Locksmith Wallet
October 6, 2023
Explainer
June 4, 2023
Unveiling ERC-6551: A New Token Standard in Crypto
ERC-6551 is a new token standard that is set to redefine the meaning of Non-Fungible Tokens (NFTs). This innovative Ethereum standard, also known as Token-Bound Accounts (TBAs), introduces a novel concept where NFTs are given their own wallets. And not regular wallets, but smart contract wallets controlled by the NFTs themselves. ERC-6551 is poised to transform how we perceive and utilize NFTs today, representing a significant upgrade from the traditional “functionality” of our favorite expensive jpegs.
In this blog, we will explain the concept of token standards more broadly, outline how ERC-6551 works, and highlight some practical applications of TBAs. Lastly, we will make a brief comparison of TBAs to the Locksmith Wallet and ponder the future of crypto custody.
The Role of Token Standards in Crypto and the Emergence of ERC-6551
Token standards play an essential role in the crypto ecosystem, ensuring interoperability and consistency across various platforms and applications. Also called ERCs, token standards set the rules for token creation and interaction, making it possible for diverse tokens to coexist and function within the same ecosystem. By adhering to a common set of rules, different tokens can interact with each other and with other components of the blockchain, like wallets and smart contracts, in predictable ways.
It’s important to note that token standards are not written into the blockchain itself, which means we do not need an Ethereum “upgrade” (hard fork) to implement a new standard. But similar to the Hypertext Transfer Protocol Secure (HTTPS) that we recognize in every website URL, there is a powerful network effect once enough people adopt a given standard. ERC actually stands for “Ethereum Request for Comment,” referencing the fact that these standards are just proposals for others to debate and adopt if they see fit.
In crypto, we normally think of token standards as literal tokens; for example, ERC-20s (fungible tokens) or ERC-721s (NFTs). However, ERC-6551 is not a token itself but a proposed standard for managing tokens. Or, in other words, it’s a proposed standard for a wallet. What sets ERC-6551 wallets apart is that they are wallets for your ERC-721 NFTs, which the standard developers also call Token Bound Accounts (TBAs).
Let’s go one level deeper. At the core, ERC-6551 is a smart contract called the Registry that deploys a virtual address and then maps that virtual address to your NFT. Any tokens deposited into the virtual address are then de facto owned and controlled by the associated NFT. If you transfer your NFT, you also transfer all of the tokens owned by that NFT. It’s really that simple.
Practical applications of ERC-6551
But why on Earth would I want to let my Bored Ape hold ETH? Actually, you don't – that's not the point! Let’s explore what it might mean to give an NFT a wallet:
- Inventory System for Owning Items: With ERC-6551, each NFT can have its own Ethereum wallet, which can hold and manage other tokens. This could be used to create an inventory system for virtual items. For example, in a virtual game, an NFT representing a character could own other NFTs representing the character's equipment or inventory, such as weapons, armor, or potions.
- Community Loyalty or Reputation Systems: ERC-6551 could be used to create community loyalty or reputation systems. An NFT could represent a user's membership in a community, and the NFT's wallet could hold tokens representing the user's contributions or reputation within the community. These tokens could be earned by participating in community activities and then used to access benefits or privileges within the community.
- Mint or Curate Baskets of Assets: ERC-6551 could enable the creation of NFTs that represent ownership of a basket of assets. For example, an NFT could represent a curated collection of art, where each piece of art is also an NFT. The NFT representing the collection could own the NFTs representing the individual pieces of art, allowing the entire collection to be bought, sold, or traded as a single unit.
- Composable Media Structures: ERC-6551 could enable the creation of composable media structures. For example, an NFT could represent a song, and it could own other NFTs representing individual tracks or samples used in the song. This could allow artists to create complex compositions from simpler elements, each represented by its own NFT.
- New On-Chain Game Mechanics: With ERC-6551, game developers could create new on-chain game mechanics. For example, an NFT representing a character in a game could own other NFTs representing the character's attributes, skills, or equipment. These could be used to determine the outcome of on-chain interactions or battles.
- On-Chain Meme/Derivative Economies: ERC-6551 could enable the creation of on-chain meme or derivative economies. For example, an NFT could represent a meme, and it could own other NFTs representing variations or derivatives of the meme. This could allow users to create, trade, and profit from meme derivatives, all on-chain.
- NFTs as Onboarding Vehicles Instead of Wallets: With ERC-6551, NFTs could be used as onboarding vehicles for new users. A new user with a basic wallet could be given a pre-funded NFT token-bound account, already customized with useful features. This could lower the barriers to entry and make it easier for new users to start using Ethereum applications.
This last point highlights the fact that TBAs are smart contract wallets (i.e., the assets are held by a smart contract), and one of the key features of smart contract wallets is that they can be programmed with custom logic. For example, they could automatically participate in decentralized finance (DeFi) to earn interest on their tokens. Or they could protect against unauthorized access by requiring multiple signatures for certain transactions. This post is too short to delve into smart contract wallets fully, but suffices to say that ERC-6551 represents a novel way to deploy smart contract wallets, with a unique design space enabled by joining the wallet to an NFT.
A Comparative Study: ERC-6551 and the Locksmith Wallet
The Locksmith Wallet and the ERC-6551 systems are both innovative solutions that enhance the functionality and security of crypto assets using NFTs. However, they have distinct features and approaches that set them apart.
While ERC-6551 starts with the NFT and issues it a smart contract wallet, Locksmith starts by issuing the smart contract wallet and then mints NFTs that control it. This subtle design choice with Locksmith allows the user to mint a collection of NFTs, each of which can be assigned different permissions over the smart contract wallet.
For example, if I transfer my NFT to a friend under the ERC-6551 standard, all the associated assets go with it. By contrast, with Locksmith, I can mint an NFT for a friend that gives him access to a particular asset. In other words, each NFT I mint in Locksmith carries a set of permissions over my assets, instead of carrying the assets themselves.
But at the end of the day, ERC-6551 and Locksmith Wallet aim to solve different problems. The goal of ERC-6551 is to create a new standard that increases the utility of NFTs and enables new use cases. On the other hand, the Locksmith Wallet is a specific product that uses ERC-1155 tokens to create a more secure and flexible self-custody solution. If you want to learn more about Locksmith Wallet, check out our whitepaper.
Final thoughts: The world with ERC-6551
Recently, ERC-6551 has rapidly gained attention within the crypto community on Twitter and will soon undoubtedly make its way onto our favorite crypto podcasts. But not without good reason: ERC-6551 has the potential to revolutionize the role of NFTs in crypto. We are finally ready to elevate NFTs from simply representing adorable penguins and monkeys (albeit ones worth millions of dollars) to becoming a fundamental component of applications within the Web3 ecosystem.
If widely adopted, it’s possible that ERC 6551 may even transform the very nature of crypto wallets. Rather than using Metamask and Phantom as our primary interfaces for managing and interacting with crypto assets, a new wave of wallets could become the tools for managing and interacting with our collection of "smart" NFTs. As we continue to explore and understand the potential of token-based accounts, one thing is clear: the future of NFTs is more exciting (and useful) than ever.
Sources:
https://eips.ethereum.org/EIPS/eip-6551
https://ethereum-magicians.org/t/erc-6551-non-fungible-token-bound-accounts/13030
https://blockworks.co/news/erc-6551-nft-wallet