November 8, 2022

Emergence of Real-World-Assets backed NFTs

Each USDT is matched with a US dollar, and 100% of these dollars are stored in Tether’s reserves. USDC also claims the same. Developed by Circle, each USDC is a digital dollar that can be exchanged to fiat. These are all cryptocurrencies with the highest market capitalization that are backed by real-world assets - specifically by dollars. Now, it is not just limited to fungible cryptocurrencies. This wave has come upon non-fungible tokens (NFTs).

This article tackles on what “backed” really means, how NFTs’ attachment to real-world assets can be advantageous, its current state, and what is expected of in the future of these NFTs.

What does “backed” mean?

Folks in traditional finance must be very well-versed with terms like mortgage-backed securities. This just means that a promise to perform a contractual obligation like paying a loan is made stronger by attaching an asset to it in case of non-compliance.

Asset-backed NFTs are similar to these types of assets; but instead of existing to secure a promise, these give the holders a choice to purchase the NFT in order to claim a real-world asset. In fact, a lot of mainstream brands have dipped their toes in this type of technology.

Last August 2022, Tiffany & Co., a renowned luxury jewelry brand launched NFTiff, their own NFT collection with only a limited supply of 250 items. The holders may then choose to redeem this NFT for physical jewelry, or simply trade it for gains.

Blockbar also launched as a marketplace for NFTs that are redeemable for physical luxury liquor, such as Johnny Walker, Hennessy, Glennfiddich, Royal Salute, and many more. The holders may choose to burn, trade, or redeem these luxury spirits in a physical facility located in Singapore.

Greater Proof of Authenticity.

With proper education about blockchain or with just a simple blue tick, it is relatively easy to determine whether an NFT collection is legitimate. This makes it easier to detect fake items or fraudulent sellers pretending to be official distributors. Verification processes, anti-counterfeit measures and copymint prevention systems established by NFT marketplaces make it systematically safe from fraud, mainly because their basis for authenticity is the NFT metadata that is generally immutable.

Easier Transfer of Assets.

It takes just a few clicks and a few minutes (as long as gas prices are calm, of course) to transfer the ownership of NFTs from a holder to another holder. This makes the ownership to real-world assets linked to these NFTs much easier to transfer as well. Aside from ensuring that the items being transferred are genuine, the blockchain also allows a more legitimate process for transfer and ownership verification. In this space, each wallet is unique. No two wallet are the same, and this make its easier for both the buyer and the seller.

Fractionalization.

Real estate is considered as the safest form of long-term investment; yet, its barrier to entry is extremely high. With NFTs, it is possible to have multiple owners over a single real-world asset by attaching piecemeal NFTs to it. This way, more people can get hold of real estate investments.  One of the leading examples is built by Ekta Real Estate NFT Marketplace. This entity enables digital investing to interest-bearing physical assets through leasehold contracts normally seen in real estate.

It’s still in the trial phase.

Given that the entry barrier to NFT creation is extremely low, there are already a lot of NFT projects that boast to be backed by real-world assets. Unfortunately, only a few projects seem to live up to their vision, and the number of users actively redeeming these assets are just a small fraction of the community.

Nevertheless, the landscape for this is and will continue to be a work-in-progress. Just like how Bitcoin and stablecoins took over the financial markets; with proper logistics, education, and utility, NFTs backed by real-world assets might just be the next thing to bring mass adoption to Web 3.0.