ERC-6551: Powering the Re-rising of the NFT

Key Takeaways:

• In 2023, the transaction volume of NFTs dropped significantly. Lack of innovation and playability were reasons behind the liquidity decline.

• The slump in the NFT market is largely influenced by the broader performance of the cryptocurrency market.

• ERC-6551, Blur’s Blend lending platform and Opensea’s Deals may be pivotal for the revival of the NFT market.

• In the long term, NFTs may trend towards convergence with other technologies such as quantum computing, virtual reality and augmented reality technologies, biotechnology, and super AI.

  
  

Over the past few years, NFTs, like a shining rising star, have rapidly risen and become a topic of global discussion. This unique digital asset, with its irreplaceable characteristics and empowerment from blockchain technology, is redefining the ways we perceive creativity, ownership, and the exchange of digital value.

As the concept of NFTs became more widely understood, based on their features, NFTs have found use cases in more and more areas, including serving as a certificate of ownership for digital assets such as music, videos, and images and non-digital assets such as physical arts, automobiles, and event tickets. Along with this trend, numerous institutions recognized the distinctiveness of NFTs and chose to strategize early.

In the first half of 2022, we witnessed the boom of NFTs and the hype around digital assets. Subsequently, there came the birth of NFTfi, which helps NFT holders make their NFTs more liquid. The financial innovations brought about by NFTfi, including NFT fragmentation, NFT rentals, and NFT lending, significantly increased liquidity and facilitated the growth of the whole ecosystem. It also demonstrated the potential NFTs hold to become even more distinctive when coupled with other innovations.

In this article, we will analyze the current state of the NFT market, explore the latest developments within the ecosystem, and discuss potential challenges and future prospects.

NFT Market Overview

Starting from the summer of 2021, the NFT market experienced rapid growth and increased adoption. During this period, transaction volumes and prices of NFTs reached historic highs, driving the total NFT transaction volume for 2021 to reach approximately $20 billion, a tenfold increase from 2020.

However, incidents in 2022, from the Luna crash in the mid-year to the FTX collapse at year's end, put an end to this period. Although the launch of new projects and exploration of innovative use cases brought continued attention to the sector, the NFT sector had been dragged into a bear market by the overall crypto market which had suffered significant setbacks. The total market cap for NFTs declined from its 2021 peak of 21B to its current 4.19B as of October 8th, 2023, with transaction volumes also sharply decreasing.

The transaction data of different types of NFTs shows PFP (profile picture) NFTs to be the most popular type. Indeed, most of the notable blue-chip NFTs belong to this category. Following PFP NFTs, utility NFTs, collectibles, and artwork are the top categories in terms of transaction volume.

In terms of public chains, Ethereum remains the dominant chain in the NFT market, followed by Polygon. And this dominance is still increasing, according to data so far this year which shows monthly increases in Ethereum’s market shares. This trend means that Ethereum’s established reputation, security, and widely accepted technological capabilities are vital to the working of NFTs.

Noteworthy Innovations

In 2023, the trading volume of NFTs dropped significantly compared to that in 2021. NFTs also suffered from low liquidity as a result of the lack of innovation and playability. Fortunately, with the rising recognition of ERC-6551, the release of Blur’s new lending platform Blend, and the rollout of Opensea’s Deals feature, something new seems to be brewing. Will these minor iterations in the bear market become catalysts for market recovery?

Deals

Deals is a new feature launched on OpenSea that allows users to swap a combination of their NFTs for someone else’s securely and hassle-free. Deals is powered by Seaport, a decentralized smart contract protocol designed to create and execute orders for ERC 721 and ERC 1155 items. Each order contains an arbitrary number of items that the offerer is willing to give, along with an arbitrary number of items that must be received along with their respective receivers.

Value Propositions

• Simplified Transactions OpenSea Deals aims to boost user engagement by simplifying the trading processes. By enabling users to acquire new NFTs using existing ones, it tackles the liquidity issue while enhancing the overall trading experience.
• Reduced Risks Leveraging Seaport, collectors can swap NFTs on OpenSea without facing risks that might occur outside the platform.

