The Dawn of the Physical Backed Token: How NFC and Secure Chips are Bringing IRL Assets On-chain

All right, everybody. I think we're gonna get started here. My co-panelists. Hello. Hello.

Hello. Hello. Uh so, thanks for joining us everybody. We're going to be talking about uh the intersection of physical real world assets and crypto as bridged by chips uh secure elements. So, I'll give a brief introduction about myself.

My name is Cameron Robertson. I'm one of the co-founders at ARCs. You may have heard about us called Kong. We made these cache notes. Um, and we basically make small little NFC chips that can be embedded into all sorts of different things.

I'll turn it over to Mark. I'm Mark Shackleton. I'm the CEO and founder of Smart Seal. Uh, we're embedding NFC chips into physical assets for proofs of authenticity, ownership, and possession. Hi everyone.

I'm Rebecca Kaida. I'm the founder of Physical. We actually help brands with their marketing strategies or their just general strategies. And part of that is helping them uh figure out tokenization and how to actually put things on blockchain. Hello everyone.

I'm Chris Lee, co-founder of IYK and um yeah, we've been experimenting in this digital world since 2021 and excited to talk about it here today. Awesome. Well, to kick it off, I'm kind of curious to hear how everybody got working at this intersection of crypto and physical. So, you know, let anybody jump in here. Yeah.

Uh, so, uh, I've been, uh, in in, uh, my background is in software and hardware engineering. Uh, I've been working in that that field for over 20 years. And, um, I've also have a background in cryptography. And, you know, when I saw that the the chips, NFC chip adoption was rising and the secure elements were becoming more ubiquitous, uh, it really was a no-brainer to mix the two together. Um, I think it's a really an amazing time to be in this um, field right now and um, it's super exciting to see all the really neat things we can build with this tech um, that's just we're just on the forefront of it right now.

Uh, so I actually got bit by the bug as someone said this morning. I was working for a marketing agency in New York and we were working on a watch account for the second largest luxury conglomerate in the world and they were like, "We want to do something with blockchain." And I had had experience um working with some of the early Ethereum co-founders and the CryptoKitties experiment had just happened. So early 2018, the rise of Fortnite and hund00 million a month uh spent on skins. I'm like, let's do a digital version of this watch in AR.

Let's add it onto the watch. Let's have it ship with an NFT. So, I've been thinking about how to connect the the digital and the physical for a while. I'm also an RPG game player, so I really love in-game And so that made a lot of sense to me that people might also value digital assets. Um but linking them to the physical seemed very important especially to segue into that.

Yeah. For me um I actually met my co-founder on Discord early in 2021. Very crypto. Yeah. We were um very into NFTts at the time and we actually we started to see brands come into the space.

So as NFT people were super excited to see that and ultimately we were kind of disappointed in the implementations that we were seeing. So there was this one example Dolin Gabbana was dropping this pair of sneakers and they said it came with an NFT. Um, but when we did some research, the way it was implemented was you'd buy the sneaker and the snore, get a code on your receipt that you would then put into a separate form with your ETH address and they would airdrop you the token. So, the reason why that was disappointing to us is um the NFT is completely detached from the physical, right? where it's supposed to be this purchase that comes with these two assets, but when you do it in that way, they're instantly detached where I can sell the NFT on OpenC but keep the shoe or I can sell the shoe on eBay and keep the token, right?

So, what we really wanted to solve was how can we have a digital asset that mirrors um physical possession? And so we went down this whole rabbit hole of like different design models and all of that. And ultimately we landed on what we call the pull model where anyone who has a verified tap of an item should be able to claim the corresponding token in perpetuity. So that also means if I sell my shoe or if I give it away to someone else that the next possessor can actually tap to claim and that ends up creating like an onchain history of a physical items movement in the real world and that was kind of the genesis of everything um we've done since then. So this kind of brings up the next question which is I'm curious to think about like an integration that anybody has worked on or can think about which exemplifies the power of this or conversely you know Becca you and I were talking previously about like maybe maybe there's an integration that has been a terrible failure and like things don't work really well.

So like curious to jump in. I mean you know Becky you can start here. Something work well or work bad. Yeah, I haven't seen anything work too well to date. Although, you just showed me something ahead of this that that seems to work reasonably well.

