If you have been involved in the NFT space then you have probably heard of smart contracts. Although a simple concept, they are the building blocks for this space.
That is why in this article I will be providing a comprehensive explanation of this novel technology. So without further ado, let’s jump right in.
NFT smart contracts are predetermined contracts written in code that automatically execute once the terms of the agreement are met. They are stored on the blockchain which makes them transparent and immutable.
What are NFT smart contracts?
Simply put NFT smart contracts are the blockchain equivalent of traditional contracts. Thanks to the underlying technology they enable peer-to-peer agreements that remove the need for an intermediary.
NFT smart contracts store important cryptocurrency information. This includes the wallet address, transaction history, and the corresponding NFT collection to name a few.
Moreover, this is completely transparent meaning it can be verified by anyone. Not to mention, it is immutable therefore it cannot be changed or deleted.
Advantages of smart contracts
Transparency – this guarantees authenticity as all the information can be verified on the blockchain. Moreover, it highlights any bugs in the code and malicious activity. If the contract is altered for personal benefit anyone with access to the network will know.
Security – smart contract information is immutable. Moreover, the NFT transaction records are encrypted. As a result, they are hard to hack and are extremely secure.
Unique – NFT smart contracts have unique IDs which enable scarcity in the digital world. This is important for creating stores of value and exclusivity.
Cost reduction – as smart contracts are digital and remove the need for intermediaries they reduce costs significantly. There is no need for a ton of paperwork, moreover, there is no middleman that charges exorbitant fees.
Reduction in human error – as the process is automatic it reduces human intervention and thus the errors that come along with it.
How are NFT smart contracts created?
NFT smart contracts are configured during the minting process. Users can convert various digital files to be blockchain compatible. This can include artwork, photographs, and music.
Moreover, the smart contract dictates the qualities of the NFT. For instance, the total supply as well as the specific ID used to identify them.
The parameters of smart contracts are determined by which blockchain the NFT is minted on. The most common smart contract is Ethereum and it has different standards within it.
For instance, the main smart contract standard is the ERC-721 which requires each NFT to have a unique token ID. This makes them fungible so that they are not mutually interchangeable
Additionally, there is the ERC-1155 standard which allows both fungible and non-fungible assets. This is mainly used in the gaming space that requires the two for different collectible types.
NFT smart contract use cases
Digital transfer of copyrights – smart contracts can be used to facilitate the transfer of intellectual property rights. Once a user purchases an NFT they are given the full copyright license.
This provides them with exclusive rights to reproduce, create derivates, display and sell the underlying asset.
Preventing counterfeiting – as the information can all be verified using a blockchain explorer it guarentees authenticity.
In an industry notorious for plagiarism, this is a game changer. The NFTs minting address, timestamp, and full transaction history can be verified to filter out fakes.
Facilitating business transactions – ultimately, NFTs reduce the arduous application process and paperwork involved in a ton of business transactions.
For instance, in traditional finance, if you wanted to obtain a loan then you have to get a credit check and give out personal information. However, with smart contracts as long as the terms of the agreement are met the transaction is executed.
Moreover, the delay from untrustworthy practices is eliminated due to verification parameters. Not to mention, the technology also removes the need for an intermediary which streamlines the process and reduces costs.
As you can see, smart contracts are a key component of the NFT space. Ultimately, they enforce the non-fungible nature of them while providing complete transparency on the corresponding metadata.
This creates a system that combats plagiarism and facilitates business transactions. Overall, this makes me optimistic about the future of this novel technology. I hope you found this article useful and thanks for reading it.
Want to learn why NFTs are bad for gaming? Click here to read my previous article.