A unique type of non-fungible tokens (NFTs) that represents ownership of a real-world asset (RWA) or a certain physical, underlying asset, such as property, artwork, or musical instruments. These tokens are generated using blockchain technology (by means of asset tokenization), where a transparent, immutable, and tamper-proof record of ownership can be provided on such assets. The direct connection between the NFT and the real world asset/ underlying asset, allow asset owners to easily prove their ownership. Asset backed NFTs constitute digital tokens that provide a unique representation within a distributed ledger and are backed by tangible assets that have value in the market.

By nature, NFTs are mostly used for digital art, collectibles, and in-game assets. By asset tokenization, visual metadata such as an image (which can be either static or dynamic) can be added or assigned to an NFT, and therefore investors can legitimately own a digital art piece or collectible or a stake therein. As a technology, tokenization involves the use of smart contracts and blockchain technology to represent ownership or rights to an asset (or any other financial item, e.e., a liability). As a result, such items become tradable, onchain tokens. For RWAs, the process involves reformatting assets not recorded on a blockchain (offchain assets), into a token format. Once tokenized, these assets become more liquid and tradable in terms of the ability to record, update, and transfer them assets in the market.

NFTs are most suitable for unique assets that can’t be easily represented by fungible tokens, such as real estate assets. Tokenized real estate, where each piece or plot is uniquely different from the others, in certain aspects or characteristics such as size, age, location, depreciation, etc. In general, NFTs can be applied to real-world assets either as proportionate (1:1), tokenized representations of physical assets, or as a reflection of ownership of unique assets requiring up-to-date metadata (state updating).

Physical asset NFTs are also known as asset-backed NFTs or wrapped assets (WRAPs).