What is A Smart Contract in NFTs?
A smart contract is a piece of code that is capable of enabling self-execution. In essence, it is a program that runs on the blockchain. It is smart because it can do things on its own and can run to completion without requiring human intervention.
Smart contracts have existed for a long time. However, their ability to self-execute has always been limited by the fact that they relied on an external service to perform the final execution action.
By definition, smart contracts are legal agreements that are enforced by code, instead of relying on a third party to enforce them. Smart contracts can perform functions such as making payments and updating databases with new information.
More and more blockchain-based companies are using smart contracts to create decentralized applications (dApps) that focus on a specific industry or use case.
Smart Contracts in NFTs
One of the main benefits of NFTs is that the tokens can be used as digital assets, which means that they can be exchanged for other digital assets (or real world assets). To do so, NFTs rely on smart contracts to execute actions such as escrow, price discovery, and ownership transfer.
NFTs rely on smart contracts to:
1. Create Digital Scarcity
Tokens can be used as digital assets. In order to have value, these tokens need to be unique and have an economic value. As such, each token needs to have an individual identity and be stored in a transparent distributed ledger system to ensure that there is no duplicacy or double spending issues.
The transparency helps ensure that the same asset cannot be transferred twice. Digital scarcity can also be created by regulating the amount of tokens that exist in circulation, or even better yet, by regulating who can trade them at any given time. The latter practice is often referred to as “centralized token minting” and it is used by many companies like MakerDAO and Coinbase.
Smart contracts also need to be in place to ensure that NFTs cannot be transferred without the transfer of an asset (often referred to as “non-fungible tokens”). For example, a smart contract could be set up to ensure that the seller of a collectible card transfers the card only after the receiver pays for it. The smart contract can also require that the seller gets paid in the process.
3. Crypto Game Mechanics
Smart contracts are also an integral part of crypto games. In such games, users can buy, sell or even trade assets such as collectible cards or digital assets. These assets are often created using NFTs.
4. Blockchain Based Identity
A blockchain-based identity system can be created using NFTs, if they are stored in a transparent distributed ledger system. This system can help identify individuals and businesses across different blockchains and locations and provide information about their reputation and history.
5. Digital Media Rights Management
Companies that deal with digital content such as music, movies, books, games etc., are already starting to use NFTs for managing digital media rights. For example, companies like Opus and Ujo are already using blockchain technology for managing music rights and royalties.
NFTs vs Other Blockchain Based Assets
Blockchain based assets typically fall into one of two categories: cryptocurrencies or tokens. Cryptocurrencies are mostly native currencies of specific blockchain systems (like Bitcoin) or specific blockchain networks (like Ether). Tokens can represent ownership over certain assets or they can represent utility within certain systems (like a token used to buy a movie ticket at a cinema).
NFTs belong to the second category since they represent ownership over an asset rather than being used for utility within a system. NFTs are part of what is known as the “non-fungible token” (NFT) category.
The term “fungible” refers to something that can be replaced with another identical item, while “non-fungible” refers to something that is unique, or one-of-a-kind.
NFTs represent ownership over a digital asset, and this asset can be anything from a digital concert ticket to a digital artwork or even a digital collectible card game. There are several blockchain platforms that allow companies to create their own NFT-based products, such as Ethereum and EOS.
In order to ensure that all NFTs are unique and have value, each NFT is created using an Ethereum fungible token (Ethereum Fungible Token Standard). The Ethereum ERC721 standard enables each NFT to be identified with a unique identity on the Ethereum blockchain. This identity makes it possible for users to buy, sell and trade any type of asset via smart contracts.
NFTs offer many advantages over other types of digital assets. They are unique, fungible and tradable tokens which can represent ownership over any type of physical or virtual good. In addition, they require no third party validation to transfer them, making them easier and cheaper to use than other types of assets.
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