A guide to Non-Fungible Tokens (NFTs), 2023 - Flipbook - Page 26
Commercial Issues
Smart Contracts
For an introduction to smart contracts as they form part of the
underlying technology of NFTs, see Constituent parts of an NFT.
Smart contracts are computer programs, pieces of code, that automatically run
predetermined transactions when certain conditions are met. A smart contract
is created when an NFT is minted. This contract is stored on the blockchain, and
is used, amongst other things, to determine the ownership and transferability
of the NFT.
Smart contracts are different from natural language contracts. The code
automatically carries out certain actions or steps when specific conditions
are met, while natural language contracts dictate the actions or steps that are
obliged to be undertaken when specific conditions are met. For example, a
smart contract might be programmed to issue an asset on receipt of funds, or a
certain date; this action would be automatically undertaken on the satisfaction
of the condition. A natural contract could specify an obligation to issue the asset
but, when the specific conditions arose, the action would not be automatic and
would need to be undertaken to avoid breach of contract.
The Ethereum token standard smart contract for non-fungible tokens is called
ERC-721. However, a standard form of smart contract does not have to be used
and in many cases will not be appropriate for use, with the NFT requiring a
bespoke smart contract to be coded.
Smart contracts can be either full or hybrid:
• Fully smart contract: all the terms and performance of the contract are
written in and carried out by code.
• Hybrid smart contract: some of the terms and performance of the contract
are written in and carried out by code, but with some natural language
written terms.
