How Can Utility NFTs Connect Digital and Physical Objects for Use in Real Life?

Dr. Frank Betz

Introduction

NFTs are a growing trend in digital arts and entertainment, providing huge value for their creators, buyers and sellers but their utility extends far beyond that. Many artists, collectors, and traders are into NFTs for their extrinsic value as unique forms of digital art or their value as licensing, speculation and royalty mechanisms. However, NFTs are also finding utility in their ability to represent physical and digital objects in real life (IRL).

TLDR

• NFTs (non-fungible tokens) are blockchain-secure digital certificates of authenticity
• NFT utility extends far beyond investment in digital art and digital collectibles
• Through a process known as token gating, NFT token holders can gain access to rights & permissions assigned to them
• Authentication is required to verify the connection between digital and physical objects for NFT-based proof of provenance, ownership, and access to historical information
• NFT keystones bind physical and digital objects for IRL applications by connecting unique physical and digital object identifiers
• The exploding number of use cases for utility NFTs is opening up a world of new opportunities for organizations and builders

An NFT can represent anything from digital art and music to non-native digitized art and documents, as well as physical objects like people, fine art, and real estate. As a transparent, immutable, and decentralized blockchain record securely linked to a crypto account, a utility NFT acts as a tamperproof digital certificate of authenticity (COA). With these unique abilities, it’s no surprise that NFT use cases are popping up everywhere.

NFT-based communities are flourishing as organizations discover the mutual value utility tokens have for their communities and members. Utility NFTs provide members exclusive access, rights, and privileges. One NFT-based membership community, Flyfish Club (FFC), provides perks and benefits like access to their restaurant, as well as various culinary, cultural and social experiences members can unlock through demonstrating proof of NFT membership. FFC in turn gains direct access to all token holders to promote events, sell merchandise, and receive member feedback. Aside from becoming a trend in sports, art, fashion, music, and gaming communities, NFTs are finding utility in applications requiring proof of authenticity or provenance for physical assets. Imagine being able to reliably track the provenance history and authenticity of an artwork or luxury handbag. With its ability to act as a secure COA, a utility NFT makes all of this possible.

What are utility NFTs?

Utility NFTs are a broad class of non-fungible cryptographic tokens with specific practical applications. In contrast to fungible tokens like cryptocurrency where one bitcoin is the same as any other unit, an NFT’s underlying utility comes from the recognition that it is a one-of-a-kind digital asset that can be used to represent any unique physical or digital object that it is bound to. Like other NFTs, utility NFTs are typically created via programs stored on a blockchain known as smart contracts that automatically run when predetermined conditions are met making them dynamic, immutable, transparent, and secure digital records that are inextricably tied to their owner. Unlike regular NFTs, the core focus of utility NFTs is not their collectibility, but their ability to represent ownership or control of 1) digital objects like music, digital art, and virtual assets in gaming; 2) community-based memberships providing token holders access to rights and privileges; and 3) physical objects whereby through tokenization, historical information is bound to real-world assets for authenticity, provenance, and tracking purposes.

What are some IRL applications for utility NFTs?

As tamperproof digital certificates of authenticity with the ability to link unique physical and digital assets, NFTs are making their way into many aspects of our lives. The following are a few popular use cases where utility NFTs are beginning to take hold.

Utility NFTs for Connecting Communities IRL

Exclusive Access to Brands, Clubs, and Organizations

In the real world, NFT projects infuse utility into their NFTs for members to gain access and claim rewards and benefits. An increasingly popular web3 tool, “token-gating” gives organizations and brands the ability to offer special perks to select customers who are token holders. Token gating provides digital scarcity that retailers can use in many creative ways. Magnolia Park, a California streetwear store with a loyal fanbase that follows its releases, now limits some product releases only to holders of their tokens who are guaranteed exclusive access to product sales while ruling out bots and other predatory practices.

Other community-based projects like World of Women (WOW) use NFT ownership to add value to a thriving community celebrating representation, inclusivity and equal opportunity. When you purchase their NFT you not only receive a digital asset but as a token holder, you gain access to token-holder-only raffles, curated passes to high-potential collections, invitations to an annual gala, and other real-life events like the NFT New York City 2022 Celebrity Dance Party with Madonna. These NFT privileges and benefits, plus fear of missing out on perks that non-holders can only speculate about help make the WOW membership NFT so desirable.

Community and Organization Communication and Decision-Making

Many NFT-based communities recognize the power and utility of NFTs as a voting proxy and member-participation mechanism. In Decentralized Autonomous Organizations (DAOs), where people use NFTs to access membership to support a cause or investment initiative without the need for a hierarchy, each NFT holder is granted the right to vote on specific issues, similar to the way a conventional executive board operates. The process of voting established blockchain-based smart contracts is transparent and verifiable due to the on-chain settings. In the case of a music DAO, an artist could use NFT-based membership voting to learn what type of songs the community wants to hear, what collaborations they might be interested in, or even decide how to manage funds. In the example of an impact DAO, SOW, a platform focused on sustainable food as a public good utilizes NFT-based solutions for community coordination, voting and quadratic grant funding. With decentralized governance capabilities, utility NFTs are poised to become a key component of web3 communities and DAOs.

