Smart Contracts for NFTs
What is a smart contract?
A smart contract is a program that is encoded and stored on a blockchain and automatically fulfills a set of specific actions once the pre-agreed-upon conditions are met. Simply put, smart contracts are designed to eradicate any middleman when it comes to value settlement as two parties can directly interact without an intermediary. Smart contracts are used by blockchains such as Bitcoin and Ethereum to automate processes and facilitate transactions. It’s important to note though that Bitcoin’s smart contracts are less expressive than those of Ethereum and other smart contract platforms.
Therefore, a smart contract NFT is a code that lives on the blockchain and manages non-fungible tokens. Since their inception, NFTs have taken the digital-art market by storm, earning artists and creators millions of dollars.
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Benefits of using smart contracts
Smart contracts are suitable for automating processes and facilitating transactions because they offer the following benefits.
Lowering Costs and Increasing Speed
Smart contracts have been developed to execute agreements and, in turn, lower costs and save time. Hence, they are different from traditional contracts, which require more resources and time due to the involvement of intermediaries.
Parties Can Transact Peer-to-Peer
Smart contracts are used to carry out transactions on a blockchain, which is considered a trust-minimized and permissionless system without any restrictions. This means two people can transact peer-to-peer mediated through a smart contract.
Smart contracts eliminate the need for intermediaries thanks to the decentralized nature of the blockchain.
In the ideal world, smart contracts are immutable given that their underlying blockchain is also immutable. This means they cannot be changed once deployed on a blockchain and are thus secure from manipulation.
Smart contracts are customizable and can be used for a myriad of use cases.
Smart contracts only perform the tasks they have been programmed to carry out. This means that if they are given an input, they deterministically generate a definite output according to their code lines.
Smart contracts execute automatically, minimizing the risk of human errors.
Despite the numerous benefits offered by smart contracts, it’s important to note that they aren’t legally binding. While the code created to help execute an outcome on the blockchain can be accomplished, it cannot be used to execute off-chain agreements or transactions.
What is an NFT?
In the context of smart contract NFTs, it is important to also define what an NFT is. Let’s first address the question: Is an NFT a smart contract? No, NFTs are not smart contracts. Instead, they are minted through smart contracts.
So, what exactly are NFTs?
NFTs are unique virtual assets that can portray real-world assets such as art, sports collectibles, tickets, and real estate on the blockchain. Additionally, they can also represent virtual items like digital art, music, videos, digital collectibles, in-game items, and virtual land. Unlike fungible assets that can be interchanged with other assets of the same type, NFTs are not interchangeable. This is because they have their own token ID and are thus irreplaceable and unique.
Although NFTs have been around for years, it wasn’t until 2017 that they started gaining traction. This was after the launch of CryptoKitties, a non-fungible token game that allows players to collect eccentric digital cats. In 2021, the NFT market experienced rapid growth, recording sales of around $25 billion. Artists like Pak and Beeple have also made a killing in the NFT space selling artworks for upwards of $60 million.
How do NFT smart contracts work?
NFTs are minted via smart contracts that also assign and reassign ownership. Smart contracts for NFTs reassign ownership when an NFT is being sold, transferring it from the previous owner to the new buyer. Think of smart contracts for NFTs as tools used to execute a sale agreement without the need for third-party involvement. Moreover, smart contracts help ensure that digital assets can’t be replicated and are unique in their own way.
Lots of guides are available online on how to create and deploy an NFT smart contract. Therefore, you can refer to them if you’re interested in building and deploying your own NFT smart contract.
How are smart contracts and NFTs connected?
NFTs are produced through a process called minting. During minting, the digital files used, such as images, sound bites, or videos, among others, are converted into digital assets on a blockchain — correctly speaking, the data and the actual digital asset are not stored on the blockchain, it’s only the data’s metadata that is — and configured with the underlying smart contract code that assigns ownership and reassigns the same when the NFT in question is transferred or resold. This means that during minting, the creator is assigned ownership of the NFT until they opt to sell or transfer it.
NFT marketplaces also utilize a suite of smart contracts when it comes to auctioning NFTs. A marketplace can temporarily take up ownership of a token until the predetermined conditions are met. In addition, they can also include other parameters such that if the auction isn’t successful, the NFT can be transferred back to the owner. Such conditions would be programmed into a smart contract at best.
In other cases, smart contracts can give NFTs utility or deactivate them. For instance, a creator can design a digital item, such as a pet that grows when properly taken care of and dies if abandoned. So, smart contracts play an important part when it comes to NFTs. In other words, NFTs are not really possible without using smart contract technology.