The inspiration from Punk+Tiffany: Can assets in the virtual and real worlds be "bidirectionally mapped"?

Written by: Will Wang Xiao Xiaopao, Qianglie Forum

Recently in the news: "Tiffany" has upgraded to "NFTiff." The real world actively embraces the virtual world, allowing holders of CryptoPunk NFTs in the virtual realm to qualify for purchasing a physical necklace crafted by a real-world jeweler, shaped exactly like the Punk NFT. The Punk on the chain has thus arrived in the real world with "tiffany blue."

This inevitably leads to thoughts about the future:

One day, a Tiffany designer sends an email, planning to release a limited edition necklace. As a fan, I am already on the whitelist. On the release day, I send several ETH to the designer's wallet address and receive the NFT of the virtual graphic of the necklace; the NFT also has a 3D effect that allows for AR try-ons.

Once the necklace is ready, I can "redeem" a physical necklace in the real world; the NFT in my hand does not need to be destroyed, as it will become my "holder's proof of identity." When I receive the necklace, I can't put it down and discover a small tag on the back that, when scanned, shows the NFT in my wallet.

Even more surprisingly, the necklace contains an NFC chip! I flaunt the necklace everywhere, and once I reach special locations (like the Tiffany museum, offline events, and stores), it gets triggered, automatically airdropping POAPs and discount vouchers into my wallet. The chip tracks the usage data of the necklace, and if I allow Tiffany to use the data, I can earn some USDC—by clicking "agree," the data usage fee is deposited into my NFT wallet.

If I no longer like it, I can sell it. After reaching an agreement with the buyer, my NFT and the buyer's payment are locked by a third party; I send out the necklace, and once the buyer receives it, the NFT is transferred.

This vision is beautiful and seems entirely feasible. Could the "next wave of application" be initiated by large companies in the real world? A "utility tokenization" that appears in a real company's real product with a clear purpose?

After all, "tokenization" is the star feature of web3. If the biggest criticism of web3 is that there are almost no "useful things" or any sustainable "real businesses" in "native" projects, then what if real-world "real businesses" actively embrace it?—Turning valuable things in the real world into "web3" tokens and trading them on an open network with universal standards, isn't that a "real" application?

"Everything can be tokenized"—could this really come true this time?

At first glance, this time might indeed be different. The popularity of Web3 in traditional business seems to be increasing, from exchanging tea vouchers for tokens to buy virtual stocks, to redeeming fitness card discounts with sweatcoin. If we take another step forward: allowing points to be traded on-chain—"public trading" gives customers stronger incentives, isn't that more attractive?

At this point, those familiar with the "Wenli" thinking should realize: there must be a "second glance" coming.

This is not a new idea; the exploration of "tokens" (utility tokens) by real-world enterprises has a long history, even dating back to two cycles ago—loyalty programs, mileage, points, countless blockchain enthusiasts have tried numerous POCs, but in the end, they all came to nothing, with almost no successful cases.

What about the Web3 era? The conclusion hasn't changed: the possibilities are still slim.

We can argue separately about "virtual points tokenization" and "physical enterprises embracing NFTs":

1. Can "virtual points tokenization" take off with web3?

If the object itself is already a virtual asset, then tokenization is quite simple—it just changes its technical implementation. For example, "airline mileage points tokenization" simply means that "points" will be issued on the blockchain. What is the purpose of "points tokenization"? Of course, it allows for broader transfer and trading.

But does this make sense? It depends on the "value proposition" of the issuing entity.

Historical records indicate that this value proposition is quite small. "Tokenization" disrupts the traditional business model of "loyalty programs." Merchants in traditional points programs would never want their points to be traded on the open market. The reason is simple: "loyalty" implies "exclusive," "privileged," and "special"; its function is to create class distinctions among customers. In economic terms: "class distinctions" can generate higher "producer surplus"; the more detailed the price discrimination, the more producer surplus there is.

If airlines allowed you to sell your miles, and "bulk discounts" could be freely transferred, then where would the "loyalty" be? Would the business model still hold?

This not only disrupts the airlines' original intention of "rewarding specific customers," but it can also easily be "exploited." For example, Xiao Pao has 10,000 airline points, and Teacher Will has 10,000 airline points, while Eastern Airlines requires 20,000 points to exchange for a ticket. Thus, we have the impulse to trade—Teacher Will, stuck in the country due to the pandemic, simply sells 10,000 points to Xiao Pao for 50 bucks, allowing Xiao Pao to "score" a free ticket—thus taking advantage of the airline.

