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Beyond Art. How NFTs Can Transform Many Industries

How NFTs Transform Industries

Imagine in your mind’s eye a world where any physical object can be reduced to a series of bits. This digital twin can then be backed by actual value, allowing that object to function as a currency with the potential to be traded on an open market. That’s what NFTs are about.

They’re not just digital collectibles of art or forgery-resistant file signatures. NFTs are programmable tokens that existed long before CryptoKitties and have applications in finance and other fields like supply chain management, identity management, and digital rights management. They’re essentially smart contracts that can best be understood by looking at use cases of asset tokenization.

We can classify NFT use cases into two categories: tokenization of intangible assets and representation of physical assets in the digital world. Asset tokenization was the 4th most popular blockchain application in the financial services industry in 2021 (Statista).

Blockchain applications within financial services

Image via Statista

An NFT can represent ownership of any physical or digital asset. For example, Unstoppable Domains sell blockchain domains, and when you buy one, you receive it as an NFT. You won’t have to pay renewal fees and the domain remains yours forever.

Tokenization of Intellectual Property rights with NFTs

Patents, licenses, and intellectual property assets are among the most valuable illiquid, transferable assets. Transferring and using intellectual property in financing agreements became vital for growth and investment. Blockchain and NFTs enable smooth asset exchange by creating efficient mechanisms for the open and secure transfer of property rights. With NFTs, we can now trade and leverage IP assets on the blockchain.

Today, leading technology companies, including IPwe, offer patent tokenization and partner with tech giants like IBM to tokenize intellectual property assets. IBM and IPwe are creating an infrastructure for a marketplace where people will sell and buy patents using NFTs. Moreover, this marketplace will be ideal for establishing licensing agreements, building and assessing patent portfolios, etc.

Without blockchain, any transaction involving IP is lengthy and costly, involving lawyers, attorneys, and a lot of paperwork. With NFTs, we can distinguish ownership of an IP with timestamps, showing the entire history of the IP transactions.

How do NFT-based patents work?

NFT patent example

Image via researchsquare.com

Let’s look at the architecture of NFT-based patent systems that would usually consist of five primary layers. 

  • We need the storage layer because blockchains are costly and inefficient for data storage. The immutable nature of the blockchain makes data pile up and reach storage limits. Therefore, many projects maintain their metadata-of-chain and use the tokenURI method to indicate the location of the metadata.  
  • The authentication layer uses the Decentralized Identity (DID) approach to collect and store credentials from various issuers, including government, employers, educational institutions. Then, at the verification layer, the verifier checks a person’s validity using a blockchain-based ledger. This verification is necessary to check the NFT creator’s legitimacy.
verification layer data sequence diagram

Image via researchsquare.com

  • At the Verification layer, the inventor generates the patent document’s hash and records it in the blockchain to make the hash and the timestamp publicly available. Permissioned blockchain is the best fit for IP management because, in this case, patent granting offices can play the role of the identified nodes. Patent validation has to be done by certified persons, so nodes or miners cannot be anonymous. Moreover, using blockchain and timestamps, the inventor can record each phase of the patent development as a separate hash. Once the hash is generated, the inventor creates an NFT for the patent, and validators (nodes) validate it. After the nodes reach a consensus about the patent, they record the NFT on the blockchain and add comments. If nodes detect a malicious request, they ignore it and do not record it.
  • The blockchain layer is essential for IP management. Why? Because, thanks to its timestamping abilities and immutable nature, it offers IP management entities solutions for many potential disputes, including sharing confidential information, establishing proof of ownership, transferring IP rights, etc. For example, if a person used a patented invention for his business without the inventor’s permission, the inventor can immediately report this issue and claim his ownership.

Blockchain and NFTs offer efficient and cost-effective ways to create a transparent, auditable, and resilient environment where patent owners can benefit from tamperproof, decentralized networks to trade and exchange IP rights worldwide.

NFTs for supply chain management

One of the biggest challenges in supply chain management is verifying product authenticity. A brand’s name is an asset with a specific value for consumers and enterprises. Together with projects like ownest.io, Blockchain technology represents physical goods, like branded clothes, accessories, and much more. In the digital world, Ownest.io uses NFTs to determine the ownership of products and who is responsible for this item at a given time. The owner of the NFT or the digital twin of the product is responsible for the physical object. Use cases for NFTs in supply chain management are almost limitless, and here are some highlights: 

