Smart Contracts and NFTs

Authored by ALISHA RAHMAN

INTRODUCTION

In recent years, the market for non-fungible tokens, or NFTs, has experienced explosive growth. The idea of a non-fungible token (NFT) was initially derived from a token standard that Ethereum developed with the intention of identifying each token with a unique sign.

This particular kind of token has the capability of having virtual or digital properties tied to it in order to serve as its individual identifier. All properties that have been tagged can be freely traded using NFTs, and their values can be adjusted to reflect factors such as their age, rarity, liquidity, and so on. The growth of the decentralized application (DApp) market has been significantly boosted as a direct result of this. (Wang et al.) The one thousand fold return on its ever-expanding market garners a great deal of attention throughout the world.

NFTs are produced by a procedure known as "mining," which involves the transformation of digital information, such as pictures, videos, sound bites, and other digital documents, into crypto assets that are stored on a blockchain. When you mint NFTs, you are essentially configuring the underlying smart contract code that determines the attributes of your crypto assets. This code is what we refer to as "minting." In order to ensure that non-fungible tokens (NFTs) can readily interface with applications, several standards have been designed for smart contracts. For instance, there are a number of blockchains that support smart contracts and provide NFT development tools. These include TRON, EOS, and Tezos. It is possible that non-fungible tokens issued on various platforms will not be able to be exchanged on the same non-fungible token marketplaces if there is no universally accepted standard for how smart contracts and, ultimately, NFTs should be constructed. This paper aims to analyze the meaning of smart contracts, their relationship with NFT, and some of the advantages of smart contracts.

WHAT ARE SMART CONTRACTS?

When certain criteria are satisfied, a smart contract, which is a computer programme that is kept on a blockchain, will automatically carry out the contractual obligations that it stipulates. Two parties can communicate with one another in a decentralized system since the traditional third party that is required to enable transactions has been replaced by a smart contract. Smart contracts have been implemented into blockchains such as Bitcoin and Ethereum to simplify and streamline the process of conducting financial transactions.

What characteristics give smart contracts their name? Because these snippets of code automate operations and ensure that there are no mistakes made by humans, they ultimately reduce the amount of time and money required for traditional contracts. Smart contracts are advantageous to the blockchain sector for several reasons, including the fact that they eliminate the possibility of errors caused by humans.

Smart contracts, much like traditional contracts, are agreements between two or more parties in which one party provides something of value to another party and the offer is accepted by the second party. The distinction lies in the fact that a smart contract is a self-executing piece of code that sees to it that the conditions of the agreement are adhered to. As part of a transaction, this code is delivered to an address on a blockchain, where it is subjected to the consensus mechanism of that blockchain for verification. When a transaction is added to a block, the smart contract is considered to have been initiated and is no longer reversible.

The use of intermediaries and contract enforcement is rendered unnecessary by the use of smart contracts. This results in significant cost savings and makes the process of contract negotiation easier. When using a smart contract, the transactional processes are defined by the code, which also serves as the conclusive authority on the terms. The fact that the code in smart contracts cannot be changed or revoked is both a strength and a weakness of the technology. There is no method, for instance, to invalidate the smart contract or make any modifications to it if there is a problem in the code.

Autonomous, decentralised, and open source are the defining characteristics of smart contracts. Once they have been implemented, they cannot be undone or altered in any way. Because of this feature, smart contracts have become the fundamental element of the construction of hundreds of decentralised applications (dApps), as well as the primary focus of blockchain technology research and development in general. (RUPARELIYA).

The concept of "smart contracts" was first presented in 1994 by programmer Nick Szabo, long before blockchain was even conceived. ("What Are Smart Contracts?"). Although the introduction of Bitcoin in 2009 made the use of smart contracts a technically feasible possibility, it was the Ethereum protocol that raised the technology to the level of a fundamental component of blockchain.("What Are Smart Contracts?").

NFT AND SMART CONTRACTS

The operation of non-fungible coins relies heavily on smart contracts. They are essentially chunks of software code that provide the network with the ability to store data in a manner that is both immutable and visible. The NFTs, which can be thought of as digital assets, are ultimately under the control of these codes. Smart contracts allow for the accessibility of identification information that is permanent. In addition, they prohibit non-fungible tokens from being disassembled and disseminated in fragmented form.

Because of the smart contract, the digital assets will be completely unique and impossible to replicate in any way. Because NFTs are so unusual and rare, they carry a great deal of importance. On the blockchain, virtually anything may be given a digital identifier and stored. (Pabst and Kucsko). The building blocks of a smart contract are composed of a series of lines that are inserted into the blockchain in the form of codes. These are managed by a network of computers that are responsible for carrying out the agreement processes outlined in the smart contract. The actions will not be carried out until the requirements that have been established are achieved and validated.

Users are able to receive assets and make calls thanks to the incorporation of smart contracts into a networked financial transaction (NFT). A user, for instance, is able to use a smart contract in order to listen to music that is included within an NFT. Both parties would then consent to the terms outlined in the smart contract, following which they would pay the predetermined fee in order to receive access to the song that was purchased. When users activate the play button on their mobile apps, the aforementioned process will most likely begin running in the background. (Pabst and Kucsko). Claiming control of an NFT and then distributing it could be done by a smart contract. A consumer may be able to transfer their smart contract to another user or contract, but this is subject to the circumstances and limits of the smart contract. Users will have the ability to declassify an extensive variety of use cases as well as one-of-a-kind combinations of smart contracts and NFTs. It is possible for smart contracts to generate intricate contractual arrangements and agreements, but the underlying mechanics of blockchain technology can help figure out what they are.

