All You Need to Know About NFT Smart Contracts
Smart contracts play an important role in the blockchain space across many use cases.
In particular, NFT smart contracts are becoming increasingly important as the metaverse and Web3 attract more interest.
Here’s a crash course on NFT smart contracts, how they work, and how we can use them.
Learn what makes NFT smart contracts ‘smart’, how they work, what properties they have, as well as present and potential use cases of smart contracts.
Did you know that NFTs live on the blockchain and are managed with the help of smart contracts? When you buy or sell an NFT, you’re most likely relying on smart contracts to execute trades.
Find out more about this reliable software solution and how it can help verify ownership, combat counterfeiting, and more.
What Is a Smart Contract?
A smart contract is a program stored on a blockchain that automatically enforces specific actions once predetermined conditions are met. In a decentralized system, two parties can interact by replacing the intermediary typically needed to facilitate transactions with a smart contract. Blockchains, including Bitcoin and Ethereum, have used smart contracts to facilitate transactions and automate processes.
What makes smart contracts ‘smart’? These chunks of code automate processes and do not make human errors, ultimately reducing the time and costs associated with traditional contracts. Apart from overcoming human errors, smart contracts possess other benefits that make them important for the blockchain industry.
Advantages of using smart contracts
They facilitate transactions in a trustless system, which means ensuring that parties can interact without knowing or needing to trust each other.
They replace the need for intermediaries and paperwork, increasing speed and lowering costs.
They are immutable and cannot be changed after deployment, making them more secure.
If smart contracts are deployed on a public blockchain, they are transparent and can be seen by everyone.
They are customizable before being deployed, making them versatile for varied uses.
They are deterministic and only perform what they have been programmed to do.
There is no risk of human errors as they are automated.
That said, smart contracts are not actualy legally binding, unlike traditional contracts. This means that while these lines of code help execute outcomes on a blockchain, they cannot enforce off-chain agreements.
Creating NFTs With Smart Contracts
NFTs are created via a process known as minting, which involves converting images, videos, sound bites, and other digital files into crypto assets on a blockchain. Essentially, when you mint NFTs, you’re configuring the underlying smart contract code that decides the qualities of your crypto assets.
Several standards have been established for smart contracts to ensure that NFTs can easily interact with applications. For instance, there are several smart contract blockchains with NFT creation tools like TRON, EOS, and Tezos. Without a common standard of how smart contracts, and ultimately NFTs, should be coded, NFTs minted on different platforms may not be able to be traded on the same NFT marketplaces.
Standards of smart contracts for creating NFTs
Among the various standards available in the crypto space, Ethereum’s ERC-721 standard is one of the most widely used as it’s the first non-fungible token standard on Ethereum. As a pioneer in the NFT minting space, this standard is used by many to create and launch NFTs. ERC-721 requires all tokens to be non-fungible and to possess unique token IDs, a requirement that other standards may not enforce.
Apart from ERC-721, there’s another standard used mainly within the NFT gaming realm. The ERC-1155 standard was created to accommodate both fungible assets like in-game currencies and non-fungible assets like limited edition skins.
Smart contracts, NFTs, and the metaverse
The metaverse can be considered a 3D digital universe bridging financial, virtual, and physical worlds. NFTs, blockchain games, and crypto as we know and use would all be part of the metaverse.
If smart contracts are the foundation of NFTs, it’s not surprising that they are also a vital tool in building the metaverse. For instance, NFT art and gaming are two potential aspects of the current metaverse landscape that smart contracts can support. Monetary transactions can also be facilitated with smart contracts, eliminating the need for a third party and reducing the friction of interactions on the metaverse.
Other NFT-related Use Cases for Smart Contracts
Enforcing ownership and verifying authenticity
Smart contracts used to issue NFTs can help enforce ownership and authenticate data. If these NFTs are hosted on public blockchains, information about ownership and creation time can be accessed by anyone.
In the case of digital degrees, unique NFTs can be issued to students by educational institutions on public blockchains. Employers looking to hire students can check the authenticity of an applicant’s degree by searching on the relevant block explorer. This search engine allows anyone to access public information recorded on the blockchain.
This can also be extended to NFT licensing. Details of transferred rights of an image or sound file can be created and easily transferred to the next NFT token holder. Anyone can check both the ownership and rights licensed to buyers.
Preventing plagiarism and counterfeiting
Through NFTs, smart contracts can also help combat counterfeiting and plagiarism. Because they are built on the blockchain, smart contracts can automatically check an NFT or token’s time and place of creation, i.e., the first recorded wallet address. Smart contracts can also track creative ownership, combat fake certificates, and help eliminate the issue of counterfeit products. For instance, such products can be automatically filtered out if they do not meet certain prerequisites.
Facilitating business transactions
With smart contracts, business transactions can be improved in two ways: speed and safety.
Smart contracts allow two parties to enter an agreement and ensure that the previously agreed upon outcome is enforced when the terms have been met. Delays due to lack of trust can be eliminated, allowing a more efficient transaction process. Parties may not trust each other but can be reassured with a smart contract that will carry out the transaction as soon as the contract terms have been met.
Consider the process of buying a house. As soon as the buyer has met all the requirements like credit checks and successful downpayment, a smart contract can release funds to the seller and transfer ownership to the buyer simultaneously. The transaction, which could include the transfer of title deed, will also be recorded on the blockchain for easy verification.
Smart contracts are very versatile and can be customized to be applied to almost any industry. As the building blocks for one of the hottest digital asset classes out there, the importance of smart contracts is likely to grow with further NFT adoption and the expansion of the metaverse.