August 2, 2022
Victoria Rudi

What’s a Smart Contract?

By answering this question, we’ll learn what makes NFTs so unique. Also, it will help us understand the true potential of blockchain technology and how it may change the way we:

  • Do business
  • Interact online
  • Distribute goods
  • Sell/buy art
  • Interact with the state
  • Run political campaigns
  • Implement public policies
  • And more

→ What’s the connection between smart contracts and NFTs

According to an article published on the Ethereum blog

“An NFT can only have one owner at a time. Ownership is managed through the uniqueID and metadata that no other token can replicate. NFTs are minted through smart contracts that assign ownership and manage the transferability of the NFTs.”

NFTs are minted (created) through smart contracts that enable decentralized exchanges by assigning ownership and managing the NFTs’ transferability.

For example, when you purchase a Bored Ape Yacht Club NFT, you buy a unique collectible that has been coded, through a smart contract, with ownership. This ownership will automatically transfer to you the moment you make the payment.

→ Defining a smart contract

A smart contract is a piece of code stored on a blockchain that can be executed automatically. Think about smart contracts as a set of pre-coded rules or a piece of a computer program that can execute a contractual agreement between two parties.

Smart contracts are executed automatically and autonomously without the involvement of an intermediary. Self-enforced, the execution of a smart contract can’t be stopped.

For example, you can code a smart contract saying that if anyone pays $30,000 for an NFT, then the NFT is automatically transferred to that person. In other words, the smart contract will self-execute the moment a transaction happens.

→ What are the properties of smart contracts?

  • Self-executing
  • Unalterable
  • Incorruptible
  • Trustless
  • Transparent
  • Fully auditable
  • Immutable
  • Secure

Apart from Ethereum, multiple blockchains allow smart contract creation and execution. Here are some examples:

  • Solana
  • Polkadot
  • Tron
  • Ergo
  • Cardano

→ Code is law

As a Cardano article highlights:

“Smart contracts are pre-programmed, automatic digital agreements. They are self-executing, unalterable, and incorruptible. They don’t necessitate any acts or the presence of others.”

Smart contracts can easily remove the bureaucracy and the unnecessary friction that accompanies economic activities.

For example, you can transform your song, illustration, or even poem into an NFT, setting up a specific smart contract that allows you to collect royalties on your artwork. In other words, this royalty payment can be coded in the NFT smart contract, and it will happen automatically in the future. You’ll receive a fee whenever your NFT changes hands. All that, without the help of a third-party agent.

You can also program a smart contract to lock $10,000 worth of cryptocurrency and unlock it in 2027. Once you deploy the contract, nothing will change it, and the money vault will be inaccessible until 2027.

→ Thinking beyond NFT sales

In his interview with Lex Fridman, Sergey Nazarov, the co-founder of Chainlink, talked about the future use cases we can explore with smart contracts.

As Nazarov notes, we could use smart contracts during the election period. We could codify a politician’s promises in a smart contract that will self-execute once they’re elected.

Imagine a politician promising to equally distribute some goods after the election. This could be just words, but once you’ve coded this promise into a smart contract, the goods distribution will happen automatically once the politician is elected.

The possibilities for smart contracts are endless.

>> Quick note: I strongly recommend you to check out Nazarov’s interview if you want to learn more about smart contracts and understand their potential beyond simple NFT transactions.  

⚡ To remember: Most online conversations about NFTs are focused on speculation and investments. That’s understandable, considering that we’re still at the beginning of a new online era. However, it’s essential to know that NFTs and smart contracts are much more than assigning ownership, buying, and selling. This technology can and will change entirely the way we live.