  • Tracking heavy (+30kg) packages. Imagine an Amazon-like company that sends billions of heavy packages every year and loses a few thousand along the way, including yours. With NFTs, Amazon can create a token for each package on a pallet by just scanning each item. As a result, there will be an identified owner with a package at each stage, and no package will be lost.
  • Every year companies lose thousands of dollars because of losing reusable packaging, like pallets. Think about “pallet-furniture” you see on YouTube that shouldn’t exist at all. NFTs offer easy and cost-effective tracking for reusable packaging. Now companies can create a digital twin in the form of NFT for each kind of reusable packaging, follow their movement and check the balances in real-time. If some packages get stuck (for example, five pallets that never move from their location), the owner gets notified and takes them back to the warehouse.
  • In the automotive industry, you can create an NFT to represent digital identity for any part of the vehicle – from microchips to batteries or engines. This identity will include current location, ownership, temperature, responsible party, etc. This data can be automatically updated via time-stamping and geolocation and will represent accurate and complete information about the physical object to all parties involved. As a result, if one of the parts in China is delayed, the manufacturer will get notified in advance and source what is missing from other locations, like India, and the supply chain will continue working without disruptions.
Ownest.io

Image via ownest.io

The same technology applies to the food and beverage industry or any goods for that matter. For example, NFT can represent each bottle of wine from a specific distillery with a digital twin. A Norwegian platform, wiv.io, does precisely that. They create wine NFTs that represent actual bottles of fine wine. This technology opens new opportunities not only for wine lovers but also for investors, who can trade fine wine without storing the actual bottles.

A ‘single source of truth’ is an expression used in the blockchain industry to refer to a particular state or set of data that everyone agrees upon. The “truth” could be the status of a specific supply chain. It could also be information related to identity. NFTs are beginning to be deployed in this industry, providing a mechanism for the secure sharing of data and seamless coordination between all parties involved in each transaction. The tokenization of everything is already happening – further adoption and integration with artificial intelligence could help avoid catastrophes like “The Great Disruption” of 2021.

NFTs in finance

Out of all NFT use cases, the finance sector can get the most benefit from this technology by implementing quick, cost-efficient, error-free ways to verify bonds insurance, prevent fraud and manage debt. Finance is one industry that needs better tools for verifying the provenance of business contracts, so NFTs are perfect to prove ownership of an asset and confirm the existence of an insurance policy or a title record. NFTs offer proof that can’t be taken away and provide an extra level of security, especially in jurisdictions that suffer from corruption or rely on paper records.

The DeFi world is actively adopting borrowing against NFTs as collateral. For example, if you own one of the CryptoPunks that can sell for as high as $1 million or more, you can borrow against it. Once you clear the loan, the CryptoPunks NFT gets released back to you. What’s more, you can fractionize your CryptoPunks for a smaller amount to avoid accumulating a bigger debt.  Currently, the most popular P2P platforms for NFT collateralized loans are Stater and NFTfi.

NFTfi loan stats

NFT loan stats from NFTfi

How does P2P borrowing work?

In the marketplace model, like NFTfi, borrowers offer the app NFTs as collateral, and lenders can choose which NFT they are willing to accept before initializing a loan. The NFT that is used as collateral is then kept in an escrow contract, and if the borrower defaults on their loan by not repaying the initial amount plus interest on time, the NFT is transferred to the lender. With the development of marketplaces like NFTfi, we can forecast that we will be able to use NFTs that represent physical items (fine wine, physical art, real estate, lands, etc.) as collateral to borrow against soon.

NFTs in insurance

yearn.finance

Another use case for NFTs in complex financial products is insurance. Yinsure by yearn.finance is an excellent example of NFT usage in insurance. It’s an entirely new kind of tokenized insurance, a pooled coverage underwritten by Nexus Mutual. You can insure your assets with Yinsure regardless of whether it’s a base or a composite asset. Just fill in the days and amount of crypto you need to cover and get your insurance policy instantly.

What’s more, you can transfer, buy and sell those insurance policies in the form of yNFTs on Rarible, where you can buy your coverage bypassing any DeFi protocols.

NFTs for bonds

Meet Telos T-Bond, released in October 2020. This project can solve the speculation challenge when it comes to fundraising in the crypto industry.

“T-Bond NFTs offer a new and powerful option for any project seeking funding based on future technical achievement,” says Douglas Horn, Chief Architect of the Telos blockchain. “Back in the ICO boom and continuing still, far too many projects have raised funds only to see their token plummet in value and community support dwindle. T-Bond NFTs create an ecosystem where projects can raise funds through investors, who in turn have the freedom to sell their NFTs on the secondary market without impacting the token price. This facilitates a vastly more sustainable model by harnessing the new synergy between DeFi and NFTs.”

T-Bond NFT Lifecycle

T-Bond has a specific date as a maturity condition, moreover, the expiration of T-Bond NFTs can also be based on a milestone instead of a date. For example, a milestone could be a project’s token reaching a specific price or the release of a testnet. Investors can trade, sell and stake T-Bond NFTs on secondary markets, similar to U.S. Treasury Bonds or “T-Bills.” However, while Treasury Bonds are fungible, each T-Bond represents a unique smart contract written onto the NFT. Another differentiator is that no debts are created because T-Bond NFTs transfer ownership of the underlying tokens whenever someone sells the NFT, so technically, it is not a bond in a traditional sense.

