AL #013: The Wallet Economy Is Here

ERC6551 is a big deal, but not for the reasons people think.

In April, I wrote about why it's still a good time to build in crypto. It was also the first article of this newsletter.

It’s only natural that I should follow up with some trends that I find interesting to build on.

The first one is what I’m calling “The Wallet Economy”.

Before we define it, however, we need to take a detour and explore ERC6551, a new NFT standard that makes this all possible.

ERC6551 (Token Bound Accounts)

The ERC6551 standard proposed by the Future Primitive team pairs each NFT in a collection with its own dedicated set of wallets. Each wallet can be managed by the current NFT owner with these rights moving on as soon as the NFT is transferred.

ERC4337 (Account Abstraction) already paved the way for smart contracts to be used as accounts, ERC6551 simply builds on this idea.

There is good intuition that ERC6551 will be impactful for NFTs. C3 Labs wrote a good summary.

But I think it goes a step further.

ERC6551 is the missing step to turn accounts from owned assets into traded assets, creating an entirely new onchain economy.

The Wallet Economy

The Wallet Economy is a blockchain economy that facilitates the buying and selling of smart contract accounts/wallets.

ERC4337, already made accounts transferable. Under the right conditions they could be bought and sold.

However, marketplaces form around liquidity and liquidity forms around meaningful aggregation.

The fact that NFTs exist in collections inherently facilitates their trading. Collections inherit meaningful economic terms like floor prices, average prices, volume, etc. that allow participants to price them more reliably.

When seen this way, ERC6551 is as much an extension to ERC721 as it is an extension to ERC4337.

Yes, on one hand it allows existing NFT collections to be used as accounts.

But more importantly it provides a connection to existing liquid marketplaces like Opensea for collections of accounts to be traded.

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OPTIONAL SECTION: Just like business

This is not just nomenclature. The existence of an open market for accounts may change how people operate them.

For example, the introduction of corporations and common stock led business owners to rethink how they run their businesses. Several ideas in management theory like owner earnings, dividends, level of automation arise from the idea that a business could be owned by a different person than originally operated it.

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As a crypto Founder, how should you play in the Wallet Economy?

1. Understand the security implications

This is web3, so let's start with the bad news.

Trading accounts is tricky.

Two known issues include front-running and ownership cycles.

Front-running of account transactions

Consider an NFT which owns a wallet with 10 ETH.

Is it worth at least 10 ETH?

Depends.

An innocent user may place a 10 ETH buy order for the NFT.

If the owner is able to transact with the underlying account, they may be able to front-run this transaction. They sell the 10 ETH before the NFT sale completes and now the NFT is worthless.

Ownership cycles

Another issue is locking an account by transferring the NFT to itself. Even longer cycles can exist.

Both issues were explicitly not solved in the standard and will need to be addressed by integrators and marketplaces.

2. Add value to an existing collection

The obvious place to start is by considering how existing collections may be improved by ERC6551.

Magic the Gathering creator Rhystic Studies documented how a “worn out” deck of unsleeved Magic cards could have more value than a spotless collection of near mint quality cards, calling this collection of cards priceless.

The idea being that the history of gameplay and enjoyment associated with a card is more valuable than the physical damage it has caused it.

ERC6551 allows each NFT to accumulate other NFTs, soulbound tokens, ERC20 tokens and other types of assets and onchain history.

3. Build new collections

Another idea is to build NFT collections with a plan how they may be used as wallets.

For example MIKΞR expects that game avatars will be a natural container for in-game assets. For example your character could be an NFT and all the equipment would be stored alongside it.

It will be important to align this to help buyers see complementary value in what the NFT is and what the NFT owns. For example, game equipment that's suited for a specific class of the avatar or soulbound tokens in games that are impossible to acquire past a certain point.

4. Lead the wallet economy

The boldest and potentially most valuable move would be to think about new opportunities to support the paradigm.

Here are just a few ideas:

• Marketplaces will need better tools to protect buyers of token bound accounts

• Third-party wallet pricing sites could emerge that will analyze outgoing allowances, owned assets, etc. to provide a coherent valuation of an account

• The way to display NFTs and the underlying assets will evolve

I think the Future Primitive team came up with a truly groundbreaking proposal (I could go into much more detail on why the specific technical implementation they chose is so elegantly supportive of the stated goals).

But ultimately the upside here is creating entire wallet economies. Instead of NFTs being used as wallets, it's wallets being traded as NFTs.