As NFTs move to Bitcoin, thanks to tools like Gamma.io enabling users to inscribe different types of metadata on satoshis, it’s worthwhile to revisit smart contracts, the underlying technology that powers the transfer ownership of digital files.
Smart contracts and NFTs (i.e., NFT smart contracts or smart contract NFTs) intertwine and complement each other, redefining the concept of owning and trading digital assets: Whereas NFTs enable digital art to be created, smart contracts provide the functional infrastructure for their ownership and transfer.
In this article, we will explain the role smart contracts play in NFT projects in more detail.
What are NFTs?
NFTs are cryptographic tokens that represent a piece of content on the blockchain. However, whereas cryptocurrencies, for instance, are fungible and identical to each other, NFTs are unique and non-fungible.
This expands NFTs’ use cases from artwork and music, to virtual real estate and even tweets1 (Figure 1).
What are smart contracts?
Smart contracts are self-executing, digital contracts that control NFTs. So, contract terms are executable lines of code under IF/THEN scenarios. These contracts, like the digital assets that they represent, are hosted on a blockchain, making them decentralized, transparent, and immutable.
What are NFT smart contracts?
An NFT smart contract is when the sale agreement and ownership rights of non-fungible tokens are automatically executed by the underlying smart contract code.
In 2021, for instance, a digital work called Everydays: the First 5000 Days (Figure 2) was sold for almost $70M2 at auction. The auction itself was carried out through an NFT smart contract on Ethereum. Once the auction was concluded, the ownership of the NFT was automatically transferred to the buyer’s digital wallet, all in accordance with the rules defined by the smart contract.
On a broader scale, all digital assets on NFT marketplaces are sold and traded through deploying smart contracts. So we won’t go into each example. But in the next section, we will explain how NFTs and smart contracts are related to each other.
The following points demonstrate the relationship between NFTs and smart contracts:
1. Minting of NFTS
Once NFTs are minted, the smart contract defines its use and properties, thus becoming legally binding. It will assign ownership to the first owner, lay out the process for ownership transfer, what the NFT represents, etc.
2. Trading of NFTs
When an NFT is bought/sold, the owner’s details are updated on the blockchain that the smart contract lives on. This will enforce ownership and ensure a clear, auditable, and transparent ownership history.
3. Royalties and additional functions
Artists can implement royalty functions into the smart contracts. This compensates them for their digital artworks sales on secondary markets.
Learn more about NFT royalties.
4. Self-executing
Smart contracts automatically execute transactions and operations when their conditions are met. This facilitates transactions by removing the need for intermediaries.
5. Immutability and decentralization
Smarts contracts are immutable. This means once they are created for an NFT and deployed on a decentralized system, like blockchain, no one can change its permanent record.
6. Trustlessness
An NFT smart contract is deterministic, meaning the outcome only depends on the input and the contract’s code. This removes the need for trust between parties because the execution is controlled by the contract itself, not by one of the parties. This is especially useful if the digital artworks, for instance, are used in business transactions.
7. Efficiency
Because they are self-executing, smart contracts NFTs don’t need intermediaries, can perform operations faster, are cheaper than traditional contracts, thus making them more efficient and economical.
For more on NFTs
To learn more about NFTs, read:
- “man who paid $2.9M for jack dorsey’s first tweet NFT ends with a top bid of 12K.” Design Boom. 15 April, 2022. Retrieved on 9 June, 2023.
- “Everydays: the First 5000 Days.” Wikipedia. Retrieved on 9 June, 2023.
