Physical NFTs and their importance (Part 55)

Welcome to the 55th part of the 100-part series on Blockchain.

NFTs are most commonly associated with digital assets (discussed in Part 46), but they can also be used as a digital representation for physical assets like jewelry, property, antiques, or even consumer goods. In fact, they act as a guarantee of ownership over a real-life, physical asset. So, in short, a physical NFT is a non-fungible token that is linked to a physical asset. Physical NFTs are also called phygital NFTs.

So you can say phygital assets have two distinct parts. One of the parts refers to the actual physical asset, such as the tickets, property, jewelry, etc., and the other part is in the form of metadata, present in the smart contracts (on Blockchain) that contains the link to documents/certificates, indicating the ownership of the physical asset. Storing documents on the Blockchain itself will be costly; therefore, they are stored on the decentralized IPFS. But the hash of the documents, along with their address, is stored on the smart contract of the physical NFT. The smart contract is recorded on the Blockchain.

Thus, through physical/phygital NFTs, every physical object can be digitally connected to the Blockchain.

Benefits of physical/phygital NFTs

(i) Traceability for products to increase consumer trust: Physical assets, as they are today, are largely untrustworthy. We often do not know whether the product we are buying is genuine or counterfeit. We trust that the retailer or brand is selling authentic products as they are advertised. In reality, not even the retailers know whether these products are authentic. This applies to both high-priced items, like designer jewelry, and low-cost items, like oil. Another important example of physical assets being inherently untrustworthy comes from the art world. Phygital NFT provides proof of authenticity of a physical product. The product data can be about where the raw material was sourced from, the manufacturing process, and how the shipment was handled. All this product information is stored on Blockchain, which acts like an immutable database, and the NFT acts as a certificate of quality and trust. For example, precious stones like diamond are valuable only when they contain proof of authenticity, such as a certificate from professionals. Here the NFT attached to the diamond provides this proof. The whole information about the origin, provenance, and history of the physical asset will be present on the Blockchain, which can be accessed by the NFTs. The other example of phygital NFTs can be in the wine industry.

(ii) Fraud Prevention: Anyone imitating a product of a high-value luxury brand with a limited edition would earn huge profits but spoil the reputation of the original brand. Brands have been using the certificate of authenticity for years, but these can also be easily counterfeited. An NFT gives the physical products a certificate of authenticity that cannot be tampered with. As the information is stored on Blockchain, the brands can easily use it to maintain the proof of authenticity to prevent any kind of fraud.

(iii) Secondary sales royalties: NFTs are powered by smart contracts which handle the transferability and verify the ownership. Once you have an NFT for your physical product, you can write a code in a smart contract to include pre-defined royalties on every resale. Then, on the resale of your product, the smart contract will automatically execute and trigger a royalty payment to you as defined on the smart contract.

How to add a QR code to access physical NFTs?

The physical assets will be tagged with an NFT and stored on a Blockchain. NFTs let you give your products a unique digital identity by serializing every item. This works just like any other serial number, but the difference is that the information is stored on the blockchain. Additionally, each physical item tagged with an NFT can be tracked independently from all the others. So the Blockchain will also contain the information of who owns each item and whether or not it has been sold. Thus the NFTs act as unique identifiers for each of the products. You could have hundreds of NFTs on the Blockchain, with a different signature for each.

The NFT present on the Blockchain can be accessed by scanning the QR code present on the product. You might wonder, “Can’t the QR codes be faked or copied?” The answer is simple: No. It is because each certified document stored on the Blockchain has a unique hash. While minting NFT for the product, a QR code is generated by encrypting it with the hash of the product’s documents. The QR code can be scanned only by a specific dApp. The dApp will not scan any other QR code unless it is Blockchain-based and has a hash value. The dApp cross-checks the hash value in the QR code and compares it with the hash value on the Blockchain network. If the hash value matches, then only the customer gets access to the content associated with the NFT.

If the product is sold, then the ownership status will be updated on the Blockchain. Suppose the encrypted QR code is copied on the fake product. If you scan the QR code, you will see that this product has already been sold. Thus, preventing counterfeiters from introducing fake products into the market.

Additionally, if the hash value doesn’t match or the QR code points to the malicious link, the dApp will not open the malicious link. This is how encrypted QR codes also prevent hacking and attacks such as malware attacks, phishing attacks, etc.

Few applications of physical NFTs

(i) In art: The physical NFTs can be used to represent the authenticity of the physical fine art. This would ensure safeguards against counterfeiting, fraud, or plagiarism. Another significant benefit in physical versions of NFTs is the generation of royalties with each secondary sale of the art. The rules of royalties on secondary sales can be indicated on the smart contract associated with the NFT.

(ii) In supply chain: The end consumers in the supply chain can personally verify if a product is authentic by simply scanning the smart label or QR code attached to each product’s packaging. After scanning, the customer gets full access to the unique content that comes with the NFT, like raw material used for the specific product, its origin, current location, shipment conditions, etc. If the customer buys the product, the status and ownership will be updated on the Blockchain.

NFTs can also help in managing the complex returns process. For example, through the NFTs, the companies can determine whether the returned item should be recycled, repaired, sold to discounters, or destroyed.

(iii) In metaverse: In the future, physical NFTs can act as a digital twin, which are 3D models of your physical products. You can easily bring these products to the Metaverse and interact with them digitally. For instance, if your avatar can travel in the same car you own physically, and can use the same laptop you own physically. As more and more physical goods we own are available in the metaverse, the Metaverse will become more and more an extension of our physical reality.

Not only this, online shopping in the metaverse will become more convenient for users. You can shop for phygital NFTs with other digital avatars in a shared space. The physical products associated with phygital NFTs we purchase in the Metaverse will be delivered to our physical homes. For instance, on an online store in the metaverse, you purchased physical NFT for a shirt after trying on your avatar. After buying NFT, the shirt associated will be delivered by the physical store to your physical home. In this way, shopping in the metaverse will provide a lot of opportunities for businesses to increase customer satisfaction and decrease return rates.

If you liked this article and want to know more about Blockchain, NFTs, Metaverse, and their applications, click the below link.

Happy learning!

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