The concept of non-fungible tokens (NFTs) has been the biggest hype of 2021 in the crypto world. You probably have read about one of the digital art pieces that have been sold for millions of dollars. For example, the NFT sold by Beeple for $69 million at the auction house Christie’s or have a look at this top 10 most expensive NFTs ever sold including other artworks of Beeple and CryptoPunks.
Currently, NFTs are primarily used to create collectibles in games and sports, to buy and sell digital art, and to collect royalties for music. These first use cases of NFTs definitely are impressive and show overall innovativeness, but does it make sense to use NFTs in other business scenarios as well? And why is an NFT different from other tokens? In this article we explain what an NFT is and we highlight other practical applications for NFTs, especially in supply chains.
What is an NFT?
An NFT is a token that is used to track and exchange the ownership of unique digital assets stored on the blockchain. While tokenization of (digital) assets is already happing since the start of Ethereum in 2014, tokens couldn’t be uniquely linked to a specific asset yet. NFTs are non-fungible tokens that can be transferred without being mutually interchangeable with other tokens. This means that a particular NFT is always linked to a unique asset (e.g. an artwork), and no other token exists that represents the same unique information. Most tokens that are created on the Ethereum blockchain are ERC-20 tokens. See this extensive list of ERC-20 tokens which includes many popular tokens that traders buy and sell on crypto exchanges today. For NFTs a new standard has emerged, namely the ERC-721 standard. For more information about NFTs we refer to this detailed report published by the European Union Blockchain Observatory & Forum.
The term NFT definitely is a buzz word, and there are also critical views on the actual value of claiming ownership of digital images or artworks that can simply be copied by anyone else. To illustrate this, recently the website NFT Bay was launched which enables you to torrent an entire blockchain’s worth of NFTs in a few clicks (for who remembers the torrent website Pirate Bay, you’ll understand how this works).
NFT use cases for supply chains
If we relate the existing use cases of NFTs to the domain of supply chains, the question arises which unique assets can we represent by tokens, and when does it make sense to make these tokens non-fungible? The following list includes some of the assets that can be represented by a NFT to make their exchange or ownership history clear:
- Unique physical products or product batches (Product authenticity)
Product traceability and provenance is a popular use case of blockchain technology. In many industries blockchain and tokenization are applied to track products such as food, medicines or fashion items. Tokens are used to track the exchange and movement of goods throughout a supply chain. By creating NFTs for products or product batches, a unique digital twin can be created that is linked to unique identifiers of the physical products.
- Unique physical assets (Asset tracking)
The way how NFTs can represent products also counts for other assets such as factory machinery or real estate properties. NFTs have already been used to simplify real estate transactions, as well as to facilitate fractional investments by creating unique revenue generating assets characterized by an NFT. Factory machinery are also revenue generating assets which could be financed in other ways through tokenization.
- Unique digital business documents (certificates and transactional data)
Business documents such as certifications, invoices and sales orders always contain a unique identifier. These type of documents can also be represented by NTFs.
Looking at the list above, we basically see a number of use cases that are facilitated by blockchain-based tokens already. For example, tokens are already being used for a few years to trace a product back to its origin in food traceability systems. Do we just call these tokens NFTs now? In some way, this is correct. We already used NFTs but the term has found its way into the mainstream now and we can just call it what it is: an NFT, which can trace a unique asset. You could argue that the NFT is a slightly different implementation of a token that enables you to create a unique digital token for each unique underlying asset, which was not possible before by using ERC-20 tokens.
Are NFTs relevant for supply chain use cases? The short answer is: yes, it certainly makes sense to use NFTs to track (digital) assets, especially when it is required to represent unique assets. You can argue that we tokenize assets in supply chains for years already, and that we just call them differently now as NFT went from crypto niche to mainstream. Though, the implementation of the tokens is a bit different from ERC-20 tokens. It highly depends on the use case which token standard should be used, but we foresee that many of the existing tokens that are used in traceability use cases and tokens that represent business documents will be replaced by NFT-based implementations.
Would you like to learn how your organization can implement NFTs in your supply chain? Please contact [email protected].