NFT Smart Contracts Explained


Creative intellectual properties known as NFTs are currently trending hot. NFTs are basically crypto tokens managed on blockchains. The function of an NFT is based on underlying smart contracts. If you’re like me, you may be wondering what are smart contracts and how do they influence NFTs? After a bit of research, here’s what I discovered.

An NFT smart contract is a mechanism for implementing a sale agreement between the NFT owner and the buyer. Smart contracts are self-executing and can check that the contract terms have been satisfied, as well as execute the terms without the need for an intermediary or central authority.

What is an NFT smart contract?

A smart contract is programming that exists within the blockchain. This enables the network to store the information that is indicated in an NFT transaction. Once done this information can be accessed when needed. The smart contract also ensures that the information stored is transparent as well as immutable.

NFTs are run by smart contracts which govern the various actions such as:

  • Verifying the ownership
  • Handling the transferability

Since it is a software application, NFTs are also programmed to go beyond these basic functions and add on other functionalities as well. These functionalities include linking to other digital assets, handling royalty payments, etc. Smart contracts make it possible to have permanent identification information. They also ensure that NFTs cannot be divided into smaller units to be sold. 

Also, the smart contract can ensure that the digital assets are one-of-a-kind and non-replicable. This makes the NFTs scarce and rare which is the reason why NFTs have value. Virtually anything can be represented digitally on the blockchain.

At the very core of smart contracts are a series of if/then and when statements that are written as code into the blockchain. These are run by a network of computers that executes all the agreed-upon actions coded in the smart contract. Each action is executed only if the predetermined conditions are met and verified.

How are smart contracts created?

When you make an NFT it is known as minting. You are basically writing the underlying smart contract code. The smart contract code decides the qualities of the NFT and it adds them to the relevant blockchain on which the specific NFT is coded. There are many standards that have been established for smart contracts. Ethereum is one of the very first to use these standards.

Standards of smart contracts for creating NFTs?

Since Ethereum is the most used NFT. We will look at the Ethereum standards. The standards in Ethereum are ERC 1155 Standard and ERC 721 Standard.

  • ERC-721 Standard

ERC 721 Standard is an open standard that describes how to build NFTs on the Ethereum blockchain. ERC 721 is unique and unlike most other tokens. ERC721 standard defines the workings of a smart contract. When a token is transferred you need 2 pieces of information:

  • Address of Smart Contract
  • ID of the Token

A single ERC721 has the ability to manage multiple tokens.

  • ERC-1155 Standard 

The ERC 1155 is a multi-token standard that allows each token id to represent its own configurable token type with its own metadata attributes and supply. Other than Ethereum, other smart contract blockchains with NFT tools are TRON, EOS, TEZOS, and Solarium. This standardization of NFTs will help in ensuring the interoperability of the tokens.

NFTs tokens may operate differently based on the blockchain platforms they are executed in.

The series of capabilities that a blockchain has, may bring in variations in the operations of the NFTs. But these variations are usually small and adjustments are made so that the smart contracts adapt to the blockchains environments they are executed in.

What do smart contracts cover?

The smart contracts cover—among other things—the actual rights that are being sold. It is assumed that if you own an asset you own the copyright to it. In reality, it is not so. 

Ownership and Copyright rights are not the same. 

Having ownership does not mean that the person who buys a digital asset owns the copyright. The copyright will stay with the author in most cases unless explicitly outlined in the contract. 

The NFT license outlines what rights are being specifically licensed to the buyer. NFT license identifies the NFT as separate from the art. The art could be an image or music/sound file.  The license provides clarity on the rights being transferred. 

In most cases, the license would allow the buyer permission to display the art along with the commercial license that would allow them to create merchandise that incorporates the art. But these terms could be different for each transaction and will have to be specifically coded into the smart contract.

How do smart contracts verify authenticity?

Verifying authenticity is the main purpose of a smart contract, so how do smart contracts verify authenticity?

Smart contracts can authenticate the token and its ownership. They can also trace the unique history of the token on how they were developed and linked to creative work, this would be available on public blockchains. You can verify the wallet address and its linked metadata from the public blockchains.

But it cannot link to any person in the real world. Also, it cannot verify if the creator has the right to link the NFT to specific works. 

The platforms that display and sell the NFTs will verify the identities of the creators. In many cases, this is done manually. SuperRare does this by an application form that collects the name, email, and specific details of the artwork, while other platforms may add in disclaimers that the buyers do the research before buying any NFT.

How do smart contracts prevent counterfeiting?

When you buy an NFT a unique token is issued which has the information and the details of the smart contract. This gets registered on the blockchain. Now this information on the blockchain is public and includes the record of purchase and proof of ownership. 

The owner can display the asset and sell it. If the image is reproduced (which is definitely possible if you display the work to the public) the blockchain will prove the ownership and the reproduced images or assets would be worthless. The transfer of any NFT is authorized on the blockchain only if the personal key of the owner is used.

NFTs can have applications beyond just transactions. They can also be used for supply chain management of goods and even manage financial transactions.

Uses for smart contracts?

The benefit of a smart contract is that it is useful in business transactions where a specific agreement has to be enforced. This removes any uncertainty of the outcome and intermediaries can be avoided completely. 

Think of any business transaction you would engage in. 

Imagine you are buying a house. The entire process is delayed and becomes complex due to the lack of trust among the parties. There might be too many steps involved and delays are probable at each step. You may want to obtain financing from a bank for the house. You will be asked to fill out various forms, give your personal information, and have credit checks done, you know — all the fun stuff involved with attaining a loan.  

Multiple people may be involved in the process and there may be commissions and fees at each step. This will also add to the base price of the house. Smart contracts can streamline the process and reduce delays and fees by removing the need for intermediaries. 

Your personal details and credit information will be in the blockchain and quick checks can be done avoiding all paperwork. The smart contract will be initiated between the bank, the seller, and you. Funds will now be released back to the seller, the repayment will be initiated and the title will be held by the bank till the terms of the repayment are fulfilled. Once done, the transfer of the ownership would be automatically done and the transaction is recorded in the blockchain for anyone to see.

These smart contracts prove to be extremely useful because of the following characteristics:

  • They bring in speed and accuracy as paperwork can be avoided completely
  • They engender trust as no one can change the terms once it is created
  • They are highly secure and hard to hack
  • There are a lot of savings as intermediaries are avoided

Overall, smart contracts are the building blocks of any NFT. The potential for implementing smart contracts into future transactions such as home loans and other business-related deals is very exciting. Imagine completely eliminating the lack of trust which may be experienced when transacting with others, that’s exactly what a smart contract can do.

AlexWGomezz

Alex is an experienced writer and aspiring entrepreneur. He has written for numerous outlets such as MexicoTravelBuddy, ONE37pm, and Voice. He spends the majority of his time collecting NFTs and exploring the web3 space. In his free time, he enjoys hanging out with his family, helping others, traveling, and learning new hobbies.

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