NFTs (Non-Fungible Tokens) are a confusing concept for many people since they’re so new. The idea of what an NFT consists of changes from day to day. NFTs can represent either strictly digital assets or physical assets. However, the rules around NFTs as physical objects can be complicated.
NFTs can be physical objects because they are frequently used as digital markers for intangible, physical objects for sale, such as tracts of land or fine artwork. This allows traders to exchange NFTs for the value of the physical asset without exchanging the physical object itself.
NFTs can be tied to physical assets, but there are only certain assets where it makes sense from a financial standpoint. Keep reading to learn more about NFTs and how they are used to secure physical objects.
What Is an NFT?
NFTs can represent many different objects recorded in the ledger of a blockchain like Ethereum-also known as a cryptocurrency. NFTs are primarily a way for content creators to mint their creative tokens and attach smart contracts to their digital content to protect its originality and value as a digital asset, plus include royalties for all future sales. (Source: FlipKick)
Without being tokenized through NFTs, a digital asset can be easily reproduced by people who don’t have the right to copy or distribute it. Although there are plenty of scams where fraudsters screenshot and copy popular artwork, mint it, and sell it all the while breaking all NFT copyright laws under the sun.
However, it’s much harder to prove the originality of a digital asset without some digital marker to set it apart as the original copy. That’s why it’s always critical to check the owner and creator of an NFT should you wish to purchase it. Here is how:
Creating an NFT
In order to create your own NFT, you will need to mint it, which then secures the smart contract to the blockchain. This process generally does cost money, or should I say crypto. Some NFT platforms will allow you to mint an NFT for free or defer the costs to the buyer at the time of purchase, known as lazy minting.
If you do decide to mint an NFT for crypto, just know it’s not guaranteed you will be able to sell it and get your money back.
How Do Physical NFTs Work?
When applied to physical assets, NFTs are used as a cryptographical way to authenticate the physical assets even if they aren’t physically present during the time of sale or auction.
This allows expensive fine artworks to be traded with cryptosecurity attached to them to protect their value.
Are Physical NFTs the Same Thing as Fine Art?
Physical NFTs aren’t typically the same thing as fine art, but they can be in some cases. Some fine artworks from digital artists only exist as media files, and these media files can be the NFT itself. Other artworks are physical objects represented digitally as NFTs.
Can You Make a Physical Object an NFT?
Physical NFTs can be connected to physical objects for sale, which is a common occurrence in the sale of NFTs as fine art. In the art world, physical NFTs can be traded for the value of the physical artwork they represent and redeemed at any future point for the physical art.
NFTs as Physical Assets?
NFTs can be the digital tokens associated with physical assets. Physical assets attached to NFTs are considered a part of the NFT – in other words, these two aspects of the asset are sold and traded as a single entity.
Physical assets that can be represented with NFTs include the following:
- Creative work such as film and music tracks
- Fine artworks like paintings that may otherwise be stored in an art gallery
- Multimedia files
- Real Estate and stocks
The digital NFTs associated with physical assets are uniquely identifiable. This means that they’re a perfect method of digital verification for a wide variety of valuable assets in many different types of markets.
Are NFTs Physical or Digital?
The answer is both. NFTs are typically digital tokens, but they can be attached to physical assets. However, NFTs can be entirely digital assets as well. In fact, the majority of NFTs are strictly digital. NFTs are generally in the following categories:
- Digital Art
- Collectables (Cards and Sports Highlights)
- Metaverse Components
Turn an NFT into a Physical Asset?
What if you buy an NFT and start making physical printouts or prints and sell them? Chances are, this is highly illegal. It all depends on what’s allowed within the smart contract or if you get some kind of authorization in writing from the creator. Always consult with an attorney!
Generally, this will break copyright laws and set you up for a nasty lawsuit.
Do NFTs Have to Be Digital?
NFTs have to have a digital component because the NFT is a unit of digital data. This data is attached to a system known as a blockchain. Blockchains act as a sort of digital ledger for people to keep track of the data associated with physical or digital assets.
Popular NFT blockchains are Ethereum and Polygon.
NFTs as Markers for Physical Assets
When connected to physical assets, NFTs act as valuable markers for physical assets that help validate their authenticity. Here are a few examples of data that NFTs can contain for ensuring a physical asset’s value:
- Certificates of authenticity: Many rare items and fine artworks have traditionally had physical certificates of authenticity associated with them. These physical certificates are relatively easy to forge and can make ascertaining the value of a physical artwork difficult. NFTs are much harder to alter and help verify an artwork’s true worth.
- Proof of purchase: A large part of how NFTs are used with physical assets is how they are used to prove right of ownership. This is especially important for non-tangible media items like music files or with physical artworks that may not remain in the buyer’s possession, such as artworks on loan at museums. (Source: Markets Insider)
- Fraud-proof receipts: Counterfeit receipts allow criminals to claim the value of a media piece or artwork without having to pay for it. NFTs are fraud-proof receipts of purchase that are near-impossible to forge. (Source: Flashpoint)
- Fractional Ownership: NFTs allow for the accounting of multiple owners owning one asset otherwise known as fractional ownership. This allows a valuable asset to be owned by numerous individuals.
NFTs aren’t just useful for authenticating physical artworks. NFTs are also swiftly gaining popularity as a way for people to track ownership of properties.
Smart Contracts vs. Traditional Contracts
NFTs linked to physical objects can store smart contracts. Unlike traditional paper contracts, smart contracts are computer programs designed to automatically enforce the contract laws agreed upon by both parties in the contract.
There are some drawbacks to smart contracts compared to traditional contracts since smart contracts are conducted and drawn up in a binary language that tends to lose much of the legal nuance of written contracts. However, smart contracts are an excellent way for businesses and individuals to enforce and validate a traditional contract. (Source: Lease Pilot)
Are NFTs Valid in Contract Law?
NFTs that contain smart contracts are considered valid in contract law as long as the terms of the smart contract are in compliance with regional contract law wherever the smart contract is established. Contract law can vary wildly from country to country, so the legality of NFT smart contracts also varies from place to place.
The best way to determine whether a smart contract is valid is to check regional contract law. For example, the United States has no federal regulations for contract law. Instead, contract law in the United States is determined from state to state. (Source: Harvard University)
NFTs Provide Provenance for Physical Objects
One of the biggest advantages of attaching NFTs to original content like fine artworks is that they help provide an authentic supply chain for the asset’s history. This concept in art collection is known as provenance. (Source: Visionary Art NFTs)
By using an NFT, art collectors can trace every owner a painting has ever had, as well as a painting’s authenticity. This makes it much easier for art collectors and buyers to verify both the authenticity and the true value of an artwork or media file.
As you can see, there is nuance involved in every aspect of NFTs. NFTs can be attached to physical objects as a way to record ownership, enforce smart contracts and keep track of sales data and current ownership.
Because NFTs are relatively new, the technology is only in its infancy. In the future, NFTs are going to be significant components of everyday life. In fact, the future is bright, as explained in this viral article: 10 Reasons Why NFTs Will Change the World.
To further your education and quench your curiosity, I highly suggest these 3 viral articles: