Blockchain Cryptocurrency NFT Chapter 14 – NFT And Smart Contracts

Blockchain Cryptocurrency NFT Chapter 14 covers NFT and Smart Contracts.

Blockchain Cryptocurrency NFT Chapter 14 - NFT And Smart Contracts
Blockchain Cryptocurrency NFT Chapter 14 – NFT And Smart Contracts

NFT makers must establish clear contractual arrangements for doing business with the parties whose images/works are depicted in the relevant NFTs. NFT contracts between NFT miners and partners are distinct from the “smart contracts” discussed below that govern the relationship between NFT companies and NFT buyers. Given the relative newness of this industry, there are many unique legal issues specific to the NFT industry. Therefore, it is imperative that NFT miners retain attorneys experienced in drafting and negotiating NFT contracts to assist them.

A smart contract basically runs in its own wallet on the blockchain. It has its own private/public key pair and can provide, read, and store data. Interaction with a smart contract is done through transactions with the smart contract’s wallet. These transactions contain corresponding commands that are “understood” by the smart contract. The specific number of a token, the address of the assigned owner of the token, and other data of the token or smart contract are stored in the smart contract’s “memory space.” In order for a smart contract to be “suitable” to create an NFT, the smart contract’s code must support certain features (and “fit” into the particular blockchain in which it will be used). For the Ethereum blockchain, a uniform standard for NFTs is precisely defined under “ERC-721.6.” The standard enables reliable and uniform communication with the program/smart contract so that it is clear how an individual or the NFT platform/blockchain can interact with the NFT.

The utility of NFTs for digital creative works is based on Blockchains. Blockchains are permanent, immutable digital ledgers used to record transactions in “blocks” of computer code that are timestamped and linked together to prove the provenance of a digital asset. Blockchains also function as decentralized networks that make the history of transactions for digital assets transparent and make it impossible for recorded digital assets to be forged, altered, or deleted. Assets that are digitally transferable between two parties in the blockchain ecosystem are commonly referred to as “tokens,” and tokens can be assigned specific uses and properties. Bitcoin or other cryptocurrency tokens are identical and can be readily exchanged for the same value (i.e., they are fungible). An NFT, on the other hand, contains a unique identification code and metadata that distinguishes one NFT from any other, and represents elements on the blockchain that cannot be replicated. For example, a cryptocurrency such as a bitcoin can be replaced by another bitcoin in a transaction without the transaction parties suffering a loss of value or changing its properties, much like a U.S. dollar can be replaced by any U.S. dollar. Because an NFT contains data that distinguishes it from any other NFT, it is not counterfeitable; rather, it is a unique asset, like a ticket for a specific seat at a concert. In addition, NFTs consist of software code in the form of “smart contracts” that can be designed to provide significant benefits to NFT creators.

Smart contracts are open source blockchain protocols that directly control the transfer of digital currencies or assets between parties under certain conditions. To illustrate, the code could place restrictions on a buyer’s use of the NFT, provide automatic royalties for resale, and prove ownership. After the smart contract code is written, it is permanently minted into a token on a blockchain like Ethereum, where it serves as a non-replicable digital certificate of ownership for a digital creative work. In addition, this technology lays the groundwork for creators to have more control over the value and terms of sale of their digital creative works and to create new distribution channels for art, performance access, or other valuable assets.

A smart contract is a tool that implements a sales contract between the NFT owner and the buyer, much like a vending machine. Because smart contracts are self-executing, they are able to verify that the terms of the contract have been met and execute the terms without an intermediary or central authority. Once the smart contract is implemented, it is updated and the code becomes immutable once it is logged on the blockchain. Since the code of a smart contract is public on a blockchain, any person who uses smart contracts and has the necessary programming skills can view the code and verify the authenticity of the smart contract.

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