What Аre Тoken-Bound Аccounts? ERC-6551
Token Bound Accounts (TBAs), also known as ERC-6551, is one of the significant developments in Web3. It turns NFTs into crypto wallets, thus expanding their use cases.
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In this article, we explore why the ERC-6551 standard is important, how it works, and what use cases it has.
Why Are Token Bound Accounts Important?
Token Bound Accounts were created to deal with the technical limitations related to NFTs, like the difficulty of transferring multiple NFTs in one transaction. Among the main features of TBAs is that they can store NFTs along with other types of crypto assets such as Ether and stablecoins. As ERC-6551 is compatible with other standards, it makes the trading of NFTs simpler and more efficient. Compared to the widely used NFT standard, ERC-721, which requires users to initiate and pay for each transaction separately, ERC-6551 allows for bulk trading of NFTs.
Another advantage of the ERC-6551 is that it’s easy to trade cross-chain, unlike ERC-721, primarily designed for the Ethereum blockchain. Support and trading of TBAs are easy, to solve the trading issues with ERC-721, which often requires users to move their assets across different platforms to finally trade them.
How Token-Bound Accounts Work?
TBAs turn NFTs into on-chain agents capable of storing assets and executing transactions through smart contracts. Acting as smart contract wallets, they can store any type of token supported by the Ethereum blockchain, and connect to decentralized applications representing a user profile. When a user sells the account, they can choose to transfer all the NFTs stored in it at once.
Traditional Application Layer vs ERC-6551. Source: messari.com
The ERC-6551 standard provides the interface that allows ERC-721 and ERC-1155 tokens to have their smart contract accounts. As mentioned, the 721 is a widely used standard for creating NFTs, while ERC-1155 enables managing multiple types of tokens.
NFT holders can easily convert their ERC-721 NFT into a TBA without having technical knowledge. Doing so is possible on tokenbound.com, the website of the organization that proposed ERC-6551. Users simply need to connect their crypto wallet, choose an NFT, and create an account for it.
ERC-6551 proposal was created in February 2023 and is in the active development stage. As of April 2024, TBAs allow NFTs to have their own wallets, but the cross-chain implementation is yet to come.
What Are the ERC-6551 Use Cases?
Due to its programmable nature, the ERC-6551 provides new cases for NFTs in decentralized applications. Below are a few examples:
Gaming
TBAs in Web3 games can represent characters that collect various assets. The NFT acts as an inventory and an avatar at once. Its ability to buy, store, and monetize assets provides personalized gaming experiences where all achievements can be seen in the wallet.
Portfolio Management
Crypto investors can use token-bound tokens as a diversified portfolio for digital collectibles, and ERC-20 cryptocurrencies. Storing their holdings in a single NFT simplifies asset tracking and management. On the downside, this feature makes TBAs attractive targets for hackers, requiring wise risk management from users.
DAOs
DAOs can send rewards and proof-of-participation tokens directly to members' NFT accounts instead of crypto wallets. This allows having separate accounts specifically for DAO-related incentives to improve both control and security. Representing each member's contributions and participation, TBAs facilitate precise tracking and management of individual activities within the DAO.
DeFi
With the ability to hold various types of assets including NFTs, staking tokens, and stablecoins, Token Bound Accounts enable holders to use their assets for diverse purposes. For example, from a single account, they can stake NFTs to receive stablecoins, take part in protocol governance, and more.
Metaverse
Acting as a dynamic digital identity, TBAs add a new layer to the metaverse. NFTs in the virtual world can manage virtual assets such as tickets and lands allowing for more interactive experiences.
Decentralized Social Media
In Web3 social media platforms, ERC-6551 tokens can improve the identity verification process, serving not only as an avatar but also as proof of content ownership. They also expand the functionality of social media apps. Users owning TBA accounts can change their NFT avatars and make transactions without leaving the app which is especially convenient compared to situations where fungible tokens and NFTs are stored in separate wallets.
Conclusion
The concept of NFT-linked accounts is still early, but its growth perspectives are obvious. Giving new functionalities to NFTs, ERC-6551 transforms digital ownership and interactions between NFTs and dapps. It brings new use cases and optimizes user experience, thus having the potential to onboard more people to Web3. Despite the benefits of TBAs, it's important to consider the risk of keeping all your assets in one place; you could lose all your tokens in case of hacks. As exciting as it sounds, do research before switching to new wallets, products, and solutions.
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