NFTs Tied to Physical Assets: The Meaning of Asset-Backed NFTs

What Are NFTs? 

Non-fungible tokens are distinctive, unique tokens that are stored on a blockchain. An NFT’s key purpose is to serve as a digital representation of an asset - a method to prove ownership of any asset. 

An easy way to look at NFTs is to consider them as a certificate of ownership for a particular asset. As NFTs are stored on a blockchain, it’s incredibly efficient to verify ownership of an asset as well as the transactions based around the token and asset. 

Each NFT is unique, meaning no token is equal. Unlike a fungible token, such as Bitcoin, which can be traded for one another. 

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Can an NFT Be a Physical Asset? 

Since they exploded, NFTs have only been recognised as being tied to digital assets like digital art, collectibles, or perhaps gaming-related assets. They have formed a market around assets that previously wasn’t there, and these assets have become considerable members of many investors’ portfolios. 

Many question the longevity of NFTs because of this. How much value do these digital tokens actually provide on a real-world basis? 

The benefits of NFTs can be realised on a tangible scale through tokenising physical assets. The process of asset tokenisation involves creating digital tokens on a blockchain, which represent either digital or physical assets. 

This means that any asset can have a ‘digital twin’ - a digital token that represents ownership of the asset itself. For this reason, we’re seeing NFTs being introduced to industries such as real estate and other high-value assets.

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What Are Physical Asset NFTs?

A physical asset NFT is a unique digital token backed up by a physical asset. A perfect example of this would be a house. The NFT would be the deed to the house - a digital representation of ownership of the house. This digital deed would contain all the key data about the property. Ownership of the digital token (the deed) means ownership of the physical asset that it’s linked to (the house). 

Such NFTs bridge the gap between the digital world and the physical world, demonstrating the real potential of NFTs. As NFTs evolve in terms of use-cases and utility, applying them to real-world assets is one of the biggest moves that is on its way.

Because blockchains operate in a decentralised manner, the movement of an asset, in this case, an NFT, doesn’t require a third party or intermediary. This has massive potential to quicken the process of transactions as well we remove the potential threat of fraud and mispricing. 

If we look at real estate as an example, an industry loaded with admin and intermediaries, we could tokenise the ownership of houses and streamline the key processes involved with transferring ownership of property. No more need for hours of paperwork, as well as the need for various third parties to monitor the transaction. Property ownership can be transferred and verified in a matter of minutes. 

When applied to physical assets, NFTs can be utilised in a crypto-graphical way to authenticate the assets even if they aren’t present during the time of sale. This allows the assets to be traded with crypto-security added to them. 

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Advantages of Physical Asset NFTs

There are many advantages that NFTs can bring to a physical asset market. NFTs have brought market efficiency as well as authenticity to various digital assets and they can do the same for physical assets. Let’s dive into some of the key benefits NFTs will bring to a physical asset market:

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1. Linking NFTs to Mainstream Applications

NFTs have previously been associated with digital assets only with limited use-cases. The majority of transactions occurring with the NFT ecosystem are jpegs and/or other digital art. Although the use cases for these tokens are evolving, many question the worthwhileness of owning these assets in the long term.

Associating NFTs with physical assets means we can test how they may potentially digitise various industries when it comes to transactions and overall efficiency. 

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2. Proving Authenticity

Because of blockchain technology, the movement of assets can be tracked and traced easily, making it simple to verify the authenticity of a product as well as where it came from. This is especially important when dealing with high-value assets. 

By resolving uncertainty around an asset’s legitimacy, an NFT could actually help increase the value of the physical asset itself. 

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3. Decentralised Market

In a traditional market of buying and selling physical assets, many processes are facilitated by intermediaries. They are there to help with verifying provenance as well as bringing buyers and sellers together. 

With NFTs, there is no need for intermediaries and tamper-proof transactions can take place. This again promotes market efficiency as well as reduces costs and admin related to transactions. 

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4. Fractional Ownership 

With the process of asset tokenisation, physical assets can also be fractionalised. This is where the ownership of an asset is split into multiple parts with each part of ownership being represented by a digital token (NFT). 

This allows multiple parties to form ownership of an asset, where purchasing the whole asset may have previously been out of reach for one party alone purely because of price.

Although there may be several legal question marks around the tokenisation of assets, especially when it comes to huge industries like real estate, the benefits that NFTs will bring are slowly being realised.

In a few years' time, there's a very good chance we'll start seeing many physical assets and items having digital twins.