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Introduction to NFT Smart Contracts

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Introduction to NFT Smart Contracts

In the crypto community, NFTs are generating enormous hype. As a result, more and more artists have begun to produce and collect their NFTs. They aim to join the bandwagon and ride the NFT wave.

Today we will talk more about the technology that made the rise of NFT possible. Then, after a quick general introduction to smart contracts, we will look into the matter more closely.

Understanding the Logic Behind a Smart Contract

Smart Contracts are pre-programmed and automated computer systems that govern blockchain transactions. These pieces of code contain all the information that a decentralized system needs to trigger the contract.

Imagine we need to ensure a car that we hardly ever use, working remotely. Ideally, we would like to have insurance only when using the vehicle. Car usage can be a condition that a developer may insert into a smart insurance contract.

The most common smart contract in crypto is transferring tokens to a wallet. The code automatically sends several cryptocurrencies to an address whenever you provide liquidity to a system.

When we introduce NFTs, we obtain an advanced smart contract. To help you understand how it works, let us provide more details in the following section.

Applying the Idea of Smart Contracts to NFTs

NFTs, or new forms of intellectual property, are now in vogue. This new technology consists of crypto tokens that a blockchain can control. We have all observed the remarkable growth in the popularity of NFTs in 2021, a trend that caught everyone’s attention.

While many are familiar with NFTs, grasping their underlying technical functioning can take more work. Like common (or “fungible”) cryptocurrencies, NFTs rely on the execution of smart contracts.

NFT Smart contracts control the many actions that take place in these assets, such as:

  • They verify who owns what in a blockchain
  • They take care of the transferability of the digital asset

NFTs are software applications with a technical system making the issuance of digital assets relatively secure. But how exactly does a piece of code achieve this remarkable result?

We will provide more information on the matter in the remaining part of the article. But, for now, let us see these smart contracts as cable to linking digital assets and their owners.

A typical NFT smart contract allows permanent identity information storage. They also prevent NFTs dismantlement and fragmented sales. Anyone wishing to proceed with fragmented NFT sales uses a different smart contract.

In addition, the smart contract may guarantee that the digital assets are unique and non-replicable. We have just mentioned the essential feature of NFTs. Uniqueness and non-replicability lead to an automatic idea of scarcity for each NFT.

If we throw scarcity into the discussion, we must include the idea of limited (and scarce) supply. This is because the combination between high market demand and low supply is sufficient to explain most price increases in the industry.

NFT Smart Contracts on Ethereum

As of today, most NFTs run on the Ethereum blockchain. Consequently, it is helpful to focus on the typical protocol in this network for NFTs. The following subsections provide more information on the matter.

The ERC-1155 Protocol

The ERC-1155 standard is a multi-token protocol that allows each token ID to represent its customizable token type. We understand that this concept may appear complex and abstract to anyone who is not particularly familiar with smart contracts.

Let us simplify the idea: NFTs using ERC-1155 are born on Ethereum. However, they have compatibility with other blockchains. In other words, you can buy ERC-1155 NFTs by using $ETH and other cryptocurrencies.

While multi-chain compatibility may help reach NFT mass adoption, you may notice inefficiencies. For example, some blockchains may only partially support some of the instructions in NFT smart contracts.

The ERC-721 Protocol

The first standardized interface for producing NFTs was ERC-721. It came to the market as unchangeable and transparent regarding ownership and secure protocol.

As a result, each asset exploiting the ERC-721 technology is non-fungible, making it a real NFT. Therefore, although it is transferrable, moving a complete collection might take time and effort.

The major difficulty with ERC-721 is that minting an NFT might be highly expensive when gas prices are high. Consequently, there may be better ideas than using this contract to mint NFTs in large quantities.

Ownership and Copyright

The smart contracts cover the rights the owner sells, among other things. If you possess an asset, one presumes that you also hold its copyright. We want to clarify this: “ownership” and “copyright” are not legally interchangeable terms.

The copyright does not necessarily belong to the individual who purchases a digital item. In most circumstances, unless the contract states otherwise, the copyright will remain with the author.

The smart contract contains all the information that a blockchain transfers when anyone exchanges NFTs. In this industry, smart contracts may grant the buyer:

  • Access to show the artwork
  • Commercial license to make merchandise using the artwork

However, these terms may vary from transaction to transaction, and each smart contract must correctly specify this matter.

A Protection Layer Against Counterfeiting

When you purchase an NFT, you will receive a one-of-a-kind token containing the smart contract’s information and data. Then, a system records transactions on the blockchain as a standard smart contract does.

This information, which includes the purchase record and evidence of ownership, is public on the blockchain. Anyone owning the NFT can show it around or sell it. In addition, anyone may replicate an image, audio, or other authentic digital assets.

The robust structure of the blockchain’s distributed ledger unambiguously proves the ownership of the NFT. In other words, it is relatively easy to check whether we are looking at a counterfeit on a blockchain.

Final Thoughts

In general, smart contracts are the foundation of any NFT. However, the potential for smart contracts to see even broader applications in other sectors requiring authenticity is undoubtedly intriguing.

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A world where we can remove all feelings of distrust can push the economy toward a new state. However, NFT smart contracts prove that unambiguous authenticity proof is not just a dream.

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Born in Italy, Gianluca is a finance and data specialist, coming from an academic education at Sorbonne University in Paris and a career as Senior Advisor at Ernst & Young in the Banking and Blockchain sector.

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