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NFTs Tied To Physical Assets: How NFTs Interact With The Real World

a physical artwork as an example of what could be a physical NFT

Non Fungible Tokens (NFTs) are a very popular topic, and if this is your first time reading about them on this blog, you should read our articles on what is an NFT and NFT staking. For this article, we will look at how digital NFTs interact with the physical world in terms of how NFTs can be tied to physical assets.

NFTs are fast becoming the most popular blockchain products. When they first took off, some people wondered how one could use them like they would a physical, tangible product, and to an extent, that is possible. So, we will be exploring physical NFTs to see how NFTs interact with the real/physical world.

What are Physical NFTs?

Physical NFTs are digital tokens tied to physical assets in the real world. This could mean using a particular token to represent land ownership, gold ownership, or even art and collectibles.

These types of tokens allow users to trade digital assets that have a direct connection with the physical world.

Because NFTs, for the most part, are digital-based with no connection between an NFT and real-world assets, the concept of a physical NFT may seem futuristic. However, there are already NFTs that function as actual works of art or collectibles, much like how they would serve in the physical world.

Physical NFTs can be tied to the deeds and titles of cars, houses, property, artwork, and more.

How NFTs are Interacting With the Real World

NFTs can be tokens associated with physical assets such as music tracks, physical paintings and other fine artwork, and real estate. However, physical NFTs work differently from digital NFTs from how they are created to their benefits and risks.

Creating Physical NFTs

Creating physical NFTs has to do with the workaround of linking physical art or assets with a digital NFT.

With digital NFTs, smart contracts protect the NFT and prove ownership.

For physical NFTs, some of the physical items require licensing and other documentation with laws protecting those; you may not be able to throw them away to adopt smart contracts alone simply. Physical artwork and other physical intellectual properties may have licensing agreements; real estate is an entirely different matter with a ton of documents involved.

Nevertheless, smart contracts are still considered valid in law as long as the smart contract terms comply with your regional contract law. You can check if it is valid by checking your regional contract law. If it is, you can create an NFT and tie the smart contract and token to the physical assets without fear that you aren’t protected by contract law.

Using Physical NFTs

You can use a physical NFT like a regular physical asset or even a digital NFT. Sell it, keep it, whatever you want. Also, it comes with additional benefits, including the possibility of you benefiting from a secondary sale of the asset. There are also several other benefits as well.

Benefits of Physical NFTs

There are several benefits of an NFT representing physical assets.

1. Blockchain and Liquidity

Creating tokens based on physical assets like land or a house can move such assets and their underlying documents or deeds onto the blockchain. This creates a level of liquidity not usually a part of a physical asset on its own.

For example, an artwork may be limited to members or customers of an auction house. In contrast, a physical NFT artwork can be purchased by anyone with a crypto wallet, thus opening the sale to a broader and global pool of buyers and sellers and handling international transactions with ease.

Furthermore, transactions on the blockchain are fraud-proof to an extent and, as such, an NFT-backed physical asset gives fraud-proof receipts to buyers.

2. Prove Legitimate Ownership for Assets that are Harder to Prove

Proving legitimate ownership of items like jewelry can be more challenging when reselling them. Not all jewelry comes with a certificate of authenticity. Tyng such assets to an NFT can prove legitimate ownership like a certificate of authenticity for a diamond would.

By tying an NFT to an asset, owning the NFT will be as important as owning the asset, and you may have to consider moving the NFT to a cold storage wallet to keep it safe.

3. Easy Access to History

Because the deeds to the physical asset and its history are stored in the blockchain, you can ensure that the history of its sale or resale is authentic and reliable. You get to know who owned it and for how long. As the artist or creator, you can also tell where it ends.

4. Secondary Sale

Usually, when you sell a house, art, or other physical items, you earn from that sale and not from the future sale of the asset. However, with physical NFTs, artists or creators can get value even after selling by benefiting from secondary transactions, even ten years later. You can ensure that if such a clause is part of the smart contract.

Many NFT marketplaces ensure that sales result in royalties to the artists or creators. As such, you could continue earning from the same item for many years.

5. Cuts Out Middlemen and Simplifies Sales

If you were to sell a physical house, in most cases, there are agents who would take a percentage of the sales and other middlemen. That applies to several other physical assets. By tying your asset to an NFT, you can cut out middlemen and deal directly with buyers, thus enjoying the entire profit on your asset.

