Redeeming physical NFTs: Easier said than done?

by · January 5, 2023

Despite the crypto winter, non-fungible tokens (NFTs) continue to attract interest. This has become evident as many brands and retailers have started offering digital NFTs linked to physical products. These offerings, known as “phygitals,” allow real-world products to be tied to digital NFTs.

For example, RTFKT – a digital fashion and collectibles – recently launched a project called Cryptokicks iRL. According to sources, RTFKT makes 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 their 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 challenging. For example, in some cases, NFT holders may only need to provide a wallet address to redeem a digital NFT linked to a physical commodity. Nevertheless, this makes it difficult to collect personal information, such as shipping details, from NFT holders.

Jacob Ner-David, CEO of 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 Vincent launched both a public and a private NFT release. This allowed consumers to purchase tokenized bottles of fine wine that could be redeemed for physical bottles one year later.

Picture from Vincent’s collaboration with a company called LAAVA. Source: Vincent

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 linked to the private drop have claimed their physical bottles of wine, while close to 30% involved in the public drop have redeemed their bottles.

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

Due to issues like these, companies launching physical NFT drops have started to take different approaches. For example, Jeff Malki, strategic advisor to 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 will be available in the first quarter of 2023. He added that this particular drop is aimed at non-Web3 natives, noting that users have the option to submit their physical delivery addresses upon purchase.

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

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

In addition, Malki noted that NXTG3NZ may implement a first-come, first-served system. This will mean that a top group of NFT holders can claim their physical sneakers, but must select their item and redeem it immediately. If this is not properly organised, another user can 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.”

While this may be the case for some phygital projects, others claim to have found successful strategies. For example, Charlotte Shaw, head of marketing at BlockBar – an NFT project offering digital and physical wine founded in 2021 – told Cointelegraph that the firm offers NFT owners storage, insurance, a resale marketplace and global shipping.

“Each BlockBar NFT corresponds to an actual physical bottle of wine or spirits, 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 through the BlockBar website. “When you redeem your bottle, you ‘burn’ the digital version to receive the physical version [one is exchanged for the other], which means that one less digital NFT will exist. When you redeem, you will also be asked to enter your delivery address and you must be in full compliance with your jurisdiction,” she explained.

Image from the BlockBar collection. Source: BlockBar

According to Shaw, there have been no challenges related to redemption of physical BlockBar NFTs. However, collecting user information when NFTs are purchased creates less of a decentralized platform. Nevertheless, this may be the norm when it comes to ensuring that NFT holders receive physical items. Brian Trunzo, metaverse manager 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 who disclose personal information. For example, Justin Banon, co-founder of Web3 trading team Boson Protocol, told Cointelegraph that “doxing” is a major concern for Web3 natives.

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

Ner-David also noted that Vincent is currently working with the cross-chain NFT coin platform NFTrade to find a solution for the two previous phygital drops. For example, regarding the storage of physical wine bottles, Ner-David mentioned that a period will be included in the cost of the NFT to cover storage fees. “We will then be able to communicate with the NFT holder that costs will be incurred if the NFT remains unclaimed. All of this will be incorporated into the NFT metadata.”

Physical NFTs are here to stay

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

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While companies like Starbucks have already started implementing loyalty programs using NFTs, Banon mentioned that physical NFTs will soon become part of these models:

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

Although innovative, Akbar Hamid, co-founder of the Web3 diversity project People of Crypto Lab, told Cointelegraph that there is a long way to go in solving the challenges and logistics associated with offering physical NFTs in fashion, retail and luxury goods:

“There can be challenges in meeting utility for a much larger drop when you’re talking about physical items tied to digital. This is also the case if you consider marketability and someone outside of the original buyer redeeming the utility and the physical goods. Many brands don’t have the infrastructure or the team to monitor this, and that’s key because we have to make sure the tool is delivered to the end user.”

Because of concerns like these, Hamid explained that it may be best for companies making NFT drops to work closely with brands and buyers to ensure the tool is redeemed effectively.