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Tokenizing the World with NFTs

January 22, 2024 - 9 min read

A recap of tokenization use cases that are made possible by oracles, smart contracts, and NFT financialization.

Introduction

Non-Fungible Tokens are unique digital assets that serve as proof of ownership on blockchains, and trade hands using smart contracts. NFTs are distinct from other tokens in that they are often meant to be one-of-a-kind and aren’t exchanged on a like-for-like basis.

Those in the digital asset space are already well aware of how NFTS in the form of digital collectibles and PFP icons have taken the industry by storm. At present, NFTs are mostly used for trading digital art collectibles, in-game assets, virtual real estate, and gated membership programs.

For instance, NFTs have been used as membership cards to gain entry to exclusive events, like ApeFest 2022 in New York City or digital passports for Zuzalu, an experimental pop-up city in Montenegro. Indeed, these business models are already being pioneered by visionaries in the field. However, that is just the tip of the iceberg when it comes to tokenizing the world of real things.

Leveraging NFT Metadata

However, the images we associate with NFTs are just one component of the metadata that really make them special. In fact, a variety of data can be attached to NFTs in the form of metadata, and they can also be programmed to flex over time. That is to say that their properties can either be upgraded or downgraded over time based on developer parameters, making them dynamic.

For example, a magical in-game item might need to be recharged after a number of uses. These recharges could be accomplished by paying for tokens or else by performing the appropriate training exercises or collecting requisite smithing equipment to accomplish this goal.

What is Tokenization?

Simply put, tokenization refers to the process of digitally recording things from the real world on immutable blockchain ledgers and to be traded via smart contracts. Tokenizing assets is a much more efficient and secure way of storing, querying, and transferring data between parties which may or may not know each other. The combination of these qualities also makes it a huge improvement when it comes to transparently operating decentralized, liquid capital markets as we’ve seen with so many DeFi projects.

The tokenization of real-world assets is best understood if one considers the distinction between tokenizing tangible and intangible assets. Intangible assets like bonds, carbon credits, and fiat stablecoins all fall into this category. These are perhaps the easiest to conceptualize and implement given that there is already existing infrastructure to regulate and audit account balances.

“Tangible assets like gold, real estate and fine art are easily tokenized, but will require more effort to audit off-chain conditions.”

Stablecoins held by a custodian must be subject to strict oversight, just the same as tangible assets like gold. That is, stablecoin issuers holding Dollars or Yuan must be held in specific accounts and report their financial statements regularly to ensure the same amount of stablecoin tokens are issued in circulation for on-chain use. Of course, these will be easiest to track.

Tangible assets like gold, real estate and fine art are easily tokenized, but will require more effort to audit off-chain conditions. Nevertheless, a tokenized real estate market will inevitably be more efficient at tracking a property’s historical record, provenance of ownership and insurance claims, and will supercharge liquidity as market participants enjoy better access than ever.

How Tokenization Works

First, every NFT has a unique alphanumeric string of characters that makes it unique on the blockchain ledger on which it’s being recorded. That translates to this ID being the key to distinguishing each NFT from all others, hence where the “non-fungible” qualifier comes from.

The process of tokenizing an asset involves developers leveraging blockchains and smart contracts to cryptographically sign Token IDs where they can reside on the destination ledger. Along with this ID, developers also write metadata into the tokens, like adding images or in the case of Bored Ape NFTs. The combination of the ID and metadata can then be purchased and held by a smart contract wallet owner, with the NFT representing ownership and the asset’s associated benefits.

Once tokenized, NFTs are very easily traded between wallet holders using smart contracts. In the process, tokenization helps to recreate or mimic the scarcity we find in the physical world, and impose that scarcity on the digital world in which things can so effortlessly be copied and shared. Online ownership via tokenization will have real staying power because of this breakthrough. To tokenize an off-chain or real-world asset is a three-step process:

Off-Chain Verification

Supra’s DORA network verifies off-chain assets and reports data to destination chains to provide users with secure, decentralized validation that a given token is backed by an off-chain counterpart. This involves a cryptographic signature that follows a secure and decentralized consensus mechanism, and recording it all on blockchains for subsequent provenance verification.

Metadata Application

Supra’s DORA network derives the necessary off-chain data from a variety of high-quality sources to populate the token’s relevant metadata via a highly-decentralized, secure algorithm. The metadata of off-chain assets are recorded and cryptographically signed before the assets are uniquely identifiable. By leveraging Supra’s oracle network, DORA, the tokenized asset’s on-chain metadata can be subsequently updated in real time dynamically as off-chain conditions change.