Utility NFTs for Connecting Digital and Physical Assets IRL

Proof of Ownership of Digital Assets

As immutable COAs, utility NFTs provide proof of ownership of digital assets like virtual real estate, music, digital art, and digitized objects. In traditional gaming, in-game purchases and assets are typically non-transferable and locked into one game. Utility NFTs give game assets value outside of the gaming ecosystem by transferring ownership to the players. Ownership of gaming NFTs can easily be tracked on the blockchain and bought and sold as collectibles on third-party exchanges. One well-known example of utility NFTs is Axie Infinity, a crypto game with millions of community members. Axie Infinity offers a play-to-earn gaming model where items in the game are represented by NFTs, which confirm the member’s ownership of the item. As an additional utility, NFTs allow community members to financially support their favorite players and artists.

Proof of Provenance and Authenticity of Physical Assets

NFTs are a valuable utility for tracking the history of transactions not only for digital assets but for physical ones as well. Reliably tracing the origin of works of art, collectibles, and unique physical assets has always been challenging. Utility NFTs can be used as proof of provenance and authenticity for physical assets by providing a tamperproof historical record by securely linking or binding it to an append-only provenance record of transactions. In the luxury goods market, utility NFTs are getting put to good use for verifying product authenticity. AuthenticBay.com provides customers who purchase new and preowned jewelry, handbags and collectibles with an immutable certificate of authenticity that binds products to provenance, warranty, 3rd party authentication, and other relevant certifications and information.

What is the binding problem and how can utility NFTs bind digital and physical objects IRL?

Utility NFT and the Binding Problem

The quest for proof that a digital object can truly represent a physical object is a major issue facing NFT IRL applications. A digital art NFT is a standalone digital object that contains the artwork and its associated certificate of authenticity in one inseparable piece that does not require a separate authority or cumbersome method of authentication to prove ownership and authenticity. Anyone can inspect the address of the NFT to reveal its transaction history (transfers, sales, etc.) as well as its provenance (when, how, and by whom it was created). However, representing a physical object with an NFT presents a challenge known as the “binding problem.” With all its power to represent digital objects, an NFT cannot reliably represent a physical object without some way to authenticate its connection. QR codes and NFC tags have traditionally served as links or bridges between physical and digital objects but are not foolproof solutions for preventing fraud and counterfeiting.

Utility NFTs for Verifying the Connections Between Physical and Digital Objects

Authentication provides a practical way to bridge the digital and physical worlds to address the binding problem. By verifying that a unique identifier of a physical object matches the unique identifier of an NFT, a user can obtain access to the certificate of authenticity the NFT represents. Trustless IRL (TIRL) enables developers and applications to securely establish a tamperproof connection between physical and digital objects using inimitable cards and tags known as TIRL NFT keystones that can easily be authenticated using a cell phone (see Connecting the Physical World to Web3). “Keystone” is an architectural term first used in the 1600s to describe the uppermost stone in the middle of an arch that holds together the two parts. It is derived from the word “key” figuratively meaning “that which opens or explains.” One NFT project, Iterati, binds generative digital art to its corresponding physical rendering using a TIRL NFT keystone. As a result, the tokenized physical artwork becomes inextricably bound to an unfalsifiable NFT certificate of authenticity and provenance history allowing it to realize its investment value as a one-of-a-kind physical asset.

TIRL NFT keystones bind physical artworks to secure digital certificates of authenticity

Other advanced authentication technologies based on spectral, chemical and optical AI solutions show promise as trustworthy NFT keystones. However, most of these technologies require special authentication devices that are typically expensive and impractical for community IRL applications.

Conclusion

Utility NFTs provide a fundamentally new way of addressing ownership and providing access to information related to physical and digital assets for use in real life. Still, challenges remain for the mass adoption of utility NFT applications to take hold. NFT keystones like TIRL cards can protect NFT holders from exposing their private accounts when verifying ownership to reduce fraud and make it very difficult for bad actors in the NFT space. As new business models emerge and web3 takes hold, utility NFTs will allow communities to capture and exchange value and form more robust digital economies by providing tools for builders to create more expansive and decentralized communities and metaverses.

Call For Builders and Organizations to Develop TIRL NFT IRL Applications

While utility NFTs show great promise for providing rights, permissions and proof of authenticity, there are plenty of creative uses waiting to be discovered and deployed. This article serves as a call to organizations, researchers, builders, and application developers to leverage the power of utility NFT protocols like Trustless IRL to build the next generation of dApps that link digital and physical objects for IRL applications.

For more information, contact info@tirl.xyz.