In the digital age, creative professionals struggle to track their intellectual property rights and earn royalties for their work. NFTs (non-fungible tokens) and smart contracts created primarily on the Ethereum blockchain (and emerging blockchains, e.g. Solana, Cardano etc.) will revolutionise how creatives maximise their earnings.
To maintain copyright ownership and earn royalties for your work whenever financial transactions occur, you need to build an NFT smart contract. This also serves a function in the minting process of an NFT, so understanding how smart contracts work is a crucial step to ensuring permanent identification records are created.
Implementing a smart contract ensures that creatives can earn a passive income every time your NFT is re-sold and ownership is exchanged. They also prevent intellectual property from being fraudulently replicated in a digital format and downloaded onto a device. They also assure consumers and investors that the NFT they purchase is authentic.
What is a smart contract and how do they work?
A smart contract is a self-executing digital contract stored on the blockchain. The function they serve is to automatically execute the agreement written on its code between the parties involved in a transaction. The computer code cannot be tampered with.
What is revolutionary about smart contracts is that the information is verified by a network of computers called nodes. This essentially serves as an intermediary or central authority and replaces intermediaries like banks, notaries, brokers, solicitors, etc. Subsequently, making digital transactions tied to a contract will be less expensive than existing systems.
Furthermore, an NFT smart contract ensures that the creator – typically artists, musicians, graphic designers, digital artists etc. – is awarded royalties when any sale agreement for the digital asset occurs. The payment of royalties is automatically executed. Smart contracts also verify the authenticity of an asset.
But smart contracts are not restricted to intellectual property and digital assets. Because they effectively assign ownership whenever there is an exchange of goods, they can be created for all types of financial transactions for real-world objects.
For example, implementing smart contracts in the real estate industry will eliminate hidden fees such as estate agent costs, title transfers and other legal expenses. The blockchain makes acquiring goods less expensive for the buyer.
Whilst it may not be possible to dispense with professional services entirely – you still need someone to draft a smart contract – the Ethereum blockchain will undoubtedly reduce the involvement of certain professions.
For example, when a piece of property is “tokenised”, all the relevant information about the property can be stored in a digitised contract and serve as the agreement between buyer and seller. A solicitor does not have to perform a land registry search. This also speeds up the transaction process.
Pros of a Smart Contract
Efficiency – smart contracts cut out laborious paperwork, thus saving time and administration fees.
Accurate – Once a smart contract is drafted and submitted to the blockchain, it cannot be manually tampered with. Smart contracts are updated digitally and are always accurate, with no room for human error.
Cost savings – Without middleman fees to pay (i.e. bank transfers) and costs incurred for errors and delays, digital transactions will be less expensive than traditional systems.
Trust – Because smart contracts validate the authenticity of a digital asset or a physical asset through a digital record, buyers can purchase assets online in confidence.
Security – Advanced security technologies such as biometric authentication, trust scoring aggregated wallets and whitelisting to regulated platforms make it virtually impossible for encrypted data stored on the Ethereum blockchain to be hacked and transferred to a veiled account.
Cons of a Smart Contract
NFT smart contracts are not without their flaws. Currently, five critical vulnerabilities stand out.
Coding errors – Smart contracts have to start with humans somewhere so that they could be prone to programming errors and exposure to bugs.
Binding – The inability to adjust the terms of a smart contract means that agreements are binding. This can make it difficult for sellers to change their minds. For example, if you rent your city apartment but need to move back to the city for whatever reason, making corrections to the smart contract could create processing issues.
Regulation – Regulators are not keeping up with blockchain technology, and governments are unaware consumers could be duped into entering fraudulent contracts.
Processing – The current processing speed limits smart contracts to a maximum data capacity of 24kb.
Security – Currently, digital platforms suffer from security issues that can leave users open to phishing attacks.
NFTs and Smart Contracts
Smart contracts are the underlying foundation of all NFTs and verify an asset’s authenticity. Their function is to contain all the information about a particular NFT and detail the terms of an agreeable transaction. In this regard, they serve as a unique identifier.
When creating a smart contract for most NFTs, you can divulge whatever information you like. Ideally, you should provide legal knowledge together with information that underscores the token’s sell-on value. For example, the token is one of a kind.
For example, a smart contract may contain information about the NFT’s popularity, collectibility and potential re-sale value and how ownership rights are transferred to a buyer.
The smart contract should also include the terms that must be met for transactions to be successfully executed from the business to a consumer or investor. For an NFT representing art as intellectual property, this should be fairly straightforward:
- Verify the current owner (including ownership history)
- Name the buyer and the terms of the transfer (price)
- Who owns the Copyright
- What rights the owner has or does not have (can the image be used for a public presentation or work of art)
The royalty earnings determine the percentage you want to receive every time the NFT changes hands. A standard royalty is 5-10%.
Generating a primary smart contract in an NFT marketplace such as OpenSea or Rarible is straightforward. These platforms provide the functionality for you to upload the contract. All you have to do is:
- Add the floor price
- Add traits of the NFT collectable as metadata
- Add the royalty terms
Using platforms to build NFT Smart Contracts
It’s common among developers that the overall experience for building applications in web 3 is not great. I believe the industry term is “it sucks.” Fortunately, a couple of platforms serve as valuable tools to help blockchain developers create a contract.
Thirdweb makes it easy to deploy a smart contract so users can dispense with private keys and scripts. Smart contracts and other tools such as SDKs and UI components support the utility and usability of applications.
For example, Thirdweb provides templates with predetermined conditions for selling digital artwork, which can be modified for digital from the dashboard. This enables anyone to build non-fungible tokens, claim ownership, and attach them to your wallet address as the originator. This ensures royalties will always be received in your crypto wallet every time a transaction occurs.
To minimise the risk of a unique asset being hacked, OpenZeppelin provides a library of smart contracts using ERC20 standards written with Solidity code, reducing the amount of code.
The blockchain community has vetted the foundation code used to build NFT smart contracts – which acts as an intermediary or central authority to ensure a transaction on the blockchain is not fraudulent. This means the computer codes available on OpenZeppelin have trusted sources and are not copy-pasted from random websites that could have been created for nefarious purposes.
Given its focus on security, smart contract execution on OpenZeppelin is slightly more technical than Thirdweb. However, they do provide highly detailed tutorials such as The Hitchhiker’s Guide to Smart Contracts in Ethereum.
What is a Smart Contract Audit?
A smart contract audit involves performing a detailed audit to scrutinise the code. The goal is to identify errors, vulnerabilities and issues that may pose a security risk. In short, contract audits safeguard the funds invested in the assets they serve.
Auditors have specialist tools which examine computer codes through a variety of testing methods. A manual test may also be undertaken to verify the code is correct for its intended purpose. The final report will either give the all-clear or highlight errors and weaknesses and provide recommendations for improvements.
NFT smart contracts are the only way for creators to protect intellectual property and recover proceeds you are due from transactions. Thanks to advancements in blockchain technology and web 3 tools, it’s becoming easier for developers to build NFT smart contracts for assets that are available in digital environments.