NFTs have changed our understanding of digital assets since gaining more mainstream attention in recent years. With this, the relationship between NFTs and physical assets has also emerged as an intriguing and innovative use-case for this technology.

Unlike cryptocurrencies such as Bitcoin or Ethereum, which are fungible and can be exchanged on a one-to-one basis, NFTs are unique digital tokens that represent one-of-a-kind items or assets. While NFTs are predominantly associated with the digital space, they can also be linked to physical assets through tokenization, thus 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.

To put it simply, 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 for that physical item. Typically, the physical asset can be any unique item of value, such as artwork, real estate, luxury goods, 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, protecting intellectual property rights and ensuring the assets are trackable throughout their lifecycle.

There are several additional advantages to this, including fractional ownership. This is when multiple individuals have the ability to own a stake in the asset through 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 have otherwise been out of their financial reach.

Fractional ownership also enhances liquidity for traditionally illiquid assets as it facilitates the creation of secondary markets where investors can buy and sell fractional ownership stakes. This provides an avenue for liquidity and potentially increasing market depth for these assets.

Some physical assets may also come bundled with additional perks 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 drop which offered collectors a variety of benefits, including an AI-powered music generator 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 such as these can increase the value of the NFT and make it more desirable for the average consumer. 

The relationship between NFTs and physical assets has given rise to out-of-the-box concepts like “phygitals.” They blend 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. Diving deeper into phygital experiences, Nike went on to acquire the NFT sneaker studio RTFKT Studios that led to the launch of Nike’s metaverse sneaker line. Purchasing one of these NFTs not only enables you to wear your digital sneakers in the metaverse, but also provides you with your own physical pair to wear in the real world. These kinds of offerings allow for unique opportunities for user engagement and interaction.

There is significant potential and a promising future in NFTs representing physical assets. It’s still a relatively new concept, but it has already demonstrated its value and captured 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. When purchasing an NFT that is tied to a real-world, physical asset, it can enhance the ownership experience by offering unique digital experiences and additional perks. 

NFTs can incorporate smart contracts, enabling automatic royalty payments to creators and original owners whenever the NFT is sold or traded in the secondary market. This ensures ongoing recognition and compensation for creators and incentivizes the production of high-quality digital and physical assets. Smart contracts can enforce pre-determined terms and conditions, reducing risk of any disputes and ensuring fair compensation.

However, challenges and complications remain in the integration of 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 solid, 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 to the world of physical assets. By tokenizing physical assets, NFTs provide new opportunities for ownership, investment and engagement. The connection between NFTs and physical assets creates a bridge between the virtual and physical worlds, allowing for new experiences and benefits for collectors, investors and enthusiasts.

As the technology continues to evolve and mature, the relationship between NFTs and physical assets is expected to grow and continue to shape new avenues for custody, creativity, interaction and value exchange.

Anthony Georgiades is the co-founder of Pastel Network.

This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.