Blend

Blend, introduced by Blur, is a peer-to-peer perpetual lending protocol that supports arbitrary collateral, including NFTs. “Blend is a flexible, permission-free variable-rate lending protocol that can support arbitrary collateral without dependence on oracles and allow any interest rate and loan-to-value ratio that the market can support,” states Blend’s white paper.

Value Proposition

• Flexibility Blend offers loans with no expiries, allowing borrowers to repay at their convenience. The refinancing auction mechanism further enhances this flexibility.
• Simplicity By avoiding oracles, Blend streamlines the lending process. Lenders bear the risk by setting their acceptable loan-to-value ratios and interest rates, and then whether the terms will be accepted will be determined by the market.
• Capital Efficiency The “Buy Now, Pay Later” (PNPL) option lowers the entry barrier for smaller traders, enabling them to deal with big-ticket items like BAYC and Wrapped CryptoPunks.
• Risk Management Refinancing auctions mitigate default risks and enhance efficiency. However, it requires both borrowers and lenders to monitor the floor prices of NFTs, especially during volatile market conditions.

ERC-6551

ERC-6551, or “Token Bound Accounts,” is a new Ethereum standard introduced by the @futureprimitive team. It enables each NFT to have its own dedicated wallet. ERC-6551 assigns each NFT a smart contact account (such accounts don’t have private keys but are governed by code), allowing any ERC-721 token (NFT) to own assets such as ERC-20, ERC-721, and ERC-1155 tokens and interact with various applications without any change to existing ERC-721 smart contracts or infrastructure. ERC-6551 is a novel and impressive addition to the NFT stack, quickly catching the crypto community’s attention since its conception. There have already emerged some applications using this standard.

Value Proposition

• Added Interactivity and Functionalities ERC-6551 isn’t just another NFT standard; it enriches NFTs with added interactivity and functionalities. With ERC-6551, NFTs can interact with smart contracts, possess tokens, and even represent real-world entities. For example, gamers can use an ERC-6551 NFT as an active on-chain identity to collect all his/her in-game assets.

• Enhanced Security One of the major benefits of token-bound accounts is their security. As REC-6551 NFTs can record the history of ownership of all the assets it possesses on the blockchain, your assets become more resistant to hacking and theft.

• Overcoming ERC-721 Limitations While ERC-721 paved the way for the widespread acceptance of NFTs, it had inherent limitations such as passiveness. ERC-6551 addresses these, making NFTs both proof of digital asset ownership and potent smart contract tools.

• New Room for Innovation ERC-6551 resolved the limitations of ERC-721 and blurred the line between NFT, wallets, and smart contacts, providing developers with more room to innovate. It will unlock vast potential and opportunities for the entire blockchain ecosystem.

  
  

Projects related to ERC 6551 we are watching:

1. AquaNet (ETHGlobal Waterloo 2023 Hackathon Finalist)

Features and Differentiators:

• Social Network for active NFTs: AquaNet is a social network designed for AI-driven NFTs to interact with each other and develop unique personalities. They will autonomously post messages to their account, list their interests, and share information about themselves.
• NFTs’ Activity Records: It utilizes Non-fungible Tokenbound Accounts (ERC 6551) to enable NFTs to create and keep a record of their activity in an NFT-Based, AI-Driven Social Media Network, providing NFT holders with more information to assess an NFT’s value.
• AI Personality: Powered by OpenAI’s GPT-3.5, AquaNet enables each NFT to generate a unique AI personality based on the NFT’s metadata, such as usernames, bios, etc, making these NFTs more attractive and valuable.

