Smart contracts are the underlying blockchain technology that powers NFTs – a digital contract where the agreement between users is set in code.
“Surely you’re not dedicating a whole blog to that”, I hear you say. Well, what makes smart contracts actually very interesting is that they provide a way of ensuring future earnings from the value of an NFT.
Creators of NFTs can set terms that impose royalty fees whenever the tokens are exchanged second hand, taking a 10% cut of total sale prices in future, for example. So even though you no longer own it, you can still earn passive income each time the token is resold and because these smart contracts are self-executing computer programmes, creators don’t have to track payment or enforce the royalty terms themselves – the process is fully automated.
There’s never a definite way of being able to tell how much your NFTs will be worth, which is why using smart contracts to generate royalties can be particularly useful. Take the CryptoPunks as an example – these are a series of 10,000 unique characters that were initially available for free to anyone with an Ethereum wallet. After the tokens were rapidly snapped up, they have gone on to be one of the most recognisable NFT collections, with some selling for millions of dollars on the secondhand market. One of the rarest pieces, CryptoPunk #7523, even sold for $11.75 million. Imagine you’d created those pieces, with no royalties and therefore no way of recouping any money…
There are other elements you can tie in to smart contracts which are digitally stored and, again, immutable. These can include commercial elements, rights ownership and future opportunities. Essentially, a smart contract can be bespoke to your requirements.