Returning to the "value proposition triangle" of "Wenli"—the inconsistent interests of the issuing entities will prevent them from proceeding.

2. Can "physical enterprises embracing NFTs" take off with web3?

If the object is a "physical asset" in the real world, like Tiffany's necklace, which is mapped to the virtual world in the form of an NFT and can be traded simultaneously—isn't that a kind of "tokenization" to some extent?

The devil is in the details. The doubt lies in the CryptoPunk bound to Tiffany. This is an age-old question: can assets in the virtual world and the real world "map" to each other in both directions?

The CryptoPunk mapped to the virtual world by Tiffany has only "show-off" significance in the virtual realm (see the analysis framework of NFTs in "Wenli"); it cannot "reverse map" back to the physical asset (Tiffany necklace). The mapping relationship between them must be "one-way."

Returning to the earlier example of the designer releasing a new necklace: I buy a necklace and receive the NFT for it; the NFT can remain intact in the virtual world forever, but it can no longer be 100% mapped to the necklace, which is constantly deteriorating in the real world. The necklace may oxidize or get damaged, can I really use the NFT to redeem an exactly identical necklace?

Furthermore, if my NFT is stolen, can I still claim the physical necklace in the real world? Most likely not.

The matter of mapping CryptoPunk NFT to Tiffany necklace is somewhat like an Ethereum fork—Tiffany shares the value of the CryptoPunk NFT, or the value of the Tiffany necklace comes from the value of the CryptoPunk NFT.

Tiffany can produce 100 identical necklaces in the real world, but the CryptoPunk NFT on the chain cannot be copied; there is only one. This does not hold in terms of value logic; the only premise that holds is: regardless of how many Tiffany copies are made, the total value of all necklaces must equal the price of the Punk NFT—copying equals counterfeiting, and 99 out of 100 Tiffany copied necklaces would be worth zero, leaving only the price of one Punk NFT.

Conversely, if the Tiffany necklace is unique in the world (guaranteed to be the only one), like the "Mona Lisa," then its price will surely continue to rise.

Here comes the question: if the price of the Tiffany necklace keeps rising, while the value of the Punk NFT completely derives from its mapping relationship with Tiffany, but holding the Punk NFT does not equate to owning the physical property rights, can I sell the Punk NFT to someone else, and can they use this NFT to claim my continuously appreciating necklace?

If they can't obtain the physical item, does the NFT still hold value?

3. The only valid logic: "cross-chain bridges"

The mapping relationship between the real world and the physical world has only a few types, which have been explored countless times over the years. The new round of mapping relationships in the Web3 era is still primarily for marketing purposes and has not given birth to new models.

The only valid logic should come from "cross-chain bridges."

In the parallel worlds of two chains, only the assets on one end circulate in the real and virtual worlds, while the "mapping" on the other end is "locked"—applying this to the Tiffany + Punk model means: the CryptoPunk NFT is locked in Tiffany's wallet, and Tiffany issues the physical necklace in the real world based on this lock.

One can imagine a fervent CryptoPunk fan spending a million dollars to buy a necklace to obtain the Punk NFT, but without a neck to wear the necklace, they return it to Tiffany—what they seek is merely the satisfaction of showing off their CryptoPunk in the virtual world.

Conversely, there may also be a Tiffany fanatic completely indifferent to CryptoPunk, who spends a fortune to buy the necklace to wear around their neck, discarding the NFT. The mapping between the physical and the real seems to only occur in the model of "cross-chain bridges," which can be considered a "true" mapping.

Of course, there is an even more extreme logic than cross-chain bridges—"either-or," where the physical entity must be destroyed for the uniqueness of the virtual world on-chain to be proven, thus completely eliminating the risks of "cross-chain double spending" and "the simultaneous existence of cross-chain double assets."

However, this sacrifices another possibility: there will no longer be necklace fanatics in the real world willing to pay high prices for CryptoPunks in the virtual world—because a limited edition Tiffany necklace may appreciate to an astronomical price in 50 years; whereas once the Punk NFT bubble bursts, it will become worthless. At that point, you can only feel dejected, as the necklace has been destroyed.

The mapping from virtual to reality can only achieve maximum value through mutual exchange on cross-chain bridges.