Future Prospects:

• Leading An NFT Social Revolution: Combining the strengths of AI technology and the ERC-6551 standard, AquaNet could lead the social revolution of NFTs, becoming a pioneer in the NFT social domain and offering unprecedented value and opportunities.
• Tapping Further into ERC-6551: AquaNet could utilize the features of ERC-6551, enhancing interactivity and functions for NFTs, which might attract more users and developers.
• Pioneering New NFT Applications: AquaNet could pioneer new use cases for NFTs, such as NFT-based social media, interactive games, etc.

2. Fukuro (ETHGlobal Waterloo 2023 Hackathon Finalist)

Features and Differentiators:

• ERC-6551-powered Innovative Auctions: This project leverages EIP 6551 to create an auction marketplace. Users are able to list and bid on Fukuro bundles. The name “Fukuro” is inspired by the Japanese Fukubukuro, also known as “lucky bags”. They are mysterious sealed bags that are sold for a set price.
• Support for Diversified Assets: Each Fukuro can contain anything that an Ethereum address can contain, including other NFTs, ERC20 tokens, and much more.
• Complete Marketplace Experience: From listing to bidding to trading, users can enjoy a complete marketplace experience on one platform.

Future Prospects:

• Application in More Scenarios: With the growth of the NFT market and increasing user acceptance of new trading methods, the concept of Fukuro bundles may attract the attention of more artists, investors, and collectors. Fukuro bundles not only represent a novel trading method but also allow users to trade multiple assets within a single pack, allowing them to be used in complex trading strategies and combinations.
• Leading in NFT Auctions: Given the uniqueness of the Fukuro bundles and their application in the auction marketplace, this project has the potential to emerge as a leader in the NFT auction domain, providing unparalleled trading experiences and drawing in more users and developers.
• Integration with Other Platforms and Services: The concept of Fukuro bundles can be integrated with other platforms and services, enhancing user experience. For instance, integration with DeFi platforms allows users to use Fukuro bundles as collateral for loans or with gaming platforms that enable in-game asset trading.

3. Piggybank (ETHGlobal Waterloo 2023 Hackathon Finalist)

Features and Differentiators:

• NFT Savings Account: Piggybank 6551 is an NFT savings account. Users can mint Piggybank NFT, then load them with ETH via a payable function, or by sending ETH directly to the NFT’s 6551 account address.
• Real-time Metadata Updates: As ETH accumulates within each Piggybank, the NFT’s metadata (color, text tags, attributes) updates instantly, thanks to 100% on-chain metadata rendering.
• Safe ETH Withdrawal Method: Once the ETH is locked in the NFT, the only way to extract it is to burn the NFT, either by calling the burn function or manually sending the NFT to its own 6551 account. Mint NFT (Piggybank) ➡ Send ETH to NFT (Piggybank) ➡ As ETH quantity changes, the NFT color alters ➡ To withdraw, the NFT must be burned.

Future Prospects:

• Increased User Adoption: The concept of gamified savings using NFTs may resonate with a younger generation of savers, leading to an increase in user adoption.
• Pioneering NFT Financial Services: Piggybank 6551 could pave the way for various other NFT-based financial services, including loans, investments, and insurance, among others.
• Integration with Traditional Financial Systems: The concept of an NFT savings account might catch the attention of traditional financial institutions, leading to collaborations or partnerships that integrate blockchain-based savings with conventional banking systems.

4. Tokenbound Titans

Features and Differentiators:

• Dynamic Generative NFTs: Players own unique NFTs, with each NFT having distinct capabilities and characteristics.
• NPC Battles: The gameplay revolves around battles between NFT-based NPCs where players can strategically bet their tokens against each other in a digital arena.
• Level-up System: Victory in battles rewards players with the ability for their NPCs to level up and unlock new abilities and combos for their NFTs to play. As NFTs level up, they become stronger and more versatile. This progression system adds depth and longevity to the gameplay, motivating players to strategize, adapt, and continuously improve their NFTs to dominate the gaming landscape.

