Published on December 2, 2022
What Is an NFT Smart Contract?
Learn about NFT smart contracts and how they are used to create unique, digital assets on the Ethereum blockchain.
8 min read
The underlying mechanics of the NFT economy seem like a mystery to most, but on a basic level, they are driven by a tool called smart contracts. NFT smart contracts facilitate the creation and reassignment of tokens that represent digital assets, such as images, videos, or other digital content. These tokens can then be traded on decentralized marketplaces, or used in other decentralized applications.
Fundamentally, NFT smart contracts serve as a tool for creating and trading unique digital assets without relying on third-party services. In this article, we'll explain the basics of understanding NFT smart contracts and how they are implemented in the NFT economy.
What Is a Smart Contract & What Are Its Benefits?
A smart contract is a digital contract that is stored on a blockchain. At a base level, it is a computer protocol that verifies, facilitates, or enforces the actions of the contract. Smart contracts are essential because they provide several benefits to the crypto ecosystem:
Overall, smart contracts have the potential to revolutionize the way that parties conduct business.
How Are Smart Contracts Created?
Smart contracts are created using a programming language called Solidity.
Solidity allows developers to create contracts that can be executed on the Ethereum blockchain. These contracts can be used to create decentralized applications (DApps) and other blockchain-based applications. Solidity is a key part of the Ethereum ecosystem, and many developers use it to build a wide range of applications.
Solidity is an open-source language, and it is constantly being improved and updated by the Ethereum community. It offers a rich set of features and tools, making it a powerful language for building smart contracts and DApps.
Smart contracts are stored on the blockchain and are immutable — this means they cannot be changed or deleted once they have been published. This makes them ideal for storing financial agreements, such as loans and insurance contracts. To create a smart contract, you'll first need to write the code in Solidity. Once the code is written, it needs to be compiled into bytecode which the EVM can understand. The bytecode is then deployed to the blockchain, where it becomes a smart contract.
Smart contracts can be triggered by events, such as a loan being repaid or an insurance policy being active for a certain period of time. When the event occurs, the smart contract is executed, and the agreement is enforced.
How Are Smart Contracts Used with NFTs?
Before we relate smart contracts to NFTs, it's important to understand smart contracts in their historical context. Nick Szabo first proposed smart contracts in 1996. He defined a smart contract as "a computerized transaction protocol that executes the terms of a contract."
Smart contracts have been used in various industries to reduce costs and increase efficiency. For example, in the real estate industry, smart contracts can automatically transfer property ownership upon the completion of a sale. In the supply chain industry, smart contracts can be used to track the movement of goods and ensure that payments are made on time. With the growing popularity of blockchain technology, smart contracts have become more widely used and have been adapted for use with non-fungible tokens (NFTs). They are often used to represent items such as art, collectibles, or video game items. Smart contracts can be used with NFTs to verify ownership, track provenance, or enforce rules.
For example, a smart contract could be used to transfer ownership of an NFT-based digital artwork upon the completion of a sale. The use of smart contracts with NFTs provides a number of advantages including security, immutability, and transparency.
Smart Contract Standards For Creating NFTs
Because NFTs are largely built on the Ethereum blockchain, the most common NFT smart contract standards stem from Ethereum.
Ethereum's ERC-721 standard was the first NFT standard built on Ethereum, and remains one of the most widely used smart contract standards today. A smart contract standard is a fancy way of saying "template" that other developers agree to follow. It is easier to build compatible dApps and NFT wallets by developing on a widely used standard. The distinctive feature of ERC-721 tokens is that each one is unique, a requirement other smart contract standards may not enforce.
Aside from ERC-721, the ERC-1155 standard has become a prominent standard in the NFT gaming community. ERC-1155 is optimized for deploying both fungible and non-fungible tokens within one smart contract - something ideal for gaming environments. For example, fungible assets like native gaming currencies can coincide with non-fungible assets like unique in-game unlockables.
What Is The Difference Between an NFT & Smart Contract?
NFTs, or non-fungible tokens, are a type of digital asset that is unique and cannot be exchanged for other assets of the same type. NFTs are often used to represent items such as art, land, or collectibles. In contrast, smart contracts are digital agreements that can be programmed to execute on their own when certain conditions are met. While NFTs are not interchangeable, smart contracts can be used to exchange NFTs or other assets. For example, a smart contract could be used to sell an NFT artwork from one user to another. By using a smart contract, the transaction can be completed without the need for a third party, such as an art dealer. As a result, NFTs and smart contracts can both be used to facilitate transactions in the digital world.
Additional NFT Use Cases For Smart Contracts
Can NFT Smart Contracts Enforce Ownership & Verify Authenticity?
NFT smart contracts use a combination of cryptographic hash functions and public-private key pairs to enforce ownership and verify authenticity. Hash functions create a "fingerprint" of a digital file, which is then compared to the fingerprint stored in the NFTs smart contract. If the two match, it proves that the NFT hasn't been tampered with. As for ownership, NFTs are stored on a blockchain, which is a decentralized ledger that records every transaction.
This means that there's a permanent record of who owns an NFT at any given time. When someone wants to sell or transfer an NFT, they simply have to initiate a transaction on the blockchain. The NFT's smart contract will then verify that the person has the permission to do so before transferring ownership. This system is secure and tamper-proof, making it an ideal way to enforce ownership of digital assets.
Can NFT Smart Contracts Prevent Plagiarism & Counterfeiting?
NFT smart contracts can prevent plagiarism and counterfeiting in a few unique ways. First, by using NFTs, creators can ensure that their work is properly credited and that no one else can copy or sell it without permission. NFTs also make it easy to track the provenance of a piece of art or other items, making it more difficult for counterfeiters to produce fake versions. Because NFTs are produced on a transparent, immutable blockchain, NFT smart contracts serve as a valuable tool in protecting the intellectual property of creators and ensuring that only genuine items are sold.
Can NFT Smart Contracts Improve Business Transactions?
NFT smart contracts have improved business transactions in a few important ways. First, they've made it possible to tokenize nearly anything of value. This means that businesses can now use NFTs to represent ownership of physical assets like buildings or machinery, digital assets like domain names or social media accounts, and even intangibles like loyalty points or carbon offsets.
This makes it easier to track and trade these assets, as well as to fractionalize them (i.e., sell them in smaller increments). Second, NFT smart contracts have automated many of the key steps in a business transaction, from offer and acceptance to asset transfer. This not only speeds up business transactions, but it also reduces the risk of error or fraud. Finally, NFT smart contracts have made it possible to conduct transactions on the blockchain, which is an immutable and transparent ledger. This allows businesses to transact confidently with each other, knowing that their records are safe and secure.
Overall, smart contracts offer a number of benefits over traditional contract law, most notably increased security, decreased costs, and improved speed. Without the need for intermediaries, smart contracts have the potential to revolutionize how we do business online. However, some challenges still need to be addressed before they can be widely adopted by companies and consumers alike. These include issues around scalability and user experience. Nevertheless, the future of NFTs looks bright, and smart contracts will likely play a significant role in shaping our digital world in the years to come.