tl;dr Summary: ERC721R is a new protocol on the Ethereum blockchain that allows for NFTs to be refunded. This adds a new layer of trustless confidence between buyers and creators, and allows creators to be held accountable for their promises.
You might have seen Leonardo DiCaprio’s scene in The Wolf of Wall Street where he bragged about the huge upside potential of Aerotyne International to make a grand commission out of the sale. Well, the same hook is what people get caught into when first hearing about NFTs. ‘Huge upside potential’ and a ‘get rich quick’ scheme. What they are not told is that for an NFT project to actually succeed, it needs sound fundamentals and actual utility rather than just hype made by greedy influencers. ERC721R or ‘Refundable NFTs’ is a breakthrough towards preserving trust between the NFT collector and the founding team.
Problems with NFTs – Beware of Scams!
NFT scams have been a hot topic in 2021 mostly in the form of rug pulls. Rug pulls are basically the owner of a project running away with the money of the investors. Chainalysis, the leading crypto analytics firm tracking all of the transactions, states that:
“Rug pulls have emerged as the go-to scam of the DeFi ecosystem, accounting for 37% of all cryptocurrency scam revenue in 2021, versus just 1% in 2020.”
So, this means we need regulation and investor security in the crypto space too. Not the one the SEC brags about, that is meant for traditional companies. For crypto, regulation needs to uphold values such as trustless interaction, decentralization and open-source protocols. For this, we need code to be law that no one can breach. ERC721R is a step in this direction and hopes to minimize risk.
ERC721R – Refundable NFTs
To understand ERC721R, we would have to look into what ERC is. So, Ethereum is this universal set of LEGO blocks for software developers allowing anything to be built in a network which is trustless and unchangeable. Considering ERC, it is an acronym for Ethereum Request for Comments. Basically, these are contracts that allow people to interact with and suggest changes to the things built. The famous ones are ERC20 and ERC721. ERC20 is the contract for fungible tokens which are like currency. ERC721 is the contract for non-fungible tokens (NFTs) similar to a piece of art, special on its own and only a single one produced. ERC721R is a new addition which is basically an NFT that has a refund feature to give it back to the owner and get your money back if something goes wrong.
Let’s say you go to Walmart and you buy something that you end up not liking because it’s not what you had thought of or is not useful to you. The Ethereum blockchain is unchangeable and once you buy an NFT it cannot be reverted. However, this additional modifier to the code, which the owner of the collection can add by choice, allows a ‘refund period’ in which the NFT collector can return the NFT to the owner in case it is not what it was advertised to be. The money spent by the collector is kept in the contract for the refund period inaccessible to the owner.
Projects Already Using ERC721R
The first project using this feature for their NFTs are CryptoFighters, who allow a refund within 45 days from mint. This is a play to earn strategy game launched in the early days when this concept was not well known. The team has started development on the project with a new roadmap and exciting updates ahead.
This new development benefits both the buyers of the NFT and the owner. The buyers are assured trust in the project by getting their money back as the funds are not accessible to the owner. The owner is now accountable to deliver on the said promises. Also, the price becomes stable as the collectors are able to get a refund on the purchased price. For the owners, it is now a way to build confidence in the market and allow better funding of their projects by stabilizing the price.
On the contrary, this feature is still in beta and needs major fundamental improvements. As described by the Triathon tech team, a flaw in the code allows the owner to change the refund address to his own and withdraw the funds. Also, the purchasing price can be changed so when you apply for the refund, you only get the discounted price. In addition, an obvious scam is the project advertising as having the feature of refunds when it actually does not include it in their code. Hence, your due diligence and research is compulsory when investing in such projects.
ERC721R is beneficial to all areas of the NFT ecosystem because it gives security to the buyers and credibility to the sellers. Major developments are still underway such as vesting schedules in which the refunded amount is released in chunks to the owner. This is surely a step towards progress and will allow NFTs to reach industry standards if implemented correctly.