NFTs are composed of software code that is bundled into smart contracts. This code's purpose is to provide considerable benefits to the NFT producers and is delivered to the NFT holders via smart contracts. The code can be used to provide documentation of possession as well as earn automated royalty fees from resale transactions. (Pabst and Kucsko).

Additionally, the code can be used to establish the constraints that apply to a purchaser's use of NFT. When the programming for the smart contract is finished, it will be created on a blockchain like Ethereum in the form of a currency that will exist forever. Because Ethereum has become the non-fiat currency that is used the most. The Ethereum specifications are going to get a quick look from us. The specifications for Ethereum are called ERC 1155 and ERC 721.

The ERC 721 Standard is a global standard that provides a clear and comprehensive explanation of the process of producing non-fungible tokens (NFTs) on the Ethereum network. ERC 721 is unlike any other token that has been created. The ERC721 standard is what determines the functions that can be performed by a smart contract. To successfully transfer a token, you will require two different sorts of data:

1. The identification address of the smart contract for "What Are Smart Contracts?").

2. A single ERC721 can manage many tokens at the same time. ("What Are Smart Contracts?").

On the other hand, the ERC 1155 standard is a multi-token standard that enables each token id to identify its customizable token category in addition to its metadata attributes and supply.("What Are Smart Contracts?"). This standard was developed by the Ethereum Research Consortium. In addition to Ethereum, smart contract blockchains that have NFT characteristics include TRON, EOS, and TEZOS. Solarium is also included in this category. These NFT standards will help the tokens be more compatible with one another. The many blockchain systems that make use of NFT tokens will each call for a unique set of functions to be performed by NFT tokens. It is possible that different sets of blockchain properties will result in different NFT activities. Smart contracts, on the other hand, are tailored to the particular blockchain ecosystems in which they are executed, so the distinctions that do exist are often quite subtle.

The actual legal rights that are being transferred are, among other things, covered by the smart contracts that are being used. When you own something, people will assume that you also own the copyright on whatever it is that you own. The truth, however, is rather different. There is a significant difference between the concepts of "ownership" and "copyright rights." The person who purchases a digital asset does not become the owner of the copyright in that asset. In the majority of situations, the creator is the one who owns the copyright, unless the terms of the contract specify otherwise. The NFT licence contains information that details the rights of the purchaser. (Pabst and Kucsko). The NFT licence exemplifies the difference between the NFT and the art form. Art could be something as simple as a photograph or as complex as a piece of music or sound. The licence specifies the rights that are being handed up. In the majority of cases, the purchaser of the licence would be granted permission to show the artwork as well as a commercial licence that would allow them to make things that use the artwork. Both of these benefits would come as part of the package. On the other hand, these terms might be different for each transaction, which means they will need to be specified when they're written into the smart contract.

The numerous valuable qualities that smart contracts provide contribute to their overall use. One of the benefits of using a smart contract in business transactions is that it may be used in situations where a specific agreement needs to be adhered to. They eliminate the requirement for paperwork, which results in a gain in both productivity and accuracy. They inspire trust since the terms can never be changed after they have been agreed upon by all parties. They are really secure, and it would be very tough to break into them. As middlemen are removed, there are various savings. In addition, the fundamental building blocks of any NFT are smart contracts in general. The use of smart contracts opens up a wealth of opportunities for a variety of future financial dealings, including mortgage loans and other business-related activities. Think about the ways in which a smart contract can solve the problem of a lack of trust that can occur while dealing with other people.

The Indian Contract Act 1872 governs the formation of any contract in India. It establishes the fundamental elements required for every contract to be valid. Section 10 of the Act states that "all agreements are contracts provided they have the free assent of parties wanting to contract, for a legitimately acknowledged price, and with a goal." According to the definition, smart contracts are permitted under the Indian Contract Act of 1872 since they include an offer, acceptance, and consideration. However, while discussing contracts formed using electronic methods, we must resort to Section 10A of the Information Technology Act. It discusses the legality of a contract created using electronic means. It states that if a contract is formed through electronic methods, such as communication of proposals, acceptance of proposals, or revocation of proposals and acceptances, the contract is lawful and will not be declared unenforceable simply because it was formed using electronic means. Under the Indian Evidence Act, an e-contract has the same legal impact as a paper-based agreement under the Indian Evidence Act. Section 65B(1) discusses it. It states that any information held in electronic form is also considered a document and is admissible in any proceeding.

However, regulatory concerns remain, particularly in India, where there are no regulations governing the finer elements of a smart contract. If particular laws are not enacted, widespread usage of the technology will necessitate changes to the Indian Evidence Act of 1872 and the IT Act.

CONCLUSION

The primary objective of a smart contract is to ensure that it is legitimate. Through the use of smart contracts, both the asset and its ownership may be confirmed. They may make use of public blockchains in order to trace the specific origins of the token, including how it was established and how it is linked to productive activity. Open blockchains may be utilised to verify the wallet id in addition to any associated metadata.

However, it is unable to establish a connection with any actual person. In addition to this, it is unable to establish whether or not the inventor is authorised to affix the NFT to particular works. The identity of the NFT's creators will be checked and validated by the websites that display and sell the collectibles. In a lot of different situations, this is typically done by hand.

There are a few short comings with the smart contracts in terms of the NFT but nevertheless it has way more advantages. The use of smart contracts can be adapted to practically any business setting thanks to their high degree of flexibility and adaptability. The importance of smart contracts, which serve as the foundation for one of the most in-demand classes of digital assets now available, is anticipated to increase as the number of NFTs that are utilised and the size of the metaverse continue to grow. And, with the coming times, virtual currency, NFT, and smart contracts will be on the rise as more and more people become aware of the virtual world. It is less of a hassle than traditional contracts and their tedious processes. With the virtual system of blockchains, a plethora of things are just a click away, and so we should embrace the changes coming, but with a little caution.

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