Smart contracts and NFTs are promising technologies that will unlock various use cases and possibilities. To fully grasp the potential of these technologies, it is necessary to understand NFTs, Smart Contracts, and Oracles in more detail.
NFT Definition
Non-Fungible Token (NFT) is a type of digital token that is unique and scarce. It is used to prove the ownership of an item, usually a digital asset. NFTs are known to be unique. They represent the digital versions of the physical collectible items.
Fungibility
Fungibility is the ability to convert an asset into another asset that is the same type. For example, if a $5 bill is fungible, then it should be exchanged for another $5 bill. However, the Oppenheimer Diamond is non-fungible, which means only one version exists.
Digital Scarcity
The rise of digital technology-enabled people to store and share large amounts of data. For instance, if I took a photo of a celebrity on Santa Monica Blvd. on my phone, I could immediately send it to thousands of people within seconds — which means I will be creating thousands of versions of this picture right away.
Blockchain technology, and especially NFTs, are tools that enable digital scarcity. They provide a tamper-resistant certificate of authenticity and the legal rights to the digital asset. These are distributed on blockchain networks such as Ethereum.
Smart Contract Definition
Smart contracts are among the most advanced features of blockchain technology. They are digital contracts that can be programmed to execute autonomously, i.e. It is a type of digital contract that has the terms of agreement set in code and can be programmed to self-execute once a set of predefined conditions has been met. Smart contracts are found on decentralized and distributed blockchain networks.
There are various efforts underway to create smart contracts that will hold up in a court of law. These solutions will involve the use of smart contract interfaces where its code will create a document in plain English determining the terms of the contract.
Smart contracts can be programmed to induce the start of other smart contracts into creating events and actions when they are executed. Not that smart contracts can hold NFTs and Cryptocurrencies within them. These digital assets are distributed upon execution once a set of terms and conditions are met based on the code determined in the contract.
Example: Smart Contracts & Basketball Games
Let’s say that a smart contract can be created for a bet that’s based on the outcome of a sporting event, say the winner of the Lakers or the Knicks. It involves creating a new smart contract where both parties agree to put a Bitcoin (or any cryptocurrency) into it. If the game is decided by a certain team, the smart contract will pay out fully to the winner. When the game is over, the smart contract will execute its contract and pay out the two Bitcoin it has in exchange for a win.
Oracle Definition
A blockchain oracle is a service that enables smart contracts with authenticated data from the real world. Oracles are often used to connect smart contracts to events happening in the outside world. Resuming the basketball game mentioned above, imagine that the smart contract receives through an oracle, data about which team won the basketball game. In this situation, the oracle can be an API feed received from a sports network like NBC Sports.
An oracle can create a wide range of data to provide smart contracts. For instance, an oracle could provide forecasts for the weather in the near future, as well as data related to legal cases, financial transactions, economic data, market data, performance data for vehicles and machines, etc. Note that oracles are data sources that can provide authenticated information about real-world events.
However, oracles with large bets or in several cases are dealt the same with. That’s why some smart contracts have added multiple oracles to ensure that the same result can be predicted correctly. For instance, for the basketball game example mentioned above, it is possible to write a smart contract that would require five oracles to participate. These oracles would have to predict the outcome of the game correctly before the contract can be executed. So ESPN, NBC Sports, CNN Sports, BBC Sports, and Yahoo Sports for example should all predict the win of one of the two playing teams and must all predict the outcome correctly.
Smart contracts can run self-execute when a condition is met in the real world. Oracles generate data about real-world conditions and events by relying on authenticated API feeds for smart contracts.
So, how do Smart Contracts & NFTs Interact With Each Other?
There are two ways by which smart contracts and NFTs interact with each other. Note that NFTs can be embedded in smart contracts and vice versa:
1- NFTs can be embedded in smart contracts. These are typically used to transfer an existing contract to another contract or a new user based on the rules and conditions defined by the smart contract.
2- Smart contracts can be used to allow a user to access and call assets in an NFT. For example, a song can be called and paid for using a smart contract. For instance, a user can get access to a song through a smart contract, which is embedded in an NFT. The user would agree to the terms using smart contract, and then pay the agreed amount. Hence, they’d be able to access the songs they want. This process is programmed to run in the backend when users hit the play button on their applications.
With NFTs and smart contracts combined, users will be able to create complex contractual structures and agreements. Blockchain technology will make these contracts secure, tamper-resistant, and auditable in real-time. This combination will be simplifying and speeding up arbitration processes in the future.
Real-world examples
Gaming: Tournaments in games could have smart contracts and NFT combinations. A player’s in-game assets, such as skins, can be embedded in NFTs. Players could also agree on rules that determine how those assets would be distributed among the participants in a tournament.
Streaming: Each episode or movie of a show can be embedded in an NFT. The user can authenticate to the platform and then watch the episodes or movies on their device for a certain period or a certain number of views. This can be done via a micropayment.
Art Exhibits: An artist can embed their art into an NFT and create a smart contract that sets the terms of use for their art. Real-world art galleries then can access it and display it on their physical screens and split the revenue they make from ticket sales with the artist upon the terms agreed upon using the smart contract.
Conclusion
NFTs and smart contracts are already available thanks to blockchain technology. With the emergence of new blockchain platforms, more NFT standards will be created. Interoperability will allow users to transact across various platforms from a single point. This means that NFTs and smart contracts could be easily accessed from their preferred separate platform. Blockchains will also secure platform assets and transactions and provide auditability.
NFTs are digital assets that can be turned into verifiable assets that are easy to buy and sell by using blockchain technology. Their ability to transform digital art into verifiable assets has huge implications for media and digital rights management. NFTs will be complementing Web 3.0 and will be able to create a more transparent and secure internet.
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