First, let’s clarify what NFTs are.

If you were to stop someone on the street today and ask them what an NFT is, you’ll probably get one of four answers: ‘I haven’t a clue’, ‘it’s a piece of digital art that’s been sold for millions of dollars and I don’t understand why or how this is possible’, ‘it’s a non-fungible token, but I don’t understand what that means or how it works’ or you’ll be given a proper explanation by someone who understands. Here’s a proper explanation:

NFT stands for Non-fungible token. ‘Non-fungible’ means something unique that cannot be replaced with something similar. For example, the world-famous Mona Lisa painting could be considered non-fungible as it cannot be exchanged for another Mona Lisa and nobody can make an identical copy of the painting. The word ‘Token’ means ‘asset’ or ‘unit’. Furthermore, NFTs are designed so that there can only be one owner at any given time.

So, when you combine ‘Non-fungible’ and ‘Token’, you get a unique asset or unit that cannot be exchanged with another token and it only has one owner at any given time.

Then there’s the word ‘Phygital’. This prefix (physical plus digital) is a term that describes blending physical items with digital ones. If we take digital art as an example, an NFT is not the digital art itself as that is created using various file formats, commonly PNG or GIF files. It only becomes known as an NFT when you tie a digital contract to it on the blockchain. These digital contracts are called smart contracts and the reason they are smart is that everything within the contract is written into lines of code which can never be altered. They are also cryptographic, meaning the information contained within the NFT is protected, so that only those for whom the information is intended can read and process it. So, for example, if you add the name of the original artist into that digital contract along with details of where, when and how the digital art was created, then tie that digital contract to the digital art, you now have an iron clad indestructible proof of ownership along with provenance that will last for eternity. You now have an NFT artwork – your digital artwork bound to a smart contract on the blockchain. Essentially this then allows you to own the original copy of a digital file in the same way you might own the original copy of a piece of physical art. A major benefit is that fraud will reduce and forgeries will stop, as illustrated in very simple terms below: 

But this is just the beginning. Everything could and will, in time, have a digital contract tied to it – property, cars, artwork, jewellery, numismatics, furniture, web domains, intellectual property, etc, etc. Auction houses and dealers will soon demand that any physical product sold by them has an NFT attached to it – a ‘digital twin’ – which will hold immutable proof of ownership and provenance and hugely reduce the chance of fraud occurring and counterfeit goods being sold. And this is why the term ‘Phygital NFT’ has been coined, so that buyers and custodians are aware that this particular NFT is tied to a physical asset.

So, how exactly is this done, one may ask and how do you know that the physical asset in question, is the one associated with a particular NFT?

This is how it works:

1. A physical asset is identified and provenance and ownership information for the asset is collected by the owner.

2. This information is then passed to developers who create a smart contract containing all this information, thereby allowing an NFT to be created (minted) which is associated only with this asset.

3. The minted NFT now has unique identifying code inside which only the current owner has access to and this code is now forever associated with the physical asset in question. If required, a scannable version of the code can be physically attached to the asset in a way that is indestructible and invisible – such as Smart Water or a cryptographic tagging system that if taken off an asset, becomes damaged and therefore invalidates the provenance. This association with a physical asset is what makes the NFT ‘Phygital’.

4. The Phygital NFT is then stored in the owner’s secure digital wallet on the blockchain which is only accessible by them by using their chosen security access procedure.

5. The asset can now be sold along with the associated Phygital NFT which will reduce the need for long-winded and expensive provenance and certification processes down the line. The information in the original Phygital NFT is now immutable and forever enshrined on the blockchain, also helping to prevent fraud or theft of the physical asset.

Tessa Finance is in the process of building the system that will support the creation of Phygital NFTs for all physical assets, using some of the techniques mentioned above, but also some even newer technology which is yet to be announced. If you would like to find out more, please visit www.tessa.finance