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    Formulating A Smart Contract And Minting An NFT – Technology

    If you are following our NFT self-experiment, you already know
    what an NFT is and what it stands for. To recap (and add some
    technical perspective), an NFT is a unique assignment of a specific
    number and further data, such as an artwork or a link thereto, to
    an owner (or their public key) in the blockchain. It is unalterable
    and unchangeably stored on the blockchain. For the NFT to be
    transferable and to be able to provide information on the current
    owner of the NFT, the assignment must be managed by a program that
    creates – or “mints” – the
    token. For this we need a “smart
    contract
    “.

    What is a smart contract?

    smart contract  is not a contract
    in the legal sense, but a program that runs on the blockchain.
    Smart contracts have two essential characteristics: they can
    receive and send transactions, and they are unalterable.

    A smart contract basically runs in its own wallet on the
    blockchain. It has its own private/public key pair and can provide,
    read and store data. Interactions with a smart contract take place
    via transactions with the wallet of the smart contract. These
    transactions contain corresponding commands that are
    “understood” by the smart contract. The specific number
    of a token, the address of the assigned owner of the token and
    other data of the token or the smart contract are saved in the
    “storage space” of the smart contract. For a smart
    contract to be “fit” to be used to create an NFT, the
    smart contract’s code must support specific functions (and
    “fit” in the respective blockchain where it will be
    used). For the Ethereum blockchain, a unified standard for NFTs is
    precisely defined under “ERC-721.6”.
    The standard enables a reliable and uniform communication with the
    program / smart contract so it is clear how an individual or the
    NFT platform/blockchain can interact with the NFT.

    Of course, someone with the requisite skills could program a
    smart contract entirely by themselves, which when using the
    Ethereum blockchain follows the ERC-721.6 standard.

    An alternative, however, is to use one of the many existing
    templates of smart contracts that are freely available and
    accessible to be used in online libraries under open source
    licences and add some individual data/codes, such as the name of
    the token, functions of transactions and potentially a link to the
    artwork that is assigned to the token.

    Legally speaking, the smart contract might be copyright
    protected

    From a legal perspective, questions have arisen: As with any
    other software, it cannot be ruled out that a smart contract as a
    program is sufficiently individual to be protected by copyright.
    This does not change fundamentally even if the software is offered
    publicly for free use under an open source licence. But what do the
    licence conditions for the open source products contain? Do they
    sufficiently cover the intended use? These are only rhetorical
    questions at this point, because the conditions under which open
    source software is offered for free use are quite different. So
    here is just a cautionary note. The answers will depend on which
    product the user ultimately chooses.

    Using an existing smart contract

    Still, both options (full and partial programming) have one
    – in our view and for our self-experiment – significant
    disadvantage: the entire source code of the smart contract would
    have to be stored in the blockchain. Storing this amount of data
    would incur considerable costs and consumer a lot of power, making
    it neither cost-efficient nor environmental friendly. A third
    option is to use an existing smart contract. Some providers allow
    minting of new tokens via an online form.

    For our NFT self-experiment, we chose to use an existing smart
    contract, specifically one from Rarible, as it was easily
    accessible by our wallet, also uses IPFS (more about that below),
    follows the ERC-721.6-standard, and is simple to use. Again,
    general terms and conditions had to be accepted. We checked them
    especially with regard to whether the use of this software would
    grant any rights to the work of art to be uploaded. That was not
    the case here. Nor did the typically extensive General Terms and
    Conditions contain any unexpected special provisions. It is pointed
    out very clearly that the sole responsibility for the “unique
    Collectible” created with the help of the tools offered lies
    with the user who uploads the “Collectible” (“There
    can be no guarantee or assurance of the uniqueness, originality or
    quality of any Collectible or Collectible Metadata.”). That
    seems perfectly fair. And of course, an artist who transforms his
    artwork into an NFT or links it to an NFT with the help of such
    services must take responsibility for not infringing any
    third-party rights.

    Nevertheless, we became aware of a particular legal aspect of
    this new distribution method.

