Despite the crypto season, nonfungible tokens (NFTs) continue to attract interest. This has been seen as many brands and retailers have started offering digital NFTs embedded in physical products. Known as “phygitals,” the offering allows real-world products to be tied to digital NFTs.
For example, RTFKT – a digital fashion and collectibles company – recently launched a project called Cryptokicks iRL. According to sources, RTFKT is creating digitally designed sneakers that are supported by physical products.
RTFKT’s official Twitter account recently tweeted that owners of the Lace Engine NFT will be able to reserve a pair of Cryptokicks iRL, which can then be redeemed for a physical version starting May 1, 2023.
1/ We allow all Lace Engine owners to reserve sneakers on the RTFKT Interdimensional Hub. This will allow holders until May to find out their US shipping address.
To pick up Lace Engine NFT in secondary: https://t.co/PoPwbooYqG
– RTFKT (@RTFKT) December 12, 2022
Redeeming physical NFTs can be challenging
While the concept behind phygitals may appeal to brands and consumers, redeeming physical NFTs has proven challenging. For example, in some cases, NFT holders only need to provide their wallet address to exchange digital NFTs linked to physical goods. However, this makes it difficult to collect personal information, such as shipping details, from NFT holders.
Jacob Ner-David, CEO at wine marketplace Vincent, told Cointelegraph that he encountered the problem after launching two NFT drops tied to physical wine bottles. Ner-David explained that at the end of 2021, Vincent will launch a public and private NFT drop. This allows consumers to purchase a bottle of fine wine that they can redeem for a physical bottle a year later.
Despite the project’s success, Ner-David points out that only a small percentage of NFT holders have come forward to claim a physical bottle of wine. According to Ner-David, this is due to challenges with the redemption process and lack of communication to NFT holders that the wine is ready to be claimed.
“The only way we can communicate with NFT holders is through Discord, Twitter and Telegram. We need to collect shipping information,” he said.
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Ner-David explained that 15% of NFT owners involved in private drops have claimed physical wine bottles, while nearly 30% of those involved in public drops have redeemed bottles.
“We have learned that there should be a redemption mechanism before launching a physical NFT drop,” he said. Ner-David added that storing unclaimed wine bottles has become a problem, as it continues to be held at Israel-based Jezreel Valley Winery.
Due to such problems, companies that launch physical NFT drops have started to take a different approach. For example, Jeff Malki, strategic advisor of the company NFT NXTG3NZ, told Cointelegraph that he helped facilitate the digital sneaker drop rapper 7220 NXTG3NZ NFT Lil Durk that was released in March 2022.
Malki explained that the physical sneakers connected to the digital NFT will be available in Q1 2023. He added that this particular drop is targeted at non-Web3 natives, noting that users have the option to submit a physical shipping address at the time of purchase.
“We expect 80% of users to be non-crypto holders. If they want to send data, they can. It is better for NFT owners to enter the shipping data immediately after purchase, then the item is sent automatically,” he said.
Additionally, Malki notes that NXTG3NZ may implement a first-come, first-served system. This means that the group with the highest level of NFT can claim the sneakers but must choose the items and exchange them immediately. If this is not facilitated properly, other users may come forward to claim the physical item. Malki said:
“NFT is sophisticated and we are all trying to innovate. There is no blueprint for this process. Brands and companies are interested in working with phygital projects, but there are still many risks.
Although this may be the case for some phygital projects, others claim to have found successful strategies. For example, Charlotte Shaw, chief marketing officer of BlockBar – an NFT project that offers digital and physical wine founded in 2021 – told Cointelegraph that the company offers storage, insurance, a marketplace for global sales and shipping.
“Each BlockBar NFT corresponds to an actual physical bottle of wine or spirits, which the bottle owner can resell, collect, gift or at any time ‘burn’ in exchange for a physical bottle,” he said.
Shaw explained that physical bottles are shipped from BlockBar’s facility in Singapore and can be redeemed through BlockBar’s website. “When you exchange your bottle, you ‘burn’ the digital version in order to receive the physical version [one is exchanged for the other], meaning one less digital NFT will exist. When you redeem, you will also be asked to enter your shipping address and you must comply with your jurisdiction,” he said.
According to Shaw, there are no challenges associated with redeeming physical BlockBar NFTs. However, collecting user information when NFTs are purchased makes it less of a decentralized platform. But this may become the norm when it comes to ensuring NFT holders receive physical goods. Brian Trunzo, metaverse lead at Polygon studio, told Cointelegraph that capturing user information is necessary for the phygital project.
Fortunately, solutions are being developed to ensure greater privacy for NFT holders who disclose their personal information. For example, Justin Banon, founder of the Web3 commerce layer Boson Protocol, told Cointelegraph that “doxing” itself is a big concern for Web3 natives.
To solve this dilemma, Banon explained that Boson Protocol has created a decentralized application that is an end-to-end encrypted messaging solution. “This ensures that buyers only have to share their personal information with the seller and no other party,” he said.
Ner-David also noted that Vincent is currently working with the cross-chain NFT printing platform NFTrade to create a solution for the previous two phygital drops. For example, regarding physical wine bottle storage, Ner-David mentioned that some time will be included in the NFT fee to cover the storage cost. “We will then be able to communicate with NFT holders that fees will be increased if the NFT remains unclaimed. This will all be incorporated into the NFT metadata.
Physical NFTs are here to stay
Challenged, industry experts believe that phygitals will play a major role for brands and consumers moving forward. For example, Banon believes physical NFTs will lead to Web3 loyalty programs.
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While companies like Starbucks have started implementing loyalty programs using NFTs, Banon mentioned that physical NFTs will be part of the model:
“NFTs and Web3 technology enable brands to create ‘programmable loyalty commerce’ applications and programs. If customers receive NFTs to engage in targeted behaviors such as buying, engaging, and staying loyal, those loyalty NFTs can unlock access to digital, physical and experiential assets .
Although innovative, Akbar Hamid, founder of the Web3 diversity project People of Crypto Lab, told Cointelegraph that there is a long way to go in terms of solving the challenges and logistics associated with offering physical NFTs in fashion, retail and luxury consumer goods:
“There is a challenge to solve the utility for a larger reduction when you talk about physical goods that are embedded in digital. This also happens when you consider tradeability and people beyond the original buyer who redeems utility and physical goods. Many brands do not have the infrastructure or the team to monitor this and it’s important because we need to make sure the utility is delivered to the end user.
Given these concerns, Hamid explained that it is best for companies that conduct NFT drops to work closely with brands and buyers to ensure that the utility is redeemed efficiently.