Also, it simplifies the sale process. Rather than going through an auction or numerous processes to sell your asset, you could list it and sell it instantly on any NFT online marketplace. Of course, there may still be the process of confirming and evaluating the physical asset itself.

6. Proves Authenticity of Assets

Fake copies of paintings and other artworks are a big problem in the art world. 

Although certificates of authenticity prove the ownership and authenticity of certain physical assets in the real world, they are relatively easy to forge, making it harder to ascertain if the asset is original or not.

With NFTs, it is much harder to alter the blockchain and smart contract. That can make it easier to prove ownership of items that are not in the hands of the seller at the time of sale.

Once a creator publishes their asset as an NFT and lists it under their name on an NFT marketplace, you can be sure it is an original.

Also, in cases of popular work, one may be able to tell if it is the actual artist publishing or not. Once it is on the blockchain, further resell can be tracked to prove authenticity.

7. Fractional Ownership

NFTs have helped enable people all over the world to pool money together so they can own fractions of a digital asset. The same can be applied to a physical asset tied to a non-fungible asset.

The NFT technology allows multiple people to own one asset in fractional ownership, ensuring that owners can sell and benefit from their fraction of the asset without affecting the asset as a whole.

8. Price Transparency

This benefit is tied to the blockchain. Since the sale of every item linked to the blockchain is recorded on it, that data is publicly accessible and provides price transparency so you can see if the value of an asset is growing or not.

This lets you know if you are getting a fair price and buying an asset with the potential for growth as an investment.

In addition, it helps the creator keep track of their physical creation and the underlying NFT to know just how far it has come in terms of value.

The Drawbacks to Physical NFTs

Like most things, there are drawbacks to linking physical assets to non-fungible tokens. 

1. Verifying Underlying Physical Asset

Here’s the thing. Someone could create a painting and link it to an NFT, then sell the NFT to one buyer and the physical painting to another buyer outside of the NFT world. The sale of the physical copy will not be recorded on the blockchain since it is outside the blockchain world, so you wouldn’t know the physical copy has been sold to someone else, and you are just getting a token that may not be worth much in reality.

Without a trusted custodian or third-party escrow for the physical asset, it is hard, if not impossible, to be sure both the physical asset and NFT remain in sync.

However, extra costs may come with having such a third party. Maintaining and securing a physical asset isn’t easy and may not be cheap. Physical artwork needs care during transfer and removal – expensive packaging and proper storage are crucial. Real estate documents also need the right care to prevent theft or damage.

The alternative is to treat the asset, and NFT as two different pieces wherein their values are independent of each other, and it’s like having a digital picture and a print version of the picture. However, that wouldn’t work for items like real estate unless the real estate is on something like the metaverse while in the physical world at the same time.

2. Restriction of Use

When it comes to art, the buyer, in most cases, owns the physical artwork but not the copyright. So, a buyer may not be able to share or distribute the work to the public. They may be able to resell it and, in some cases, use it as collateral for a loan, but that is about it.

However, we don’t know how that will pan out for other physical assets such as real estate or cars. Since there haven’t been much sales and experience with physical NFTs in the market, we can’t figure out how those challenges will be resolved. Nevertheless, as the market grows, potential solutions will come up.

The Future of Physical NFTs

Physical NFTs still have a long way to go, especially in preventing a double sale of the asset in digital and physical form.

Exploring a custodian or escrow is an option, but that may require having a centralized body which doesn’t work when you discuss NFTs because, in most cases, the conversation is centered around decentralized finance. 

Also, there’s the need to explore solutions to reduce gas fees and marketplace restrictions so NFTs can be freely traded beyond the original marketplace or platform on which it was created.

With those restrictions fixed, physical NFTs can be a safe and solid investment that gives you ownership of something that isn’t only valuable but also tangible. Something you can see in the real world. Therefore, reducing the possibility of fraud and scams that some people fear when it comes to digital NFTs and cryptocurrency investments.

Having an NFT-backed physical asset adds more opportunities for a diverse investment portfolio because you can combine blockchain and real-world investments to enjoy the benefits of both with one asset. You could also invest in a fraction of an asset rather than spend more money to buy the entire thing.

What are your thoughts on bringing the NFT tech into physical world assets? Do you think it’s something you’d want to explore? What are your fears? What are you excited about? Let us know in the comments.

If you want personalized crypto and blockchain-related advice for working with crypto or investing, you can book a one-hour session with our crypto consultants.

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