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Despite the crypto winter, nonfungible tokens (NFTs) continue to draw interest. This has become apparent as many brands and retailers have started to offer digital NFTs attached to physical products. Known as “phygitals,” these offerings allow real-world products to be tied to digital NFTs. 

For example, RTFKT — a digital fashion and collectible company — recently launched a project called Cryptokicks iRL. According to sources, RTFKT is creating digitally-designed sneakers backed by a physical product.

RTFKT’s official Twitter account recently tweeted that Lace Engine NFT holders will be able to reserve a pair of Cryptokicks iRL, which can then be redeemed for its physical version starting May 1, 2023.

Redeeming physical NFTs can be challenging

While the concept behind phygitals may be appealing to brands and consumers, redeeming physical NFTs has proven to be challenging. For instance, in some cases, NFT holders may only need to provide a wallet address to redeem a digital NFT linked with a physical item. Yet, this makes it difficult to collect personal information, such as shipping details, from NFT holders.

Jacob Ner-David, CEO at wine marketplace Vinsent, told Cointelegraph that he encountered such a problem after launching two NFT drops tied to physical bottles of wine. Ner-David explained that at the end of 2021, Vinsent launched both a public and private NFT drop. This allowed consumers to purchase tokenized bottles of fine wine that could be redeemed for physical bottles one year later.

Image from Vinsent’s collaboration with a company called LAAVA. Source: Vinsent

Although the project was successful, Ner-David shared that only a small percentage of NFT holders have come forward to claim their physical bottles of wine. According to Ner-David, this is due to challenges with the redemption process and poor communication to NFT holders that their wine is ready to be claimed. 

“The only way we can communicate with our NFT holders is through Discord, Twitter and Telegram. We need to collect their shipping information,” he said.

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Ner-David elaborated that 15% of NFT holders associated with the private drop have claimed their physical bottles of wine, while close to 30% involved with the public drop have redeemed their bottles.

“We have learned that there must be a redemption mechanism in place before launching a physical NFT drop,” he said. Ner-David added that storing the unclaimed wine bottles has become problematic, noting that these continue to be held at the Israel-based Jezreel Valley Winery.

Due to issues such as these, companies launching physical NFT drops have started taking different approaches. For example, Jeff Malki, strategic adviser for NFT firm NXTG3NZ, told Cointelegraph that he helped facilitate the 7220 NXTG3NZ NFT digital sneaker drop rapper Lil Durk launched in March 2022.

Malki explained that physical sneakers tied to these digital NFTs would be available in Q1 of 2023. He added that this particular drop is targeted toward non-Web3 natives, noting that users have the option to submit their physical shipping addresses upon purchase.

“We expect 80% of our users to be non-crypto holders. If they wish to submit their data, they can. It would be ideal for NFT owners to input their shipping data immediately upon purchase, so the items are shipped automatically,” he said.

“7220 NXTG3NZ” NFT digital sneaker drop. Source: nxtg3nz

In addition, Malki noted that NXTG3NZ might implement a first-come, first-served system. This would mean that a top-tier group of NFT holders could claim their physical sneakers but must choose their item and redeem it immediately. If this isn’t properly facilitated, another user could come forward to claim the physical item. Malki said:

“NFTs are cutting edge and we are all trying to innovate. There are no blueprints for this process. Brands and companies are interested in working on phygital projects, but there is still a lot of risk involved.”

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 offering digital and physical wine founded in 2021 — told Cointelegraph that the firm offers NFT owners storage, insurance, a marketplace for resales and global shipping.

“Each BlockBar NFT corresponds to an actual physical bottle of wine or spirit, which bottle owners can resell, collect, gift or at any time ‘burn’ in exchange for the physical bottle,” she said.

Shaw elaborated that physical bottles are shipped from BlockBar’s facility in Singapore and can be redeemed via the BlockBar website. “When you redeem your bottle, you will be ‘burning’ the digital version in order to receive the physical version [one is exchanged for the other], which means one less digital NFT will exist. When you redeem, you will also be asked to enter your shipping address and you will need to be in full compliance of your jurisdiction,” she explained.

Image from the BlockBar collection. Source: BlockBar

According to Shaw, no challenges have been associated with redeeming physical BlockBar NFTs. However, collecting user information when NFTs are purchased creates less of a decentralized platform. Yet this may be the norm when it comes to ensuring NFT holders receive physical items. Brian Trunzo, metaverse lead at Polygon studios, told Cointelegraph that capturing user information is necessary for phygital projects. 

Fortunately, solutions are being developed to ensure greater privacy for NFT holders disclosing personal information. For example, Justin Banon, co-founder of Web3 commerce layer Boson Protocol, told Cointelegraph that “doxing” oneself is a big concern for Web3 natives.

To solve this dilemma, Banon explained that Boson Protocol had created a decentralized application that serves as an end-to-end encrypted messaging solution. “This ensures buyers only have to share private information with the seller and no other parties,” he said.

Ner-David also noted that Vinsent is currently working with the cross-chain NFT minting platform NFTrade to devise a solution for the two previous phygital drops. For example, regarding the storage of physical wine bottles, Ner-David mentioned that a period of time would be included within the cost of the NFT to cover storage fees. “We would then be able to communicate with the NFT holder that costs will accrue if the NFT remains unclaimed. This would all be incorporated into the NFT metadata.”

Physical NFTs are here to stay

Challenges aside, industry experts believe that phygitals will play a major role for brands and consumers moving forward. For instance, Banon believes physical NFTs will lead the way for Web3 loyalty programs. 

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While companies like Starbucks have already started to implement loyalty programs using NFTs, Banon mentioned that physical NFTs would soon become a part of these models:

“NFTs and Web3 technology enable brands to create ‘programmable loyalty commerce’ applications and programs. Where customers receive NFTs for performing target behaviors such as purchasing, engaging, and staying loyal, these loyalty NFTs can then unlock access to digital, physical and experiential assets.”

Although innovative, Akbar Hamid, co-founder of Web3 diversity project People of Crypto Lab, told Cointelegraph that there is a long road ahead in terms of solving the challenges and logistics involved with offering physical NFTs within fashion, retail and luxury consumer goods:

“There can be challenges with fulfilling utility for a much larger drop when you are talking about physical items attached to digital. This is also the case if you are considering tradeability and someone beyond the original purchaser redeeming the utility and physical good. Many brands don’t have the infrastructure or team to monitor this and that is key because we have to ensure the utility is delivered to the end user.”

Due to concerns such as these, Hamid explained that it might be best for companies doing NFT drops to work closely with brands and buyers to ensure that utility is redeemed efficiently.