1. Introduction

The Phynite Protocol was built on the belief that the digitalization of physical assets is a valuable process that will benefit the lives of everyday consumers. The goal of a business is to create and capture value, and this protocol was created to aid businesses like ours in their attempts to create products that users want and need. The following subsections describe how exactly digitizing physical assets creates value, the problems that arise when attempting to connect physical assets to those of digital form, and the ways in which the Phynite Protocol elegantly solves those issues.

1.1 The Benefits of Digitizing Physical Assets

By creating a digital token that corresponds to a physical asset, the cost of shipping is no longer necessary for the transferring of the value of physical assets, reducing the amount of value lost between every transaction. Instead of using services like eBay to list, sell, and ship items, consumers can instantaneously trade the ownership rights of physical assets without wasting time and resources. Although there is a fee that users must pay in gas fees for using Ethereum’s network, it is far more affordable than shipping fees, and the distance between trading parties nor the size of the physical asset affects the gas fee. Furthermore, the lack of need for the transportation of physical assets allows for the globalization of trade for items of smaller value, and increases the value retention of items of greater value. For example, it simply would not make sense for someone in America to buy a physical asset owned by someone in Japan for $400, and have to pay $100 in shipping fees. However, using the Phynite Protocol, one can buy the rights to the asset, not pay shipping fees, and attain its value for a mere fraction of the trading fee all in less than a minute. Globalization will increase the possible number of buyers and as we’re dealing with finite, physical goods, the supply is fixed and the increasing demand will likely lead to an increase in the value of the physical assets.

Using the Phynite Protocol, guardian organizations are responsible for maintaining the condition of the physical assets which they store, alleviating investors of that responsibility. In comparison to everyday consumers, guardian organizations that use the Phynite Protocol should be more well equipped in keeping physical assets in pristine condition, maintaining the correct amount of light exposure, humidity, and security of the physical items. The rise in popularity of NFTs have shown that people are willing to invest in digital tokens as they can be conveniently stored in cryptographic wallets, and using the Phynite Protocol, people can do the same with physical assets. Without using any physical space, consumers can now hold large portfolios of physical assets which already have established markets, and sell such assets at any time, in the comfort of their home, or anywhere they have access to the internet and their crypto wallet.

As aforementioned, the rise in popularity of NFTs in the past couple of years have shown that people are willing to invest in digital tokens, however the highly speculative value of such NFTs have shown to be an issue as well. People invest in NFTs believing that other people in the future will buy the NFTs from them at higher or similar prices at which the NFTs were bought. However, there are many times in which there are even no buyers who are willing to buy the NFTs at any given price, and this causes the values of the NFTs to simply cease to exist. However, with the Phynite Protocol’s CBNFTs, if a buyer cannot be found, the rightful owner can simply redeem the physical asset that corresponds to the CBNFT and sell it on an already existing market of buyers. Although physical assets are speculative in value as well, there are many established markets for physical items ranging from sports memorabilia, Pokemon Cards, to even automobiles, where there are many buyers looking for a fair price on such items.

1.2 The Issue of Trust

The concept of creating NFTs that are backed by physical assets has been around for quite some time, and this is due to the fact that there are benefits that this technology can create, as previously stated. A small number of companies in the past and present have attempted to solve this challenge, and although some have succeeded on a small level, no company has yet to create and implement an adequate solution that has claimed dominant market share over the concept of physically backed digital assets. This is due to the main issue that arises when digitizing physical assets: trust.

For physically backed digital assets to exist, a 3rd party must be responsible for maintaining the condition of the physical asset, and they must also be able to hand over such asset if it is redeemed by the rightful owner. More importantly, the rightful owner and potential buyers must have trust in that 3rd party to carry out the promised actions.

1.3 The Phynite Protocol's Solutions

As previously stated, quite a number of companies have attempted and are attempting to implement the idea of digitizing physical goods. There have been companies that attempted to build trust by endorsing famous celebrities, creating a process that decentralizes the physical storage of items via financial incentives, or even using partnerships with popular brands. However, the number of scams in the past couple of years in the crypto space has brought trust in Web3 companies to an all time low. Therefore, the Phynite Protocol was designed to create maximum trust in guardian companies such as Phynite to be the 3rd party companies who can be entrusted to safely store the physical goods that correspond to NFTs.

The way in which the Phynite Protocol establishes trust is quite simple, and it is by allowing users to trust in a system they are already familiar with: the US Legal System. By creating legal contracts that are initialized when a user buys a Contractually Bound Non-Fungible Token (CBNFT) and having conditions that are triggered by changes to the CBNFT’s state on the Ethereum blockchain, users can have the trust that guardian organizations will deliver upon the promised conditions as they are legally obligated to carry them out. Furthermore, decentralization/transparency of blockchain technology essentially ensures that no one except for the rightful owner may carry out functions that can alter the state of their CBNFT. The ways in which digital signatures can be used to cryptographically verify the legitimacy of the legally binding contracts will be explained later in the white paper.