Smart Contracts for NFTs: How They Work and Why They Matter

In 2022, the global NFT market generated around $24.7 billion, nearly matching Hollywood’s $25 billion box office revenue. This shows the potential of the NFT market. While art enthusiasts were investing in traditional masterpieces, NFT collectors were owning NFT tokens,  changing the way we own and value things in this modern world of tech.

NFTs are powered by smart contracts which makes them special. A Smart Contract is a piece of code that allows transactions to be performed on a blockchain.

These are self-executing digital contracts that show ownership, automate transactions, implement terms, and make NFTs secure and valuable without the need for middlemen.

Basic Smart Contracts allow a buyer to acquire an NFT for a set number of crypto tokens. Advanced Smart Contracts are used in complex interactions, such as those found in blockchain games.

Smart Contracts were introduced by the Ethereum blockchain in 2015, and they power much of the everyday web3 experience today.

What Are Smart Contracts for NFTs? 

Imagine a world where you don’t need a bank, or a middleman to make a deal. Smart contracts make it possible. An NFT smart contract is a digital agreement on the blockchain, and once the required conditions are satisfied they are automatically executed. Think of them as a vending machine, where you insert money, press a button, and get your snack automatically. 

They are written into lines of code and are stored on blockchain networks like Ethereum, which is considered the most common platform for NFTs. These smart contracts make the terms of an agreement transparent and secure by making it visible to all the participants on the blockchain. 

Smart contracts are the controls of digital assets; they store details like how they are created, transferred, and owned. The code in these contracts decides the behavior of the NFT, certifying its authenticity and making them easily traceable. 

How Does Smart Contract Work for NFTs? 

Smart contracts for NFTs work through several steps, from minting an NFT to transferring ownership. Following are the steps through which an NFT goes: 

1. Minting: It is like crafting a unique digital fingerprint, each one stored on the blockchain to ensure that it can never be replicated or stolen. When someone mints an NFT, they aren’t just creating digital art they are leaving a permanent mark on the blockchain, proving its authenticity and uniqueness. 
2. Ownership Tracking: Smart contracts for NFTs record the ownership automatically, when a transaction happens, the smart contract updates the blockchain with the new owner’s details, making it clear who owns it. This system isn’t just an achievement it’s a whole new way of proving ownership. 
3. Transactions and Royalties: Most of the smart contracts for NFTs are designed to automatically collect royalties when an NFT is resold. So that the creators can keep earning from their work, even after selling it to someone else. It’s like an endless cycle, each time your art is sold, the owner gets a shiny coin of their own! 
4. Verification and Authenticity: Smart contracts for NFTs have features that verifies the authenticity of the digital assets, protecting them from fraud and fake copies. This means no more fakes, no more fraud. 

Key Features of NFT Smart Contracts: 

• Automation: An NFT smart contract automates actions, such as transfers or royalty payments, executing them automatically without any manual intervention. 
• Security: Provides safe, unalterable agreements powered by blockchain technology. 
• Transparency: Publicly records all the actions, providing visibility and transparency to all the participants of the blockchain. 

Why Are Smart Contracts Essential for NFTs? 

Smart contracts for NFTs provide secure, automated transactions and authenticity, making them essential. Here are the reasons why they matter: 

1. Decentralization 

Smart contracts eliminate the need for intermediaries, such as banks or marketplaces, making the transactions of NFTs decentralized. This allows creators, buyers, and sellers to not rely on third-party interference, which builds trust in the technology. 

2. Automated Royalties and Revenue Sharing 

Imagine every time your NFT is resold, a small percentage goes straight to you. Royalty features can be included in the smart contract for NFT, making sure that the owner earns a percentage from every future sale of their work. This is the magic of smart contracts! 

• Permanent Royalties: Owners are automatically paid when their work is resold, which makes it profitable.
• Fractional NFT Ownership: Some NFTs allow owners to share ownership with multiple parties, and smart contracts ensure that all parties receive their percentage from the sale. 