But from a brand standpoint, I think that everyone's so concerned with the reliability of some of these technologies, which is why they're a little bit hesitant, even though again like the benefits are quite clear from the consumer standpoint and the brand standpoint. But again, it kind of all comes down to a flawless execution and something that they are absolutely they have zero worry about. And I think we're such in we're still in the infancy stage, right, where it's like the things that you're working on or the things that Mark's are working on are so early that it's like they need to have like 12 months of that uh play out and get consumer reactions, right? Because at the end of the day, consumer behavior is going to drive that adoption. And if consumers demand these from their products, they're like, why isn't my shirt coming with an interactive experience or some level of like leveling up my shirt, right?

or having some community engagement to it. That's going to be the huge tipping point. So, I think that, you know, it's kind of a non-answer, but I haven't seen anything too well to date executed um that's had that been in been within the zeitgeist enough where people are craving it, but I think it's going to come probably the next six months. I think you're absolutely right that um it needs to be flawless. You know, if you're creating something for consumers, um consumers, most consumers are not NFT collectors.

Most consumers don't have MetaMask wallets. So, being able to abstract that away, but still have them be able to register the NFT non-custodially, you know, these are actually like very difficult problems and there are all sorts of different tricks and ways to get around that. Um, and uh, you know, it's really just in an experimental phase right now. I have a question for everyone. If you guys can raise your hand, anyone who owns an NFC chip.

Okay. every everyone's hand should be up because your badge has one on it. So, it's like I think also we have a bit of a QR code dilemma where people at first were like what do I do with that and now everyone knows because it's co oh I scan it with my camera. I think that we're going to face a little bit of an adoption friction issue until people realize that like oh I scan this because this does something. Yep.

Definitely. I think even my grandma can use QR codes now and I think the same thing will happen for NFC. Um, it's also crazy to think how device support for NFC is so ubiquitous where most people in this room you don't even need to install an app. You just need to wake your phone and tap. And that's because NFC's been used for a really long time.

It's actually powered a lot of mobile payments for many, many years. And so your Android phone and your Apple phone has like support built in. So really what we're seeing here is the inflection of consumer applications being being built on NFC cuz payments have been doing this for a long time. Um I think for to go back to Cameron's question, we're seeing two emergent cases of um like behavior kind of take off. The first is content.

So, we did this drop with this artist, Verite. She's an indie musician and she actually dropped chipped merch through us before her new album came out. And what she did was she wanted to create and IK is we're always trying to create like accessible experiences. So, um what we designed was why not just tap to get exclusive content, right? Because the chip actually gives you further segmentation on your consumer base where today she might be or yesterday she might have been reduced to posting content on Instagram but Instagram is broadcast right.

So through the chip she was able to drop early access to singles to only her merch owners and in the music world people who buy merch are generally like a super fan. So, we're seeing content kind of take off and also the social use cases. So, Goney, he's uh using our technology and if you find me after this talk, you can actually tap my shirt to get a POP that you met this shirt. And you know, it's still he's still figuring out exactly what he's going to do with that. But you can think of it as minting your IRL social graph, right?

where everyone today you're meeting all these people these people at a conference these are implicit interactions that occur in the real life through the NFC chip we can actually make it a little more explicit and bring it on chain and we're also seeing like messaging apps being built on top of NFTts where now that you minted the POP for me I might actually be able to reconnect with you tomorrow. So those are two categories like we're seeing kind of adoption grow. I and I something I didn't want to gloss over with like the capabilities. You know Mark, we were talking the other day about like kind of a little bit of your origin story with your co-founder like a key one being authenticity. So I'm like curious to see like how you think about that and how how that came out.

I mean you can tell the tell the story better than I can. Yeah. I mean we one of the ways that we really got into this um my co-founder is from Nigeria. He was making um prints that were that were like very, you know, Africans uh prints that were coming from his hometown. He was importing them to the United States and selling them here.

One of the issues, you know, there was a like a a growth of African fra fashion. And one of the issues that he ran into was that a lot of the things that he was selling against the consumers didn't didn't know whether this was came from China or it came from Africa. um and the market was very much diluted with um with counterfeits and knockoffs and there was no traceability. So he came to me and said is there any way you can put a microchip inside this or a circuit board that can you know give the end user some assurance or some um attestation as to where this comes from. Uh so we thought about it a lot and we worked on it tried a bunch of different things.

