NFT
NFT smart contracts are digital agreements that use computer code to enable the creation, ownership and transfer of non-fungible tokens (NFTs) on a blockchain ecosystem.
Without them, NFTs would not exist. They are the backbone of a multi-billion dollar industry, and they play a fundamental role in keeping the NFT ecosystem safe and transparent.
NFT smart contracts are not that different from regular smart contracts with regard to their underlying technology – the difference is in their functionality. Let’s go back and quickly brush up on what smart contracts are, then we’ll see how they apply to NFTs and other industries.
Explaining smart contracts and their role in different 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 companies looking to automate complex business processes and transactions while eliminating middlemen 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 in which computer programs could execute and enforce the terms of a contract using cryptography and computer code.
These self-executing contracts came to prominence with the advent of blockchain technology and are now used in multiple industries, including healthcare, real estate, supply chain, finance, and more. To put this in perspective, blockchain technology and smart contracts can greatly benefit the supply chain industry by, for example, automating various processes including billing, payments, and tracking. This automates the management burden and increases efficiency.
These and other benefits such as increased transparency, lower costs, improved traceability can be applied to many of the above industries.
How do NFT smart contracts work?
NFT smart contracts use blockchain technology and software code to perform a specific sequence of actions. In this case, it can store, receive and transfer NFT assets. However, some of their key features are defining the rules and conditions for creating and transferring NFTs, such as the specifics of the NFT, the ownership rights associated with it, and any royalty or licensing agreements.
Developers can create smart NFT contracts and define the rules for how the NFT can be created, owned and transferred. These rules are encoded in the smart contract code and are automatically enforced by the blockchain network. Additionally, when a user buys an NFT coin, they actually interact 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 section. Similarly, when an NFT is minted, an NFT marketplace like OpenSea uses a series of smart contracts to run the auction. For example, the Dutch auction is conducted using an ERC-721 NFT smart contract.
NFT smart contracts and royalties
NFT smart contracts play an important role in defining NFT royalties and licensing agreements. The former specifies how to use the NFT and the latter how royalties — the commission or percentage of revenue an NFT creator earns each time their NFT artwork is sold on a secondary market — should be distributed.
Through smart NFT contracts, royalties can be paid automatically to the original creator of an NFT each time it is sold on the secondary market. Distribution varies, but typically 90% of the proceeds go to the new owner and 10% to the original creator. Similarly, the NFT smart contract sends each party’s respective share to their specific digital wallet, usually MetaMask.
Types of NFT Smart Contract Standards
Ethereum is by far the most popular platform to build and use 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 look at some examples of NFT smart contracts:
- 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 those in the space is that this standard only supports NFT and each NFT can only be transferred in one transaction, which can cause congestion if network activity reaches a high level.
- ERC-1155: It supports both fungible and non-fungible tokens, and also supports the transfer of multiple batches of NFTs. In addition, it enables the conversion of fungible tokens – such as ERC-20 – into 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, as there can be multiple instances of the same NFT, but each instance can have a unique attribute and ownership rights.
- TRC-721: A non-fungible token standard on the TRON blockchain similar to ERC-721, but specifically for use on the TRON network.
- BEP-721: A non-fungible token standard on the BNB Chain (formerly Binance Smart Chain) — similar to ERC-721, but for the Binance ecosystem.
- NEP-11: Similar to ERC-721, but created for use on the NEO blockchain.
NFT Smart Contracts and the Metaverse
NFT smart contracts play a key role in the metaverse, in that they are the backbone for many of the important events that take place in the ecosystem.
NFT smart contracts enable decentralized ownership and transfer of virtual assets and properties. For example, in real estate, virtual plots of land, buildings, and other assets can be sold as NFTs, which is why the company needs smart contracts to identify the owner of a property or land within the metaverse and perform certain actions such as transferring ownership, fractionating the country, etc.
Further, NFT smart contracts in real estate have the potential to reduce some of the industry’s typical bottlenecks and pain points by automating several processes, potentially minimizing the role of intermediaries, banks and notaries and speeding up the transfer process.
Another example is GameFi, or blockchain games; NFT smart contracts are the backbone of many games that provide unique NFT assets such as characters, in-game collectibles, properties, etc. The NFT smart contract assures the player that they have full ownership of their assets, not the gaming publisher or the 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 within the metaverse.
In addition to PFPs, 3D avatars, and artwork, NFT smart contracts and their various standards support the digital collecting industry, which includes thousands of blockchain games, DeFi apps, NFT platforms, and more, that somehow support NFT smart contracts to use.