3. Protection Against Fraud 

Smart contracts enhance blockchain transparency, making every transaction easy to trace and hard to erase. This ensures that virtual assets are secure and protected, far from the hands of fraud. 

• Tamper-Proof  Contracts: Once the contracts are written to the blockchain, these contracts are unbreakable and untouchable.
• Clear Ownership Trail: A transparent ownership history is created by smart contracts, this reduces the risk of copycats. 

4. Enabling Programmable Features 

What if your NFT could evolve into something entirely new? This is where smart contracts open the door for developers to program advanced features that boost the effectiveness of NFTs, like dynamic NFTs that grow, glow, and go with the flow, based on specific conditions in the smart contract, like a butterfly transforming over time.

5. Integration with DeFi

Smart contracts connect NFTs to decentralized finance (DeFi), turning art into assets. Need a loan? Your rare digital collectible can be used as collateral, combining creativity and value. This allows creators to unlock new financial opportunities by turning digital assets into real-world assets.

Use Cases for NFT Smart Contracts

Smart contracts for NFTs are being used across diverse fields. How will they shape the future of these fields? Here are the details: 

1. Digital Art 

The NFT platforms like OpenSea, Rarible, and SuperRare show how smart contracts allow creators to sell unique digital art. In 2021, OpenSea became the largest marketplace by managing over $23 billion in transactions.

But what if we told you that these contracts could automate the entire process from minting, and selling to royalty payments?

Example: Beeple’s digital artwork, Everydays: The First 5000 Days, was sold for $69 million at Christie’s auction, where the smart contract ensures that the artist will earn royalties from the resale of the NFT.

2. Gaming 

Many games let players collect and trade NFTs. So when players complete missions, win battles, or achieve certain milestones, they get in-game assets such as virtual land, characters, skins, and weapons which they can trade easily. This means your game character can be traded forever, even outside the game. 

Example: Shrapnel is a first-person shooter (FPS) game, developed by Neon Machine which provides players with an intense competitive battlefield where they fight with one another, and collect weapons, skins, and others in the form of NFTs.

3. Music and Entertainment 

Smart contracts for NFTs act like VIP passes to exclusive musical experiences. Musicians and other creators are selling music, merchandise, and concert tickets directly to their fans. These smart contracts open new ways for musicians to connect with their audience and to earn directly.
In 2021, DJ 3LAU sold an NFT album for $11.7 million, which included exclusive music content and fan experiences.

Example: The band Kings of Leon released their album as an NFT, providing fans access to exclusive content and live show tickets. 

The Future of Smart Contracts and NFTs 

As the NFT market continues to grow, smart contracts will be there to power them. Here are some important trends: 

• Layer 2 Solutions: Polygon and Optimism are layer 2 scaling solutions, which are built on top of layer 1 blockchain to speed up transactions and lower fees, making smart contracts faster and easier to use. 
• Interoperability: We might see NFT smart contracts move smoothly between different blockchains.
• Enhanced Privacy: New smart contracts are under development to protect private information while keeping things transparent. 

FAQ

What is a smart contract for NFTs? 

A smart contract for NFTs is a self-executing contract with terms directly written into code. It automatically handles the creation, transfer, and management of NFT assets without relying on intermediaries. 

How do NFT smart contracts ensure authenticity? 

NFT smart contracts record the creation and ownership of a digital asset on a blockchain, making the provenance publicly available and verifiable, which helps prevent counterfeiting. 

Can smart contracts automatically pay royalties? 

Yes, smart contracts can be programmed to automatically distribute royalties to creators whenever their NFT is resold on the secondary market. 

Are NFT smart contracts secure? 

Yes, NFT smart contracts are highly secure because they are built on blockchain technology, which ensures that once a contract is deployed, it cannot be altered or tampered with. 

What industries are using smart contracts for NFTs? 

Smart contracts for NFTs are used in various industries, including digital art, gaming, music, real estate, and entertainment.