We had you know a a e- in QR code that was time synced to a server. uh we went through a lot of different iterations and ended up finding these secure element chips and really diving in and this is really what made the magic happen. You combine that with an NFT, you register that contract and you register the attestations associated with that and now there's mathematical proof. There's traceability that this product came from this location and these separate authorities attest to that and it's not just a sticker on a product. It's a mathematical signature.

And I think there's a tremendous amount of power in that and that's really what got us excited about this. Yeah, that I mean I think it's interesting to think about the origin stories that we all have getting into this space. Um you know similarly like we we come from a background of making door locks with secure element chips and cryptography in them. And so you know a lot of NFC chips you see that are off the shelf are literally just pointers. They're like a URL.

Anybody can duplicate it. And so when we came and saw this, we said, well, you know, we have the tools of cryptography to solve these problems. Um, you know, right now we use them for trading monkey JPEGs and, you know, USDC and things, but we can bring that IRL. Um, so I I kind of want to dive in actually now, you know, a little bit deeper on the technical side and and where we've been thinking about this. You know, we had back in right after Ethereum, the ERC20 standard came out and it was a standardization for funible tokens which led to the ICO boom of 2017 2018.

Then very shortly thereafter, we had the ERC 721, you know, the the folks who worked on CryptoKitties um and and that led to this incredible non-f fungeible token boom. And now recently we're starting to see these emergence standards around chips. Um, and obviously, you know, in the name of the the panel, we're talking about uh 5791, which is the PBT. Um, so I want to dive in a little bit further about like how does everybody think about um, you know, what will this new standard become the NFT as physicals? What are the problems with it?

Um, is there still something better to come? So, oh my god, Mark, please start with your hot takes. Yeah, I know. I' I'd like spicy takes. Well, I think it's a good start.

Um, the 5791 is uh, you know, what it does, it's a standard for an extension of the, uh, 721. Uh, but on top of that, it, you know, it it has some requirements for how you make a chip, an NFC chip. The chip has to be able to do an ECDSA signature. Um, and it it limits the transferability of the of the NFT until that, you know, it can collect a signature from the chip. Um, so what this is intended to do is to prevent the decoupling of um the NFT and the chip itself, which would mean that like, oh, I I run away with the shirt and then someone else has the NFT.

Um, so what we really want to do is we want to make sure that the NFT the NFT represents a certificate of ownership and origination that's linked to that shirt. Um, if you're like adding a an image to it and you're like adding something of value like a piece of art um to that NFT, it sort of becomes the certificate of that. So um you know for the this new standard I I think it it works really well. The o one of the things I would add to it would be to add a lost or stolen flag. That's one of one of the things that we do on our contracts.

What this really does is it incentivizes um the the token to be transferred with the item because when the the owner of the NFT can flag the that item as lost or stolen. So when that item is scanned, there's a different behavior on the screen. You know, he says it comes up red. It says this item is lost or stolen. it belongs to this owner and that's actually it's like there is no like legal enforcement of uh digital deeds.

There's no legal precedent for this. So the lawyers really don't the the judicial system doesn't really have this in place but we can enforce it technically and we can enforce it by incentive. Um so that's that's one of the things that I would add to the standard. I like that's something that I love when when Mark and I connected uh a couple years I guess now ago u that was one of the most exciting things for me right because when you think about luxury products you think about things that are expensive AF there's a lot of theft that goes on and especially since co and so to have a mechanism in place even if you know people are always going to sell on like the black market right but having something that can't go into these normal resale channels like a real real or Poshmark or vestier whatever if there was a mechanism where they could say, "Oh this was this was stolen or lost, then uh they can't sell it again." Because one of the craziest challenges right now, I'm sorry I'm going on a little bit of a tangent, uh is that companies can't authenticate products.

So even even a primary reseller or a primary seller rather of luxury goods, there's a company that I won't name just for privacy purposes, but 23% of their returns are counterfeit. So imagine they sell they're they're a primary seller. It's not resale. So they authenticate the goods because they come straight from the brand, but then they sell them and then 23% annually of those returns are fakes and they don't have enough money, they don't have enough manpower to authenticate because they're getting so good. So having a technology like this, even if it's obviously an additional expense, which is a little bit of a threshold, right?

