since NFT dependency increases the NFT’s interactivity, a buyer could feel like they're more involved in the artwork.

ERC-6551 vs. ERC-721

ERC-6551 and ERC-721 are both Ethereum standards. This means that they’re a set of rules built on a scripting language governing how users can interact with the Ethereum blockchain. Both protocols create a standard for how NFTs based on Ethereum work.

The main difference between these protocols is simply in the way they run and what they accomplish. ERC-721 is a protocol for creating an NFT. It defines an NFT as a unique token with attached media, such as a visual or set of text. Meanwhile, ERC-6551 builds on the base of ERC-721. It takes the classic ERC-721 token and adds an account that can hold other assets.

All NFT tokens remain standard ERC-721 tokens. However, users can choose to upgrade the base token to an ERC-6551 account that provides the NFT with its own wallet, which can interact with other blockchain assets.

Challenges of ERC-6551

ERC-6551 certainly provides new opportunities for people working with NFTs. However, it's not without its downsides. There are a few potential concerns to be aware of.

Lack of Compatibility With Existing Tech

Technically, ERC-6551 is backward compatible and can be used with any existing ERC-721 token. However, this doesn't necessarily mean that any previous NFT project can immediately adopt the new standard. Many NFT projects use a combination of blockchain technology and other types of technology. This additional tech might not be designed to work with ERC-6551. For example, some of the popular NFT markets aren’t coded in a way that will let people easily sell ERC-6551.

Vulnerability to Scams and Fraud

ERC-6551 can make NFTs both more valuable and complex, which makes them a target for scammers. Malicious actors can use people's lack of awareness about ERC-6551 to take advantage of others. Since NFTs can now hold a lot of crypto and other valuable on-chain assets, those who get taken in by scams can lose a lot more than just a single NFT.

Potential for Assets to Be Locked in Ownership Cycles

ERC-6551 comes with some potential problems related to recursivity. What happens if an owner transfers an ERC-721 NFT into its own token bound account? Currently, both the NFT and all assets in the account end up locked in an ownership cycle. This makes them completely inaccessible because only the owner of the account can transfer the account— but now the owner of the account is an NFT. Currently, the only way to avoid this is to be very careful with how one sets up or uses a token bound account.

The Future of ERC-6551

ERC-6551 is likely to make big waves in the NFT community. It creates a simple, on-chain way to perform many of the tasks into which DApp developers previously had to put a lot of effort. This protocol has the potential to make gaming, metaverse and collectible markets a lot easier to design and run. In the future, this might lead to a lot more NFT projects taking off.

However, keep in mind that changes aren't likely to occur overnight. Adopting any new ETH standard takes a while, and there are a lot of little details that go into implementing ERC-6551. Plenty of people and projects will start using ERC-6551 eventually, but the full effects of the new protocol might not be evident at first.

The Bottom Line

ERC-6551 solves many problems people had with the original ERC-721 NFTs. Adding a wallet to an NFT allows it to hold the assets needed to make the NFT a digital identity, game component or collectible. Though it might take some time for this new Ethereum protocol to be adopted, it's likely to become an essential part of the NFT landscape.

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