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 Building Next Generation NFTs: ERC6551 x ERC721c
[Token Bound Accounts, Programmable Royalties, Value Creation, Value Capture]
I went down another rabbit hole, this time diving into ERC721c. ERC721c allows creators to control and program how they want their NFT royalties to work. Let’s explore why this is an important building block and how combining this with ERC6551 might be a huge unlock as we continue to evolve into a digital first society.
(P.S. For the summary and further breakdown of this essay, follow me on Twitter)
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_Building Blocks All The Way Down
To those on the outside, when they see an emerging industry “all grown up,” it’s easy to assume that one thing contributed to it.
Of course that’s not the case. Emerging tech industries run on building blocks. Building blocks enable composability.
The idea is simple, one builder builds something, the next builder builds on top of it (i.e. they don’t have to reinvent the wheel).
This is especially true of open source software. Individual building blocks are useful, combining building blocks on top of each other is powerful.
Each building block adds to compounding. Building block by Building block, entire industries grow and mature.
Previously, I’ve written about the ERC6551 building block. Another important building block is ERC721c which relates to royalties.
NFT Royalties 101
The goal of ERC721c is to give creators who use NFTs more control and customization over how royalties work in their collections.
To understand why ERC721c is important, we have to understand how royalties work in NFTs.
Royalties are commissions or the cut that creators / artists receive when their NFTs get resold on the secondary market. Royalties exist as an ongoing form of compensation since primary sales might not represent the true value of the underlying item. I.e. the secondary market might do a better job in price discovery.
Artists capture upside through royalties as the underlying item increases in value. This system incentivizes creativity and innovation — with NFTs supercharging this paradigm for creators.
The Problem with NFT Royalties
While this paradigm makes a lot of sense, the problem with NFT royalties is that they aren’t enforced at the blockchain / smart contract level. (For some background, see‘s essay on royalties).
This means that while an NFT creator / artists might want to charge x% of royalties on secondary transactions, they are still beholden to the NFT marketplaces to enforce and honor these royalties.
Some platforms have explicitly stated that they will only enforce royalties up to a certain percentage. For the marketplace platform, their main goal might be to incentivize trading activity — which a low royalty regime accomplishes. And while each platform might use their royalty policy as a way to compete and signal where they stand in supporting creators … creators are still beholden to a platform’s particularly policy.
In short, this dynamic makes royalties a social contract of sorts.
Enter ERC721c: a building block that changes this dynamic from social contract to smart contract.
The ERC721c standard was created by the Limit Break team (See the Limit Break team’s write up introducing the standard).
ERC721c allows creators to program royalty logic into the smart contract code on Ethereum. It does so by creating an on-chain enforcement mechanisms that the creator can customize. For example, the creator can only allow their NFTs to be traded on certain platforms that honor their royalty policy.
ERC721c turns paying royalties from social contract to smart contract — ultimately reducing the influence that marketplaces have over creator and artist royalties.
But ERC721c also allows for programmable royalties which gives creators and artists power to decide how royalties are paid out.
Shared Royalties: Creators can choose to split the royalties they earn between the creators and the holders, as a way to reward early adopters.
Minter-Only Royalties: Creators can also make NFT minters the sole earner of royalties.
Transferrable Royalties: Creators can issue royalty rights to their holders through issuing a separate NFT to represent those royalty rights.
For example, if you hold the main NFT(1), a creator could issue you another NFT(2) that represents all the royalties for NFT(1). You can choose to transfer NFT(2) to others.
And like most building blocks, these are just the first examples.
The broader point is that ERC721c allows for on-chain programmable royalties and gives creators a new design surface on how they want to reward / engage with their community.
Back to composability and building blocks … all this is supercharged by remixing it with other standards like ERC6551.
Remixing with ERC6551 x ERC721c
Remember one of the most important concepts in Web3 is composability — the ability to combine different lego blocks to build new things.
What would it look like to combine these two primitives?
_Quick Refresher on ERC6551
If you are familiar with ERC6551, you can skip this section.
ERC6551 gives every NFT a crypto wallet. This enables the NFT to do anything that owning a wallet allows them to do.
With ERC6551, an NFT can own other NFTs, digital assets and digital items. The NFT can also participate in governance, sign messages and participate as an “entity” and standalone unit in any area that a person with a wallet can participate in.
In the launch article by Benny Giang (the cofounder of Crypto Kitties and one of the main authors on ERC6551 standard), he highlighted a few use cases that ERC6551 enables for NFTs:
Equipping digital outfits and items
ERC 20 token earning/airdrop models
POAPS or badges earned by participation
Trading entire collections as a single unit
NFTs as on chain identities with the ability to layer on social network models
For a deeper dive on ERC6551, see my previous essay 👇
_ERC6551 x ERC721c
ERC6551 allows NFTs to own other NFTs (enabling provenance at NFT level).
ERC721c allows for programmable royalty rights.
The big unlock is the ability to distinguish between different NFTs based on contributions and actions versus just the art.
Let’s walk through a before and after:
_Before these two standards:
An NFT might be valued based on the traits (usually through visual attributes). For example if you owned an NFT with a “gold” trait, it might be valued more highly.
But what about the NFT holder who doesn’t have a “rare” NFT but regularly shows up to events, participates actively in the community, sheds light on the project?
Are NFT holders who contribute work to the project important?
Yes … they are probably your super fans!!
_After these two standards:
You can reward community members based on their actions and contributions. Here is how it might work:
With ERC6551, you can easily issue badges to memorialize the actions and contributions a particular NFT has taken, but with ERC6551, to that NFT specifically. This ties the NFT’s identity with the actions they’ve taken.
Then with ERC721c, you might then say, the NFT that has x-number / x-combination of badges will be awarded another NFT that represents rights to some amount of royalties or project level revenue in composable units.
This is just one example, but it highlights what composing on top of these two standards unlocks.
Supercharging Value Capture, Community Building, Identity and Reputation
With the above example:
Value Capture: The NFT with this “inventory” of badges and royalty NFT might become more valuable solely because there is now provenance that signals and showcases the contribution of that NFT. Holders who add value through participation can capture value because of the work they do.
Community Building: Creators can more easily find / reward / tag their super fans, which gives creators high value / high engagement sub-communities they can collaborate with to push the project forward.
Identity and Reputation: Community members who get rewarded with royalty rights (memorialized as NFTs) can also capture value by selling the royalty rights NFT as oppose to having to sell their main NFT that might represent their online identity.
With ERC6551, we now have an organization primitive that enables provenance at the NFT level. This sort of acts like a new data layer.
With ERC721c, we now have a programmable payment primitive. This sort of acts like a new logic layer.
Both ERC6551 and ERC721c make NFTs more dynamic.
Instead of static images, they start to feel more like characters in a video game that own items, trade items, etc.
Except those items are NFTs.
Remember NFTs are just data packets … so anything that can be reduced to data online which is to say that everything can be reduced to data … can be theoretically abstracted as an NFT.
What if we abstracted “NFTs as characters” to “NFTs as organizations”?
This means that in the future, NFTs can represent standalone entities that can also own NFTs that represent economic rights, which are all programmable.
What would this unlock?
As more building blocks are introduced, all of this will compound at an accelerating rate.
(We’ve haven’t even layered in AI yet … more on that for another time) 🧐 😁
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This post is provided for educational and informational purposes only. Nothing written in this post should be taken as financial advice or advice of any kind. The author(s) may own some of the NFTs, art and/or collectibles mentioned in this post. The content of this post are the opinions of the authors and not representative of other parties.
Empower yourself, DYOR (do your own research).