Future Prospects:

• Richer Game Content: With continuous technological advancements, it’s expected to see more NPCs, battle scenes, and strategies introduced, offering players a more diversified experience.
• Cross-game Applications: The combination of ERC-6551 and dynamic NFTs won’t be limited to this game alone. In the future, we might see its application in other games or platforms, further amplifying its potential value.
• Increased Strategic Depth: By further leveraging ERC-6551 to enable NPCs to own other assets, the game could introduce more complex strategic decisions for players, increasing its overall appeal.
• Pioneering the NFT Gaming Wave: The uniqueness of this project positions it to potentially set a new benchmark in the NFT gaming domain, driving innovation and growth across the industry.

5. Parallel Colony

Features and Differentiators:

• AI-driven Fully On-chain Simulation Strategy Game: Parallel Colony is a game that operates entirely on-chain, where players maneuver virtual avatars to explore within mining colonies. All simulation activities run on-chain, providing players with a transparent and verifiable gaming environment.
• ERC-6551 Wallet Functionality: Each virtual avatar functions as an ERC-6551 wallet, which means they can own and transact digital assets like ERC-20 and ERC-1155, strengthening the player’s asset ownership.
• AI Decision-making: Beyond player commands, AI avatars can act based on their own decisions or the requests of other AIs.
• Strong Financial Backing: Parallel secured financing of $50 million in October 2021 at a valuation of $500 million, with investors including Paradigm and YouTube co-founder Chad Hurley.

Future Prospects:

• Expanding the Use Case of ERC-6551: Utilizing ERC-6551, the actions that avatars can perform can be greatly expanded to include activities such as executing more complex trades, signing contracts, or interacting with other on-chain projects.
• Pioneering the On-chain Gaming Wave: With the integration of AI and ERC-6551, Parallel Colony has the potential to become a leader in the on-chain gaming domain, introducing new opportunities and challenges for the industry.

6. Spacebar

Features and Differentiators:

• Spacebar is a space-themed casual game incorporating Web 3 tools, including decentralized identity systems, decentralized finance (DeFi), non-fungible tokens (NFTs), and gaming guilds. Players will be able to earn money selling assets in the game. It will have major updates and users will be involved in those updates. And it’s more like a mobile game than a triple-A title.
• Autonomy: Spacebar truly believes that a game that is fun and built with the community can bring the mass adoption of Web 3 and crypto. The game aims to be fun for users not only for gameplay but also for the fact that users actually participate in the making of the game and its governance.
• AO Labs has raised $4.5M for its Spacebar community-driven Web3 gaming platform.

Future Prospects:

• Game Launch: Spacebar will release its first game in the coming months, which is expected to attract many gamers and crypto enthusiasts.
• Dynamic and Personalized NFTs: Leveraging ERC-6551, Spacebar might introduce dynamic and personalized NFTs to offer players a more unique gaming experience.
• Enhanced Interactivity: As NFT and Web3 technologies advance, Spacebar may introduce more interactive elements and game mechanics, immersing players even deeper.
• Pioneering the NFT Gaming Wave: Spacebar has the potential to be a front-runner in the NFT gaming domain, setting new game trends and innovations and paving the way for new opportunities in the industry.

7. Sparkle

Features and Differentiators:

• Sparkle is a gamified astrology social app featuring various Web3 and AIGC capabilities. It has been selected for the 6th season cohort of the Binance Labs’ MVB accelerator program.
• They launched their Genesis NFT using the 6551 protocol on August 7th. The first batch was limited to 500 pieces and had a total transaction volume of 50 ETH. The current floor price is about 0.27 ETH.

8. Onchain Albums

Features and Differentiators:

• Decentralized Music Experience: Onchain Albums offers a decentralized musical journey, allowing artists to interact directly with their fans without traditional music distribution channels.
• Cross-platform Support: Artists can release their music across various platforms like Sound, Zora, Lens, etc., and integrate those tracks into their Onchain Albums account.
• Enhanced Copyright Management: Using ERC6551, artists can ensure proper protection and management of their pieces while giving fans a secure platform to purchase and enjoy the music.
• Flexibility: Artists can continually update and modify their music, offering fans the freshest and finest musical experience.