NFTs in options

NFToptions.app is one of the first tools for creating and executing options contracts on the Solana blockchain. NFTs allow for tokenizing any asset, so anyone can digitally make an options contract by minting an NFT for their house, piece of fine art, or land and then placing the contract on the blockchain.

NFT Options program

If you are familiar with options in the stock market, NFT options on Solana work similarly to them with some key differentiators:

  • Thanks to the auditable nature of the blockchain network, there is complete transparency, and you can verify ownership of tokens quickly and easily.
  • NFTs allow us to tokenize any kind of assets, so there are more asset classes than on the traditional stock market.
  • There are no naked options because, with NFTs, you can only transfer assets you own. Naked options are widespread on the stock market and create a lot of risks.
  • There are no brokers, and all transfers are direct.

NFT options contracts

The options program acts as escrow and authority for options and verifies that the creator of the options contract possesses the assets he claims and transfers them to escrow. To specify the ownership of the contract, the program mints an NFT for each option contract, and the contract creator receives this NFT. Then the contract creator sells this NFT to the buyer. The buyer can exercise a contract after the program has completed verification that the buyer actually owns the NFT.

call option contract

Image via github.com

NFTs in real estate

Unlike other forms of investment, the world of real estate is actually one of the least liquid asset classes in the world. The process of buying or selling a piece of property is complicated, often requiring brokers or lawyers and involving considerable time lags between decisions and actual transactions. Moreover, the real estate sector lacks decentralization and a proper mechanism to verify each transaction automatically.

Tokenization of real estate will allow more investors to access this asset and limit nefarious activities like money laundering and tax evasion. Today, several projects, including propy.com, are working on opening up new opportunities for real estate transactions. NFTs can transform the industry and help create a self-sufficient, automated network for real estate transactions.

How do NFT real estate transactions work?

The ownership of the property is held and recorded as an LLC (while we can tokenize LLC, we can’t tokenize an actual property). The buyer of the NFT obtains the rights to the LLC, with the property owner signing legal papers for NFTs to transfer NFT ownership to all future buyers.

Suppose the seller wishes to split his property into fractional pieces to attract a larger investor pool. In that case, the asset can be divided into many small parts representing partial ownership, and each of these parts can then be stored on the blockchain as an NFT. Then investors can trade their tokenized assets on NFT marketplaces and take advantage of liquidity which they can never achieve in the traditional real estate market. Fractional ownership in real-world assets is a new and growing asset class mainly catering to younger people from the post-millennial era.

What’s more, once we create an NFT for a real estate asset, it becomes collateral in the crypto universe, unlocking crypto mortgages, liquidity pools for P2P decentralizing lending, crypto title insurance protocols, and appraisal solutions. As a result, the blockchain can create a complete ecosystem for the new era of liquid real estate assets.

Benefits of real estate tokenization:

The real-estate market badly needs new approaches and interventions. Attracting more people to the market, including international individual investors and everyone else who is currently prohibited from making such investments directly, would result in lower prices, more transactions, and greater overall efficiency. Here is what tokenization offers:

  • More liquid market with less bureaucracy, minimal transaction costs, and almost zero market friction.
  • More efficient rights management thanks to smart contracts that contain hashed data of each property, including information about repairs, previous owners, and amenities.
  • Opening up global markets and adding even more liquidity by offering new opportunities for international investors to purchase real estate shares overseas, bypassing regulatory restrictions.
  • New forms of funding for private home buyers. NFTs allow home buyers to raise funds for an apartment they want to buy by issuing fractional tokens and selling shares in the apartment. The token holders will be co-investors and can collect fractional rent according to the number of shares they bought.

Tokenization is the natural next step in real estate sales and financing evolution. Tokenization will make possible the sale of different fractions of ownership and mortgage loan participation. Today, we can trade digital tokens faster and more efficiently than any other financial asset. Real estate tokenization will complement the overall market by offering a flexible and convenient way to transact with otherwise illiquid assets.

NFTs in the music industry

NFTs in the music industry

If streaming revolutionized the music industry, NFTs could transform it by becoming the most substantial change in the music business since the emergence of streaming platforms. One of the reasons for NFTs being so transformational is that they offer an opportunity for musicians to get paid for years to come. Aside from a musician making an initial NFT sale and profiting from it, they can keep a percentage of all future NFT sales.

Visual art

For example, someone buys an asset or an artist logo for an album cycle at $10,000. The artist can then designate to keep 10% of all future sales. It means that they will get 10% every time a sale of that NFT happens. So if the fan base grows together with demand, the price of the NFT will grow too, and it might sell for $100,000 in the next cycle.

