Linking Reality to the Digital
BAYC dropped from $ 1.3 million to $75thousand and then to $59thousand in less than one year.
According to a report by galaxy, when the minimum prices for popular NFT projects drop, it usually means the entire NFT market is getting smaller. and Since January 2023, the minimum prices for top tier NFT projects have been going down. This is because collectors of valuable NFTs are reducing their risks in the shrinking NFT market by selling at lower prices to minimize losses.
And while this may be the case HSBC estimates that the volume of tokenized markets is expected to reach an impressive $24 trillion by the year 2027.
This will largely be driven by the use of tokenization, to create digital representations of various kinds of assets, including securities, funds, artwork, and other collectibles
This article will cover what it means to link a real world asset to a non fungible token (NFT).
NFTs are commonly used to represent ownership of assets, with many applications in the real estate industry. Several real estate companies have emerged, offering tokenized properties where each token represents ownership of a part or the whole property
However, real estate is only one aspect of the emerging NFT ecosystem where new players are helping to keep the technology alive by:
enabling linking a real-world asset to NFT thereby making the physical asset “token backed”
providing real-world use of the physical asset token.
But what does it entail to back a real-world asset with an NFT and how can it be done efficiently?
Two companies (arcade.xyz and 4k) came together recently to give us a glimpse of how this could work.
Two Rolex watches became NFT-backed and the owner used the NFT as collateral to obtain a loan.
Here is how it happened:
First, the watch was put in the custody of 4k, a decentralized protocol. 4k then went on to issue an NFT to the owner. Thus, the NFT becomes proof of ownership of the Rolex watches.
The big goal for 4k is to ensure physical assets can change hands without needing to be physically moved.
Therefore, the protocol is made of different components and participants like:
Guardians who are responsible for safeguarding physical assets that are placed under their custody. When an asset is initially entrusted to a guardian, it undergoes a thorough audit to ensure proper documentation and verification.
A valuation protocol, utilized to maximize the certainty of an asset’s market price. Additionally, the audit record for each token that is backed by a physical asset is publicly stored on the blockchain.
An authentication protocol, designed to maximize certainty that a physically-backed token is precisely what it claims to be, leaving no room for doubt or misrepresentation.
All these components synergistically collaborate to facilitate on-chain user interaction with the physical asset. They collectively provide essential information and authentication, and ensure the asset remains securely held in custody.
Now that we have the asset securely stored and an NFT issued for proof of ownership, next is how the NFT was used to obtain a loan.
Arcade.xyz, an NFT liquidity market is a decentralized finance platform on Ethereum that provides a marketplace where NFT owners can use their assets as collateral to get loans.
Asset owners deposit their NFT or NFTs into a vault and receive an NFT representing ownership of the Vault.
The asset owners decide the terms of their loan, such as how long it will last and the interest rate.
Lenders have the option to make offers on the loans and borrowers can accept loan offers. All of these happen trustlessly.
When a loan is settled on the blockchain, the lender transfers the loan amount from their digital wallet to the borrower’s wallet. In return, the lender receives a lender note — an (ERC721) token, which represents their claim on the Vault. This lender note acts as proof of ownership and gives the lender a claim to the collateral assets, in case the borrower defaults on the loan.
In conclusion, the integration of physical assets with NFTs offers exciting possibilities within the emerging NFT ecosystem. The transparency, security, and liquidity provided by this convergence create new avenues for asset ownership, trading, and monetization. As the NFT space continues to evolve, we can expect further innovations and applications of this integration, reshaping how we perceive, trade, and interact with physical assets in the digital realm.
NFTs Revolutionizing Real-World Use: Beyond JPEGs was originally published in CryptoStars on Medium, where people are continuing the conversation by highlighting and responding to this story.