    The danger of misleading advertising

    If an artist offers an oil painting in a gallery and the gallery
    owner physically hands over the artwork to the buyer, there is no
    doubt about what the object of purchase is. Even in the case of
    online purchases of an original oil painting – at an auction,
    for example – the usual illustration and description of the
    work in the printed or online auction catalogue makes it clear what
    is being sold. But is this also clear if an NFT was offered for
    sale as a “Collectible”? Does the buyer then know exactly
    what they are getting? Doubts could arise here, and it may be
    assumed that newcomers will not have a clear picture. Some may
    equate the NFT with the work of art. They might be disappointed
    when they discover afterwards that the NFT only contains a link to
    a work that can be downloaded digitally somewhere, but they neither
    receive the file (in high resolution) nor a printout, and certainly
    no licence to use it. There is definitely a risk of misleading
    advertising here. This could also consist in the omission of the
    required clarification. The legal consequences of such unfair
    behaviour, including claims for injunctive relief, damages, etc.
    are evident. It is therefore up to the seller to clearly describe
    the content of the NFT in order to avoid misleading the buyer. This
    should also be kept in mind when promoting NFT sales outside of the
    platform. This obligation is particularly relevant with the
    emergence of this new technology, because it must be expected that
    the average consumer will have little concrete knowledge about it
    and therefore a high need for information in order to avoid
    purchase-relevant misleading statements.

    What data is packed in a freshly minted NFT?

    In principle, it is possible to include an entire data set of an
    artwork (i.e. the GIF in our case) in an NFT and thus into the
    blockchain. Still, in view of the high energy consumption and
    transactional costs, for our self-experiment we decided to limit
    the data in our NFT to a minimum.

    Besides the owner’s address and the token ID, only a link
    (more precisely in our self-experiment a URI)
    to the actual artwork is stored. In this link, which contains
    the metadata of our NFT, we further included
    the name of the artwork, added a link to where the artwork is
    stored (instead of a description) and formulated as a short licence
    agreement:


    Available here.

    URI, hash – who?

    Our aim was for the NFT to remain unambiguously assignable and
    permanently linked to the artwork and the associated data. The
    solution was to have a hash value (a
    unique and reproducible alphanumeric value from a specific data
    set) calculated from the artwork. If the algorithm used is known,
    anyone can check whether a particular work of art is assigned to
    the respective token holder, as long as the hash value is stored in
    the blockchain. The Interplanetary File
    System
     (IPFS; a worldwide peer-to-peer network for
    decentrally storing public files) calls up / reaches data not under
    their storage location, but under its hash value, such as the link
    to our artwork and associated data. The hash value forms
    our URI. This has some advantages:

    • the link to the metadata (including the artwork) is uniquely
      identified as a hash value (URI);

    • if the file should ever be deleted from the IPFS (this usually
      does not happen arbitrarily, but whenever a file is unused for a
      long time), you can always reload the same data in IPFS and the
      link becomes retrievable again (because the hash value of this data
      is identical);

    • the hash value that is noted/secured in the NFT can prove a
      data record (in our self-experiment, the data record of a specific
      work of art and that it’s linked to the NFT).

    This may be especially relevant if the owner of the NFT also
    owns the digital work of art or as a way to prove that the digital
    art was in fact created by the named “artist”.

    Voilà, our NFT was created – or freshly
    minted, as the NFT pros would say!

    Conclusion

    By using an existing smart contract and inserting a bit of data
    about our artwork, we found what we thought was the best way to
    store the artwork and its associated metadata and identify it in
    the NFT – as a URI. No serious legal hurdles or uncertainties
    have arisen at this stage of the self-experiment. However, in the
    case of a new type of product, such as art-related NFTs, and new
    distribution channels, such as the offer of art-related NFTs via
    online platforms, it is important to inform the customer exactly
    what they are getting for their money. A clear description of the
    NFT and its content is necessary to avoid claims of misleading
    advertising.

    The content of this article is intended to provide a general
    guide to the subject matter. Specialist advice should be sought
    about your specific circumstances.

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