Visual art, like logos, album covers, etc., constitutes the first phase of music NFTs because blockchain technology already allows it. You can find plenty of album art, t-shirt designs, concert photo prints, etc., on Open Sea and other NFT marketplaces.

Music samples

Currently, we don’t have the technology to sell full master tracks as NFTs. Therefore, similar to Illlmind, artists sell samples and rights as NFTs instead of full tracks. The next phase in developing music NFTs is to figure out how to sell master recordings of a song.

Artists like 3LAU are already making millions of dollars selling things such as limited edition vinyl pressings and unreleased music. However, it’s not the same as selling actual master recordings. Once this becomes possible, people will invest in music NFTs like they do in stock or startups. They will forecast the track’s popularity based on a variety of data, and if the track becomes popular, they will earn profits from it. One of the projects to watch in this space is onchainmusic.com which helps artists create NFTs and list them for sale.

Tokens of live performances

Think of those high-production live streams everyone is doing now. With NFTs, people will be able to own videos of those streams. Artists can do the same with live shows, where you will have the opportunity to buy the video recording of this show as an NFT. We will see NFTs in every pre-order of a record, packaged with every live stream and merch bundle. VIP experiences, meet & greet will all come with NFTs of, perhaps, your selfie with an artist or some other digital assets.

NFTs for event ticketing

The current problem with event ticketing is that secondary markets can take ticket prices to extremes. It happens partially because bots automatically increase prices to drive up profits through the highest possible markups. The major challenge for event organizers is limited control over transactions on secondary markets. Even unique static codes on tickets do not allow linking a ticket to its owner and do not restrict reselling it. It’s also not feasible to completely attach a ticket to a person and prohibit reselling because it will cause time-consuming and costly entry checks at the event. NFTs might solve this problem and bring transparency and trust to the ticketing market.

Event organizers can mint NFT tickets using any blockchain platform that supports smart contracts. Smart contracts allow us to embed logic and rules in digital assets directly, including a maximum sale price or an auction. It is very different from embedding logic in the conventional third-party applications that control assets. Attendees can then save those NFT tickets in their mobile wallets. Event organizers stay in control of the process and establish price limits and fees for ticket sellers. This hard-coded logic of smart contracts is superior to regulation that requires the implementation of rules by humans and monitoring user behavior manually.

The diagram below shows that the only two entities participating in the ticketing transaction are the attendees and the organizer. They transact by interacting with the smart contract without any middleman. The only prerequisite in this model is that both entities own an account on the blockchain network (i.e., Ethereum) and fund it with some of the native cryptos to interact with the smart contract. The order of these interactions is indicated by numbers 1-3.

Suppose the organizer decides to resell tickets on the secondary market. In that case, they can just call a corresponding function in the smart contract to set the ticket price to ensure that it does not exceed the maximum price set by the organizer. As a result, we eliminate the problem of bots and ever-increasing prices on secondary markets.

UML diagram

Image via Researchgate

 

NFTs for event ticketing can help prevent fraud, save costs for organizers and attendees. Blockchain will create a more transparent and auditable market and offer a continuous revenue stream for organizers and artists by reselling merchandise, content, etc. What’s more, event organizers can create collectible NFT tickets that attendees can then resell to other fans.

NFT tickets can also offer attendees more perks, like unlocking food and beverage discounts or some exclusive features for future events. For example, the first-ever NFT ticketing event by MetaCartel announced that their NFT tickets would unlock features for future events.

NFTs for SaaS

The current SaaS model relies on monthly or annual payments. SaaS borrowed this strategy from the publishing industry. For users, this model means a pure expense and requires a recurring stream of income to cover this cost. NFTs open up opportunities for a totally new model, Software as a Token.

Each SaaS project can create unique tokens to allow users to purchase access to their service. What’s more, NFT owners can trade those tokens on open markets, and users can profit from the potential upside in the demand for that software. NFTs can also open the door to various value adds, such as gated or limited features available only to specific collectibles or rare tokens holders. Therefore, purchasing an NFT for a SaaS product becomes an investment for users instead of an expense.

Conclusion

Blockchain technology is a tool for disintermediation. It enables people, businesses, and organizations to interact without the need for middlemen. Blockchain has the potential to allow individuals and groups to save and transfer assets without third parties or institutions serving as intermediaries.

NFTs are unique digital assets that grant access to a tangible, real-world asset or utility. Using NFTs, you can tokenize stocks in your company, commodities like gold or oil, physical gifts such as smart toys and tickets, even one’s time through things like gamified tasks. NFTs have the potential to unlock immense value. They enable decentralized markets for all assets on the planet and eliminate barriers restricting liquidity and interoperability across different assets like physical property. And perhaps best of all, using NFTs is seamless and straightforward–it’s a technology that anyone familiar with crypto will be able to understand without extensive onboarding from an expert.

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