Future Prospects:

• More Artist Participation: As Onchain Albums gains popularity, more artists might opt for this platform to release and manage their musical pieces.
• Expansion to Other Content Types: Onchain Albums might look into expanding to other content types like films, TV shows, or podcasts.
• Community-driven Features: Leveraging the functionalities of ERC6551 and its decentralized nature, Onchain Albums might introduce more community-driven features like fan voting, crowdfunding, or direct artist-fan interactions.
• Innovating the Music Industry: Onchain Albums has the potential to innovate the music industry, providing artists and fans with new opportunities and experiences.

9. Lens V2

Features and Differentiators:

• Decentralized Socializing: Lens V2 provides a decentralized social platform, allowing users to interact and share content without the limitations of centralized platforms for a richer and more personalized social experience.
• Profile NFTs: Using the ERC-6551 standard, Lens V2 allows users to accrue value to their profile NFTs instead of traditional wallet addresses, enhancing their social experience and interactions while providing NFTs with new monetization opportunities.
• Multi-community Support: Users can access and interact with multiple communities, creating unique actions and experiences for their handles and NFTs.
• Decentralization Advantage: Lens V2 harnesses the benefits of decentralization, offering users a more secure, transparent, and reliable social platform.

Future Prospects:

• More Interactivity: As technology advances and user needs grow, Lens might introduce more interactive features like video chats, live streaming, etc.
• Expanding the use case of ERC-6551: Lens might further expand the application of ERC-6551 in the social domain, offering users a richer and more personalized social experience.
• Emerging as a Leader in NFT Social Networks: With its unique features and decentralization advantages, Lens has the potential to become a leader in the NFT social network domain, providing the industry with new opportunities and challenges.
• Integration with Other Platforms: Lens might consider integrating with other popular social platforms and NFT markets, offering users a holistic social and NFT experience.

Challenges Faced

Challenges from the Overall Market Environment

The NFT market is closely correlated to the cryptocurrency market, particularly Ethereum. When the cryptocurrency market underperforms, the NFT market often takes a hit. This high degree of correlation implies that the stability and health of the NFT market are largely dependent on the broader performance of the cryptocurrency market.

Current data points highlight the slump in the NFT market. The market seems to have regressed to the lows seen during last year’s summer, with significant drops in transaction volume. Although the emergence of Blur momentarily boosted market demand, investors became increasingly cautious with their capital allocation during bearish conditions, leaving very little investment in NFT as an asset class. This also hampers the development of new NFT technologies. Due to the market downturn, the allure and utility of NFTs are under challenge. To rejuvenate the market, it’s imperative to introduce new technologies and innovations; otherwise, NFTs may fall into a cycle of sheer speculation and hype, losing their genuine value and potential.

Innovation Bottlenecks

• Potential and Limitations of ERC-6551 While ERC-6551 offers increased interoperability and playability for NFTs, there’s a scarcity of innovative products in the market truly leveraging this standard. This might be because developers and projects are still navigating ways to maximize the potential of this new standard.
• Risks of Fraudulent Activities In a decentralized environment, fraud remains a constant concern. For the NFT market, this means potential encounters with malicious actors selling counterfeit or fake NFTs. Although ERC-6551 enhances NFT functionalities, it doesn’t directly address this issue. To ensure market safety and buyer interests, it might be necessary to address fraud at the market level or via external smart contracts.
• Ownership Loop Dilemma A potential risk of ERC-6551 is that an NFT could inadvertently be transferred to its own token-bound account, resulting in locked assets. This “ownership loop” issue might lead to permanent asset loss. Technical and strategic measures may be required to prevent such occurrences.