Um on the long on the long run, right, saves a lot of money and a lot of time. So that's just one of the most exciting things about these technologies and their implementations. And of course they're they're reliable tech cuz it's been around for a while. But again, the execution is where really needs to be nailed. Also, just a real quick comment, the cost of the counterfeiting actually gets pushed to consumers, right?

Because now like they have to pay insurance and that's just going to be extra cost to the customer. places like the Real Real, they're verifying products by hand sometimes and that's why how they justify like a 40% seller fee, you know, so the cost trickles down. Um, to Cameron's question on standards, I think the short answer from our side is we're trying to be flexible where it it's definitely still early days and we want to leave ourselves the flexibility to evolve as more and more ideas come to light. And so, um, we have a contract we use. We're obviously following PBT.

Sounds like Mark has his own contract and so it's gonna be exciting to see um different behaviors get kind of oified and that can eventually pulled maybe be pulled out into like um the standard but it still feels a little early and we're leaving ourselves the flexibility um where IK will be like standard agnostic um you'll be able to choose whatever standard you want and it'll still work. I think it's important to know there's still this tremendous convergence of thought that's happening right now. Uh when we designed our chips, uh we designed them back in early 2021 and they are compatible with this standard that just came out. So like we're thinking on the same page here and there is a lot more agreement I think than disagreement on this. Um, and I think it's also important to note um that um a link between an NFC tag and um an NFT on a smart contract does not constitute proof of authenticity.

that there still needs to be another standard on top of that which looks like a registry where you can say you know this is this is Nike holdings and this is their tax identification number and these are the contracts that they are that they are linking products to because you know right now I could make a NFC tag that cryptographically links to a contract but I can put it on my counterfeit Nikes and it's when you scan it it's going to say that it's authentic. No, that's not the way to do it. You still need a human element. You still need a DAO of sorts to verify that this creator is making things under this contract and this is a valid product. So there's it's still a very interesting human element to this and I think that you are working on this.

Right. Perfect segue. Right. Right. I mean this is actually gets to my last sort of question around this and yeah we're we're working on this open registry uh calling it the Ethereum reality service.

Um I think we've you know Mark you've explored doing this registry stuff as well. Chris uh has looked into doing uh registry stuff as well. I think it's really important to to your point have these attestations from these brands that indeed they were the creator of this um and you will have cross attestations between the chip and the brand and the brand and the chip and you can do really incredible things that start to look like you know IRL rollups in a sense of like things that you've signed and attested to. This this brings up a broader question and I should note as one of the co-authors of of the the spec, I'm not offended that that you you have some uh hot takes hot takes. I personally believe that possession is 9/10en of the law.

I think that the rational take for brands is having this sort of marker. I would prefer an abstraction layer above the PBT to handle that, but I I think that's, you know, like put in a PR request. I think, you know, that that kind of stuff's pretty cool. Um but in our our last like minute here, I want to explore this question more around decentralization versus centralization. Um and how you approach it where centralization is frequently lower cost, easier to implement and sometimes easier for the user versus decentralization.

Um you know what are the benefits with physicals? Well, one of the things that I just want to note from a brand perspective is like they are they do not want they they want to own everything, right? And so like there's kind of there's obviously the purest decentralized probably much more secure and there are a lot of benefits for consumers more so but the brand always wants to maintain that information and control and so I think that at least for them on the larger conglomerate level will want to have a sense of a centralization uh repository of those kind of assets right so that they have more security or or at least perceived security so I just wanted to add that to your question yeah for us um we're really building with decentralization in mind but some things aren't as practical today. So that video example I gave earlier, that's a web 2 implementation, right? But there are certain elements that it's really important for it to be decentralized like Mark was talking about and Cameron with the registry, right?

Like we should have to attest that we put this chip in this product and you should be able to verify that signature, right? So there are core pieces that we think have to be decentralized today, but kind of the ancillary app experience like that will take time, I think. Awesome. Well, I I'll let Mark have the final word if there's someone to add on here and and I think we're out of time. I'll let you have the final word on decentralization, but I don't have any final words.

Um, thanks for coming. Uh, check us out smartseal.io. Awesome. I'm I'm at visical.

io and ik.app and arcs.org. Arx.org.

Awesome. Thank you so much everybody. Thanks, guys.