Sophisticated Solutions For Modern Legal Challenges

What to Know About NFTs and Smart Contracts

On Behalf of | May 11, 2022 | NFTs

NFTs are becoming more popular than ever. These digital assets represent real-world objects such as music, art, and videos on a blockchain. More artists are choosing to market and sell their NFTs with great success. NFTs use metadata and indemnification codes logged and authenticated on cryptocurrency blockchains.

Each NFT is represented on the blockchain as a unique asset. These assets are non-fungible because they cannot be exchanged or traded at equivalency. Recent NFT sales for millions have been in the news. If you are considering purchasing or selling NFTs, it is important to understand how the concept of NFTs is based on underlying smart contracts and how intelligent contracts influence NFTs.

What are Smart Contracts?

Smart contracts are not new. They have existed for a long time. A smart contract is essentially a piece of code capable of enabling self-execution. Smart contracts are defined as legal agreements that are enforced by code. More blockchain-based businesses than ever are using smart contracts to create decentralized applications (dApps) that focus on a specific use case or industry.

They do not rely on a third party to enforce them. Smart contracts are programs that run on the blockchain. They are called smart because they can run to completion without human intervention. Smart contracts’ ability to self execute has always been limited because they have relied on an external service to perform the final execution action. These contracts can perform functions such as updating databases with new information and making payments.

Creating a Smart Contract

When someone creates an NFT, the process is known as minting. When minting, you are writing the underlying smart contract code. The contract code will determine the qualities of the NFT. The smart contract will also add the qualities of the NFT to the relevant blockchain on which the NFT has been coded.

NFTs and Smart Contracts

NFTs can be used as digital assets, meaning they can be exchanged with other digital or real-world assets. To exchange NFTs and smart contracts, NFTs rely on smart contracts to execute the following types of legal actions: escrow, ownership transfer, and price discovery.

Creating Digital Scarcity

Smart contracts can create digital security. For NFTs to have value, tokens need to be unique and have an economic value to be considered digital assets. Each token needs to have its own identity that is stored in a distributed ledger system that is transparent. Doing so ensures that the asset cannot be purchased or sold at the same time and that there is not duplicity. It also creates digital scarcity, helping the NFTs retain their value. Digital scarcity can also be created by regulating the amount of tokens that exist in circulation. This practice is called “centralized token minting” and is used by many prominent blockchain-based companies.


Smart contracts also help ensure that an NFT cannot be transferred without the transfer of the non-fungible token. For example, you may need to create a smart contract to ensure that the seller transfers the NFT after the receiver pays for it. Smart contracts should also require that the seller gets paid in the process.

Crypto Game Mechanics

In crypto games, users can sell, buy, or trade assets, such as digital assets and collectibles. These assets are often created using NFTs. Smart contracts facilitate the transfer and trade of assets.

Managing Digital Media Rights

Companies that buy and sell digital content are already starting to utilize NFTs to manage their digital media rights. Even more traditional businesses have begun using blockchain technology for managing royalties and music rights.

What Do Smart Contracts Need to Address?

The smart contracts cover the actual rights that are being sold, among other things. If you own an asset, it is assumed that you own the copyright, but that is not always true. Having ownership does not mean that someone who buys digital assets owns the copyright. The copyright stays with the creator unless the smart contract explicitly states differently. The NFT license outlines what specific rights are licensed to the NFT buyer.

An NFT license identifies the NFT as separate from the underlying art. For example, the art may be an image, and the license will clarify what rights have been transferred. Many smart contracts state that the buyer is allowed to display the art. Others will provide the buyer with a commercial license that will enable them to create merchandise incorporating the art. The licensing agreement terms should be spelled out in the smart contract.

The Benefits of Using Smart Contracts

Smart contracts are an important building block for NFTs. The main benefit of using a smart contract is to remove the uncertainty of the outcome and avoid intermediaries completely when buying, selling, and trading assets. Preventing counterfeiting is one of the most important benefits of smart contracts. When an NFT has the details of the smart contract, it is registered on the blockchain.

There is a permanent record for the proof of ownership and record of the purchase. If the image or other asset has been counterfeited, the blockchain will prove that the reproduced images or assets are worthless. The transfer of the NFT can only be authorized when the personal key of the NFT owner is used, preventing counterfeiting. Additionally, smart contracts are useful for the following reasons:

  • They are hard to hack and are typically highly secure
  • They bring accuracy and speed as paperwork can be avoided completely
  • They allow both parties a sense of trust that nobody can change the contract terms once it has been created
  • Both parties may be able to save money by avoiding intermediaries

Contact an NFT Smart Contract Attorney Today

In the future, we may see smart contracts be implemented in other types of transactions, such as home loans and business deals involving physical products. If you have questions about using smart contracts with NFTs, the skilled intellectual property attorneys atAU LLC are here to help. Contact us today to schedule your initial consultation and learn more about how we can assist you.