NFTs have changed our understanding of digital assets since gaining increased attention in recent years. With this, the relationship between NFTs and physical assets has also become an intriguing and innovative use case for this technology.
Unlike cryptocurrencies like bitcoin or ethereum, which are fungible and can be exchanged on a one-to-one basis, NFTs are unique digital tokens that represent unique items or assets. While NFTs are predominantly associated with the digital space, they can also be linked to physical assets through tokenization, thereby bridging the gap between the virtual and physical worlds. This link has introduced new possibilities and use cases for NFTs that extend beyond the digital realm.
Simply put, tokenization is when assets are represented by digital assets on the blockchain (such as when that nft represents a physical asset). When an nft is representative of a physical asset, it means that the nft serves as proof of ownership of that physical item. Typically, the physical asset can be any item of unique value, such as artwork, real estate, luxury items, collectibles, or even event tickets.
The nft associated with the physical asset contains information and metadata that uniquely identifies it, including details about the asset’s origin, authenticity, ownership history, and more. This can help combat counterfeiting, protect intellectual property rights, and ensure assets are traceable throughout their lifecycle.
This has several additional advantages, including fractional ownership. This occurs when multiple people have the ability to own a stake in the asset by purchasing a fraction of the nft. This increases its accessibility and diversification, as people with limited capital can participate in the ownership of valuable assets that would otherwise have been out of their financial reach.
Fractional ownership also improves the liquidity of traditionally illiquid assets by facilitating the creation of secondary markets where investors can buy and sell fractional ownership interests. This provides an avenue for liquidity and a potential increase in market depth for these assets.
Some physical assets may also include additional benefits or privileges that are then attached to the corresponding nft when the asset is tokenized. Just this year, MasterCard debuted a free Music Pass nft release that offered collectors a variety of benefits, including an ai-powered music-generating app, educational material, and access to a virtual showcase featuring artists in the company’s Artist Accelerator program, creating a new dimension of ownership and interaction. Features like these can increase the value of the nft and make it more desirable to the average consumer.
The relationship between NFTs and physical assets has given rise to innovative concepts such as “phygitals.” They combine the physical and digital worlds to create interactive and immersive experiences and offerings for nft holders. Picture this: You own an nft of a limited edition fashion item and the nft unlocks a physical version of that item. This is exactly what Nike has done.
In 2019, the sneaker empire revealed a patent for blockchain-based sneakers. Delving deeper into phygital experiences, Nike acquired nft sneaker studio, RTFKT Studios, which led to the launch of Nike’s metaversa sneaker line. Purchasing one of these NFTs not only allows you to wear your digital sneakers in the metaverse, but also gives you your own physical pair to wear in the real world. These types of offers provide unique opportunities for user engagement and interaction.
There is significant potential and promising future in NFTs representing physical assets. It is still a relatively new concept, but it has already proven its value and has caught the attention of collectors, investors, industries and brands, such as Gucci, Adidas, Dolce & Gabbana and Tiffany. NFTs democratize access to ownership and investment in physical assets. By purchasing an nft linked to a real-world physical asset, you can enhance the ownership experience by offering unique digital experiences and additional benefits.
NFTs can incorporate smart contracts, allowing automatic royalty payments to the original creators and owners whenever the nft is sold or traded on the secondary market. This ensures continued recognition and compensation for creators and incentivizes the production of high-quality physical and digital assets. Smart contracts can enforce predetermined terms and conditions, reducing the risk of disputes and ensuring fair compensation.
However, challenges and complications remain in integrating NFTs with physical items. There are questions around legal frameworks, regulatory compliance, and intellectual property rights (when not leveraging smart contracts) that need to be addressed to provide a robust, secure, and standardized environment for NFTs representing physical assets. Ensuring seamless transferability and liquidity of NFTs and their corresponding physical twins will also require the development of efficient and consumer-friendly nft marketplaces.
NFTs have not only revolutionized the digital asset landscape, but have also extended their reach into the world of physical assets. By tokenizing physical assets, NFTs provide new ownership, investment and participation opportunities. The connection between NFTs and physical assets creates a bridge between the virtual and physical worlds, enabling new experiences and benefits for collectors, investors, and enthusiasts.
As technology continues to evolve and mature, the relationship between NFTs and physical assets is expected to grow and continue to shape new avenues of custody, creativity, interaction, and value exchange.
Anthony Georgiades is the co-founder of Red Pastel.
This article was published through the Cointelegraph Innovation Circle, a vetted organization of top executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. The opinions expressed do not necessarily reflect those of Cointelegraph.