Future Outlook: The Evolution of NFTs

For the long-term growth of the NFT ecosystem, the overall recovery of the crypto market remains pivotal. If the cryptocurrency market can experience stable and consistent growth, it will likely draw more investors into the NFT realm. Meanwhile, continuous innovation and evolution of NFT projects are required to offer more appealing use cases and functionalities to invigorate the market.

The emergence of ERC-6551 marks a milestone in the NFT arena, transforming NFTs into their own smart contract accounts and heralding a world brimming with new possibilities. This endows NFTs with multifunctionality, making them more pragmatic and relevant for users. We should keenly monitor the adoption and experimentation with ERC-6551 in the coming months.

In the short term, we can anticipate several practical applications of ERC-6551:

• Extension Stores: Developers could build extensions that can be installed on NFTs. Imagine, instead of waiting for project creators to code new contracts to add features to an NFT like Azuki, in the future, with ERC 6551-based extension stores and a plethora of developer-introduced functionalities, you could integrate new features directly into your NFT, bypassing the original creator.

• Social Applications: Decentralized social platforms, like Lens, are already leveraging ERC-6551. A harmonious blend of ERC-6551 and decentralized social networking promises a more streamlined future for decentralized social interaction, enhancing utility and lowering entry barriers.

• Blind Box Applications: ERC-6551-based blind box applications could usher in novel innovations for the NFT market. By redefining user experiences, enhancing the collection value of NFTs, and creating more business possibilities, this model could emerge as a noteworthy trend in the NFT space.

• Gaming Applications: Leveraging the features of ERC-6551, blockchain games can achieve many essential gaming functionalities such as single-character-based user upgrades, NFT item upgrades, and character customization (NFT fashion), offering a much superior user experience. ERC-6551 could breathe fresh life into the gaming sector and spur developers’ creativity.

• Integration with DAOs: With ERC-6551, DAO communities can incorporate richer functionalities. Points and SBTs could be embedded into member NFTs to confer certain rights and incentives to members. More diverse empowerment schemes can not only boost member participation but also lay a solid foundation for the sustainable growth of DAOs.

  
  

In the long run, the expected trends in NFT evolution include:

• Quantum Copyright Era: In the digital age of the 21st century, as quantum computing develops, one may wonder what sparks will fly when quantum computing meets NFT. Imagine a potential “quantum NFT” whose state could be “superimposed,” meaning an NFT could simultaneously exist in multiple ownership states until observed or traded. This unprecedented “quantum copyright” could radically disrupt traditional ownership and trading modalities, offering artists and creators vast creative leeways.

• Multi-dimensional Universe & NFT Interactions: With advancements in VR and AR, we might see a multi-dimensional digital universe wherein NFTs serve as bridges between dimensions. For instance, an NFT could simultaneously exist as a 2D digital painting, a 3D virtual sculpture, and 4D temporal art, presenting diverse aesthetic experiences in different dimensions and adding depth to NFTs.

• DNA-level Digital Verification: Forgery and fraud are massive challenges in the current market. But envision a scenario where NFTs are blended with biotechnology, using DNA sequences as unique identifiers for every NFT. Such authenticity and uniqueness would be virtually unforgeable. Future NFTs might be intimately linked with each creator’s DNA sequence, ensuring genuineness and uniqueness.

• Super AI Art Creation: As super AI becomes a reality, AI characters might become the artists and creators of the future. These AI characters could use NFTs to sell and trade their artwork. AI-created artworks, backed by deep learning and vast data, might exhibit unprecedented complexities, opening new horizons for the NFT market.

• Fully Automated NFT Lifecycles: The current NFT market primarily focuses on individual asset transactions. In the future, we might see a circular economy-based model where NFTs can be recycled, reshaped, and reused, leading to the creation of brand-new art pieces. This approach would not only be environmentally friendly but would also offer continual value for artists and investors.

  
  

In conclusion, the future NFT market will likely exceed our present imaginations, with the potential and possibilities only limited by our creativity and technological advancements. However, regardless of how NFTs evolve, it’s essential to ensure the market remains rooted in genuine value creation and real-world utility.