Selling physical items as NFTs.

The last years was loud about NFTs. They gained popularity not just inside the blockchain community, but also being recognised by wider population. While even they are recognised not surely understood by everyone, so let’s start with a short explanation what is an NFT!

NFT stands for Non Fungible Token. A token is a digital asset which state, amount, owners, recorded on the blockchain. A fungible token we can compare to cash, we are paying with it and everyone care only to receive the correct amount, because every bill having it’s own value and every bill worth the same. Non fungible tokens are like old or unique collector’s bill, when the bill’s face value not so important but people valuing the bill for some reasons and it’s important to be uniquely identifiable.

The NFTs are ordered in collections, and most of them represents a digital image, video or audio file. Depends on the project sometimes the intellectual rights for that digital property transferred to the NFT holder too. But we are here to talk about selling physical items as NFTs. As the technology is here and it’s getting more and more mainstream so peoples and companies start to think how they can make the NFT space more interesting and how can they adapt to their workflow and thats how physical items as NFTs borne.

Proof of ownership or some item’s authenticity was always a problem to solve. For a long time papers was the only solution for this problem, and humanity developed many methods to make sure that the piece of paper is hard to be counterfeit. As the methods of security papers evolved so on the counterfeiters evolved with it and this cat and mouse game never ended. The last decades brought us the online databases, and that was a high heap on the security because we can double check the authenticity of a document. Least in theory, as the practice showed to us there is many breakpoints in the system. Sometimes privacy laws don’t make it possible to let a document publicly available, and if the more dark spots left out, the more opportunity for counterfeit them. Practice also showed these kinds of databases with the online front not that cheap to maintain and make it accessible all the time so some started to ask money for the service and from that point it discourage many people to even use it. If someone else maintains a database for us that also means we lost control over it, and it can be the root of many problems. For example what if we are selling our item and we are asking the maintainer of the database to update the details of the new owner and them not doing it? Currently many-many registers are out of sync from the reality. It becomes one more extra problem for the people they are trying to avoid if they can.

Okay, but how the NFT and blockchain technology providing a solution for this? Let’s shine a light to it via an example. Physical gold bars are highly valuable items and thats why some people trying to fake them. Usually, the mint is putting a number on each bar and making sure its traceable and authenticable. If they would issue an NFT for every gold bar and they would transfer to the buyer’s wallet they would already have many advantages over paper. Paper proof can be copied as many times someone wants, and he can alter that many details of data as he wants. However at blockchain each NFT collection having a unique address and every piece of NFT token having it’s own unique address also. It’s technically impossible to have two collections or two token at the same time with the same address. This means even if someone copies every detail of the mint’s gold bar NFTs they can only launch on different addresses and the counterfeit will be obvious as we get the legit addresses from the mint. This already gives us high advantages over the conventional method, but the advantages not ending here. Layer we deciding that want to sell the gold bar after some time and the potential buyer aware of these bar issuing methods and he knows we must own the NFT also if our gold bar is legit. So he kindly asks for the proof and instead of the problematic paper and online database we can simply show our wallet address where they can find the gold bar NFT. The blockchain is usually fully public, so everyone can see the wallets and which wallet owning what exactly but this doesn’t mean we are revealed to everyone. Until we are telling someone which wallet is ours, nobody can identify us, the wallet address are just numbers and characters until that. This gives us much freedom and control over our own data. Someone might ask we could also lie about our wallet address, but thats not true, because our buyer can ask us to sign a message with that wallet, and only the owner can sign a message like that. Now as the buyer is sure also that we own the wallet and he can see which NFTs we have and they can verify the NFT matching with the physical item details he can buy it worry free from us. At this point we don’t have to contact no one to update any online database for us, we just simply is sending the NFT from our wallet to the buyer’s wallet and we aren’t relying on any service. Because the blockchain is up and running with many services and utilities they aren’t just relying only on the gold bar verification. Also an advantage that blockchains usually decentralized, so we isn’t depending only on one server or one website but many computers which running a software called nodes storing the state of the blockchain, with all the wallet, token, etc. states. The buyer can even decide to run his own node and download all the data of the blockchain if he doesn’t want to use public ones. These features were unimaginable before. Using blockchain and NFT our control over our data, assets and the freedom of choice is much more than in any other system. Of course the physical item still can be modified, but that is something, which the mint has to solve physically. NFTs are only making sure one bar having one specific token attached to it and its can’t be multiplied for fake bars.

Now we are understanding the base concepts, only our imagination make limits about the ways we can utilize this. Basically, every physical item can be tokenized. Let’s imagine buying a car as a collection and every part have it’s own NFT token, we could search back the entire of car history (as soon as the databases and frameworks made for it) by only buying a car part second hand. We can think how many industry where reliability is critical suffering from fake parts, avionics, medical just to mention only two where we don’t want any fake item in the chain. But also as a person we would be very happy if we could authenticate the shoes, watches, clothes, etc. we are buying that it’s not fake.

Different estimations telling us 600 billion to 1 trillion EUR are lost every year globally due counterfeits. 80% of us faced with fake products knowingly or unknowingly. And these amount of fake products causing 800 000 job lost just in the EU. If we would educate the people, and we would utilize immutable blockchain technologies these numbers could be reduced dramatically.

Also popular idea, to tokenize physical land or properties as NFTs. It would make the transfer of ownership much more simple and clear. If someone would own a house and one NFT, and he can’t sell the house at once he could decide to deposit that NFT to a smart contract which would emit him 1000 shards. Every shard would be a new token with individual address and it would represent 1,1000 part of the house. He could try to sell the shards and also rent out the house, the income from the rent would be shared between people who are bought the shards. If someone owning more shards he would get more income. If someone really like the house and slowly buying all the 1000 shard from different investors, and as soon as someone collects all the 1000 he can visit the smart contract and deposit the 1000 shard to burn and destroy it but he could get back the original 1 NFT what the house had. So even the shards switched between peoples over time and they co-owned the house its still possible to own by one person again. This is why I mentioned only our imagination can limit the possibilities.

Unfortunately, even if the tech side is ready to develop such a creative utilities, the legal and adoption side isn’t there yet. Technology developing fast and the legal side is not ready to follow that quick, but in time they can understand the possibilities and figure out the new legal frameworks of the new possibilities. Also, people have to learn and use these technologies carefully, because new possibilities bringing new dangers usually. People have to learn how to protect their NFT assets, blockchains usually pretty irreversible, so for an example if someone burning his NFT he can’t get that exact one back. These kinds of technologies require a mindful user, and also new trial and errors to let the developers of technology figure out every possibility and provide solution for it.

Even today most of the NFTs are just digital images and some based on this started to sell physical artwork, the above examples showing us there is much much more possibilities in physical NFTs. This makes the future pretty bright and most likely we will see more and more real world asset tokenized in the future.