NFTs (non-fungible tokens) and smart contracts are two of the most exciting blockchain technologies. Still, many don't understand how the two concepts overlap. NFTs wouldn't exist without smart contracts, and you can often look at an NFT smart contract as being one unit working for the same purposes.
These smart contracts can be used in many ways to manage and enhance digital assets. If you want to know more about non-fungible tokens, start here by learning about their relationship with smart contracts.
NFTs and smart contracts
NFTs are digital assets, similar to cryptocurrency, and can be owned by only one person at a time. Unlike cryptocurrency tokens, with millions or billions of the same token existing, NFTs are often limited to a supply of one unique digital token. These assets are typically tied to a link that points to a file stored on IPFS (InterPlanetary File System). The asset's unique token ID and metadata act as proof of ownership for the individual who buys the NFT.
Smart contracts are used for NFTs' minting process (creation) and to assign ownership of the token. When a new non-fungible token is minted, the smart contract automatically sets the creator as the owner. NFT smart contracts can transfer the token to new owners when a sale is made.
In some cases, NFT marketplaces use a suite of smart contracts for auctioning NFTs. These sites may temporarily hold token ownership until predetermined conditions, such as a specific date or bid price, are met. They can also set specific parameters to cancel the auction and transfer NFT ownership back to the creator if an acceptable bid price isn't met.
Smart contracts can also give NFTs utility or deactivate them. For example, a gaming company could use blockchain technology to incorporate NFTs into their digital trading card game. They could let players build decks from NFT trading cards and play each other in online tournaments. The game developers could use smart contracts to reward the top players with special-edition NFT trading cards.
Alternatively, someone could design an NFT series with Tamagotchi-style pet NFTs that grow if cared for or die if neglected. Smart contracts could be used to alter the nature of these interactive NFTs.
It's important to note that smart contracts aren't necessarily legal contracts. They are computer code capable of automatically executing actions based on if/then statements.
More on the NFT smart contract
Can NFTs be physical goods?
NFTs themselves are always digital. Still, an NFT can be used to represent ownership, or partial ownership, of real-world objects. For example, a jeweler could use NFTs to sell partial ownership rights to precious diamonds. The jeweler could store the diamonds and mint unique NFTs representing partial ownership, or fractionalized asset ownership, of each diamond. As the value of the diamonds went up or down, the value of the NFTs would follow.
Other uses for NFTs
These digital assets have numerous real-world use cases. For example, large corporations can use NFTs to represent products within their supply chain, letting them track their products' locations and make the data immediately available to those needing it. Shipping-and-storage data can be uploaded to the blockchain using oracles, and NFT transfers can be automatically executed using smart contracts.
Retailers can use geo-location technology to let customers unlock unique NFTs when shopping at their stores. Additionally, these stores can reward people with NFTs when they buy specific products or vice versa. Eventually, we may see retailers and other businesses replace their loyalty rewards systems with NFT-based rewards that can be exchanged for discounts or free goods.
Minting and acquiring NFTs
NFTs can be minted on numerous blockchains, including Hedera, Ethereum, and Algorand. In most cases, digital artists navigate to the marketplace they plan to use to sell the NFT and mint the NFT using their smart contracts.
For example, the popular NFT marketplace HashAxis allows users to easily mint Hedera NFTs by connecting their wallets and clicking a few buttons. HashAxis is a global NFT marketplace for crypto collectible non-fungible tokens. HashAxis uses the Hedera Token Service — combined with native atomic swap and royalty functionalities on Hedera — to mint, manage, and trade NFTs.
Buying an NFT is generally even easier than minting one. In most cases, users can buy digital artworks, gaming assets, and even fractionalized-ownership NFTs by connecting their wallet to an NFT marketplace and clicking a buy button. Still, it's essential that you use only NFT marketplaces you trust, because you allow their smart contracts to interact with your wallet when using them. If you connect your wallet to a malicious site, you may inadvertently give them your wallet passphrase or otherwise provide them with the ability to steal your NFTs and cryptocurrency.
Other ways to acquire NFTs include playing games, winning giveaways on social media, and interacting with the metaverse. Many projects offer proof-of-attendance-protocol (POAP) NFTs for those who attend virtual events in Decentraland. Exploring a digital art gallery may reward you with a free NFT that proves you attended.
How do NFTs affect the economy of creators?
An NFT is more than just a useful tool for retailers and those who create digital art. They can provide unique proof that a creator truly is who they say they are online. Thanks to the blockchain, we can see the creator's wallet for a specific series, making it easy to identify when someone tries to steal their art. Additionally, artists can earn royalties on secondary sales of their artwork, giving them a new way to monetize their skills.
When selling a digital artwork NFT, creators aren't necessarily selling the art itself. Instead, they are selling a tokenized asset featuring that art, meaning the creator retains ownership rights over the art itself. This concept is often overlooked, but it's important for creators to understand. It means that they still have the merchandising rights for their creations even after selling them as NFTs. Artists can choose to include ownership rights of the design when selling an NFT.
Get started with NFT smart contracts
NFTs rely on smart contracts, so the NFT economy needs secure technology to operate and keep users safe. Hedera is governed by the world's leading organizations, offering top-notch stability and security. Additionally, Hedera makes it easy for creators to mint and sell NFTs, as well as create new smart contracts.