At this point, the token or NFT is programmed with the necessary metadata which identifies and distinguishes it as representing a tangible off-chain asset. That is to say that an NFT representing a 2-bedroom condominium could establish ownership, track the history of transactions, claims on insurance, and more. This optimization is a game changer when it comes to the integrity and liquidity of commodity and real estate markets, among others.

On-Chain Tokenization

Once minted and in a user’s wallet on the destination chain, it is time to transact. NFTs can be easily swapped on marketplaces native to the destination chain. Protocols like Supra’s HyperLoop and HyperNova can be used to safely transact across blockchain ecosystems without the risks associated with traditional bridges. In addition to the untapped liquidity this unlocks, it also serves to expand the usefulness of NFTs as an asset class.

What are the Use Cases of Tokenization?

Tokenizing the world means upgrading the financial rails on which our economy operates. The most prominent use cases for tokenized real world assets are becoming clear, but we are still in the early stages of discovering the limits of this technology.

It is only a matter of time and a matter of how creative tech founders can be. So, now that we know NFTs will play a critical role, let’s cover a few examples of how this is taking form:

Stablecoins

Stablecoin issuers in the US must undergo regular audits to account for their issued tokens. Tether, Circle, and MakerDAO dominate the top three spots when it comes to market capitalization.

USDC stablecoin issuer Circle has will have its financial statements and asset reserves audited by Deloitte, for instance. They’ve also come to find use cases in e-commerce, cross-border remittances, and generating yields for depositors using money market protocols.

Stablecoins serve as convenient tokens for swapping with other digital assets without having to interact with legacy financial rails, or withdrawing funds to traditional bank accounts. That’s why stablecoins are already boasting a market cap exceeding $130 billion USD at the start of 2024.

Tokenized Treasuries, Equities, & Commodities

Tokenized treasuries are perhaps the most obvious connection between traditional finance and DeFi. UBS and JPMorgan have recently been making strides in the tokenization of treasury instruments, partnering with Web3 firms to develop pilot programs for settling transactions of traditional financial instruments via smart contracts and their own bespoke blockchain technology.

For commodities like gold, custodians will be needed to physically examine, store, and secure the physical assets in vaults. They’ll also be required to provide proof that each gold token represents the tangible gold assets whose management custodians lay claim. Of course, the specific token standards and metadata required for different asset classes and use cases will tend to vary based on the nature of the assets themselves.

Tokenized Collectibles

The addressable market for secure, immutable ownership and secure salability of luxury items with fidelity provenance cannot be understated. The global trading volume for collectibles is estimated to be around $400 USD billion each year. This includes baseball cards, rare coins, diamonds, classic cars, fine art, and more. This kind of value doesn’t exchange hands despite all of the friction points along the way for buyers and sellers unless the demand is off the charts.

In other words, the collectibles market could stand for a technological upgrade when it comes to digital ownership, secure verification, and liquidity for secondary markets. By tokenizing assets with DORA, Web3 marketplaces are perfectly poised to cater to this industry via the provision of liquidity and secure cross-chain interoperability.

Professional Sports Ticketing

Sports fans looking to offload their extra seat tickets could be in for a treat if NFT ticketing takes off. Buying counterfeit paper tickets from scalpers roaming the crowds outside of stadiums is a well-known risk, but tokenized tickets will change all that by providing a secure and transparent history of origin and ownership.

Recently, the Monaco Grand Prix 2023 offered NFT tickets to racing fans. NFT-ticket holders were also entitled to a few hospitality perks as well as discounts on racing merch. Fake tickets may soon be a thing of the past altogether, creating more secure and efficient secondary markets for sports fans and season ticket holders.

Conclusion

The tokenization of off-chain and cross-chain commodities is simply a manifestation of how society is being increasingly digitized for trading hands more optimally. Of course, the immutability of blockchains combined with the blind justice of automated smart contracts are just the tip of the iceberg when it comes to commoditizing off-chain assets for a 24/7 trustless, on-chain economy.

The future is one in which every part of our daily lives can be sustainably and verifiably sourced, and easily tracked by leveraging the immutability of on-chain provenance. Immutable blockchains, digital assets, and automated smart contracts are giving birth to a brave new world in which the efficient transfer of assets and data are integral to living our best lives. The on-chain world is powering ahead, supported by a sophisticated stack of cryptography, secure computation, and now artificial intelligence.

However, we can’t just leave the real world behind. The on-chain world will forever be tethered to that of the real world, and it therefore must connect seamlessly to any and all public blockchains, and that begins with being able to securely tokenize off-chain assets.

About Supra

Supra is at the forefront of researching and implementing decentralized Web3 services which optimize for scalability, security, and fast finality when it comes to settling transactions on-chain. Our developer toolkit consists of a growing library of comprehensive guides and technical whitepapers, and serves as the foundation for builders to understand and implement these tools.

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