I'm trying to create NFTs (non-fungible tokens), but I don't quite understand this part - is each token its own contract? or are all of them stored in the NFT equivalent of a 'balances' mapping in a factory contract? If these are both options which is better?


No, NFTS are not contracts of their own.

A single NFT is a uint256 ID, which is mapped to an owner address. In solidity, this would be something like

mapping(uint => address) tokenIds

The spec lists a number of reference implementations, you should probably use one of those rather than roll your own.

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