NFT Smart Contracts: What they are and how they work

NFT Smart Contracts: What they are and how they work

NFT smart contracts are digital agreements that use computer code to enable the creation, ownership and transfer of non-fungible tokens (NFT) on a blockchain ecosystem.

Without them, NFTs would not exist. They are the backbone of an industry worth billions of dollars, and they play a fundamental role in keeping the NFT ecosystem secure and transparent.

NFT smart contracts are not that different from regular smart contracts in terms of their underlying technology – the difference lies in their functionality. Let’s step back and have a quick refresher on what smart contracts are, then see how they apply to NFTs and other industries.

Explains smart contracts and their role in various industries

Smart contracts are self-executing – they automatically enforce the terms of an agreement between two or more parties. They have become a popular tool for businesses looking to automate complex business processes and transactions, while eliminating intermediaries and reducing the risk of fraud and error.

Smart contracts have been around since the 90s, a term first coined by Nick Szabo. He wanted to create a decentralized system where computer programs could execute and enforce the terms of a contract using cryptography and computer code.

These self-executing contracts rose to prominence with the use of blockchain technology, and are now used in multiple industries, including healthcare, real estate, supply chain, finance, and more. To put this into perspective, blockchain technology and smart contracts can greatly benefit the supply chain industry by, for example, automating several processes, including invoicing, payments and tracking. This automates the administrative burden and increases efficiency.

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These and other benefits, such as increased transparency, reduced costs, improved traceability, can be applied to many of the industries listed above.

How do NFT smart contracts work?

NFT smart contracts use blockchain technology and software code to perform a specific set of actions. In this case, it could be storing, receiving and transferring NFT resources. However, some of their most important functions are to define the rules and conditions for the creation and transfer of NFTs, such as the specific characteristics of the NFT, the ownership rights associated with it, and any royalty or license agreements.

Developers can create NFT smart contracts and define the rules for how NFT can be created, owned and transferred. These rules are encoded in the smart contract code and are automatically enforced by the blockchain network. Moreover, when a user mints an NFT, they are actually interacting with the underlying smart contract that defines the properties of the NFT.

There are different types of NFT smart contracts, which we will explore in another part. Likewise, when an NFT is minted, an NFT marketplace like OpenSea uses a set of smart contracts to conduct the auction. The Dutch auction, for example, is conducted using an ERC-721 NFT smart contract.

NFT Smart Contracts & Royalties

NFT smart contracts play an important role in defining NFT royalty and license agreements. The first specifies how NFTs can be used and the latter how royalties – the commission or percentage of revenue that an NFT creator earns every time their NFT artwork is sold in a secondary market – should be distributed.

Also read. Who invented NFTs? A brief history of non-fungible tokens

Through smart NFT contracts, royalties can be automatically distributed to the original creator of an NFT whenever it is sold on the secondary market. The split varies, but typically 90% of the revenue goes to the new owner and 10% to the original creator. Likewise, the NFT smart contract will send each party’s respective share to their specific digital wallet, most popularly, MetaMask.

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Types of NFT Smart Contract Standards

Ethereum is by far the most popular platform for building and using NFT smart contracts. Two of the most popular types are ERC-721 and ERC-1155. The ERC prefix refers to Ethereum Request for Comment, and it is a set of technical guidelines developers must follow to create a smart contract or cryptocurrency that can run on the Ethereum blockchain.

Let’s take a look at some examples of NFT smart contracts:

  1. ERC-721: the most popular ERC standard on the Ethereum blockchain for creating NFTs. The ERC-721 standard has strict guidelines: mainly that all tokens must be non-fungible and have their own unique metadata. One feature that is somewhat criticized by people in the space is that this standard only supports NFT, and each NFT can only be transferred in a single transaction – which can cause congestion if network activity reaches high levels.
  1. ERC-1155: it supports both fungible and non-fungible tokens, and also supports the transfer of multiple batches of NFTs. In addition, it allows the conversion of fungible tokens — such as ERC-20 — to non-fungible tokens, and vice versa. Due to its versatility, this standard is mostly used by large GameFi projects that build on the Ethereum blockchain since there can be multiple copies of the same NFT, but each copy can have unique attributes and ownership rights.
  1. TRC-721: a non-fungible token standard on the TRON blockchain similar to ERC-721, but specifically for use on the TRON network.
  1. BEP-721: a non-fungible token standard on the BNB chain (formerly Binance Smart Chain) — similar to ERC-721, but for the Binance ecosystem.
  1. NEP-11: Similar to ERC-721, but made for use on the NEO blockchain.
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NFT Smart Contracts and the Metaverse

NFT smart contracts play a key role in the metaverse, in the sense that they are the backbone of many of the important events that take place in the ecosystem.

NFT smart contracts allow decentralized ownership and transfer of virtual assets and properties. For example, in real estate, virtual plots, buildings and other assets can be sold as NFTs, therefore the business requires smart contracts to identify the owner of a property or land in the metaverse and perform certain actions, such as transferring ownership, fractionalizing the land, etc.

Furthermore, NFT smart contracts in real estate have the potential to reduce some of the typical bottlenecks and pain points in the industry by automating several processes, potentially minimizing the roles of intermediaries, banks, notaries and speeding up the transfer process.

Another example is GameFi, or blockchain gaming; NFT smart contracts are the backbone of many games that offer unique NFT assets, which can be characters, in-game collectibles, property, etc. The NFT smart contract assures the player that they have full ownership of their assets, and not the game publisher or developers.

Final thoughts: NFT smart contracts and their future

In this article, we learned what NFT smart contracts are, how they work, and what role they play in the metaverse.

Beyond PFPs, 3D avatars, and artwork, NFT smart contracts and their various standards support the digital collectibles industry, which includes thousands of blockchain games, DeFi apps, NFT platforms, and more that use NFT smart contracts in one form or another. manner.

Featured image via Unsplash.

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