What are phygital NFTs and how do they work?

by James · February 16, 2023

Table of Contents

What does phygital NFT mean in crypto?

Phygital NFTs go beyond just the virtual use cases of NFTs and connect real products to the virtual world while relying on Web3 design principles.

The world is moving towards an experience economy focused on local communities. As more businesses enter markets to serve their customers, a community experience is one of the most important characteristics that can create a meaningful impact from a customer’s point of view.

Fygital non-fungible tokens (NFTs), an amalgamation of physical and digital non-fungible tokens, enable community experiences as brick-and-mortar businesses look to engage with their customers through NFTs.

Phygital NFTs allow the buying and selling of physical goods and real-world experiences through digital collectibles or NFTs. As collectors of phygital NFTs grow and thrive, they begin to identify as part of a tribe, thereby increasing customer retention for the business.

Phygital NFTs do not necessarily rely on native Web3 communities. For example, NFT communities on Ethereum and Solana often rely on native users of those blockchains on which NFTs are created. However, communities around phygital NFTs can be blockchain agnostic and focus on the brand they feel an affinity with.

Which industries will benefit from phygital NFTs?

With more Web2 brands looking to create tightly knit communities, industry use cases for phygital NFTs are limited only by imagination.

Non-fungible tokens are truly industry agnostic. Most industries can create seamless community experiences using phygital NFTs that can have strong brand recognition and recall effects. However, brands that have embraced this paradigm have been in luxury, fashion, food and beverage, wearables, entertainment and even fast-moving consumer goods.

Here are some brands that have used phygital NFTs to engage with their communities:

Starbucks Odyssey
Timex and Bored Ape Yacht Club
The Whiskey Barrel, an online whiskey platform
Bstroy x Givenchy phygital experiences
Cool and raining.

The above examples are a small subset of a number of brands that have adopted phygital experiences, clearly confirming the movement of companies towards phygital experiences and phygital NFTs.

How do different brands use phygital NFTs?

Being a new technology, brands are still only scratching the surface of use cases for phygital experiences. However, phygital NFTs can be a way to token-gate a community, create an incentive mechanism and a brand identity, and as a result can help with user retention. Brands have used them for many of these purposes so far.

There are several ways brands enable phygital activations. One of the ways brands create phygital experiences is by asking users to buy NFT and then pushing them to burn it to access physical goods or experiences. An example of this is the project Substantivsyn.

Another strategy is to provide access to an alternative non-functional token when burning. There are also in-store NFT activations where customers collect an NFT when they have purchased a real product or service. Brands use these non-fungible tokens to offer targeted community experiences. These experiences give customers a sense of belonging, and prove to be decisive for retention and further acquisitions.

Physical NFTs are also used by gaming companies to provide new gaming experiences and to honor players for their achievements. For example, a game company may allow users to buy and sell distinctive phygital NFTs that represent the characters, items, or weapons they use in the game.

These are just a few examples of how different brands are using phygital NFTs to give their customers fresh and inventive experiences. Future applications of phygital non-fungible tokens are likely to become even more creative as this technology evolves.

What are the benefits of phygital NFT?

On top of the community experience, phygital NFTs also help build traceability into a product sold to a customer. The history of the product and its provenance can add credibility and commercial value to a physical good.

Community experience is just one big use case of phygital NFTs. Considering that non-fungible tokens are authentic and tamper-proof, any person who buys phygital NFTs can track the development of the goods they buy right from the person who bought them first. This helps build authenticity and trust, one of the cornerstones of financial transactions.

Thanks to traceability, phygital NFTs can also help counter counterfeit products on the market, leading to genuine goods being sold. Finally, phygital non-fungible tokens create more collaboration and are a means for artists to monetize their skills. For example, artists can monetize their work on Felt Zine by partnering with a brand, such as Givenchy, to create branded content for the brand’s advertising and marketing campaigns.

This may involve producing fresh photographs, artwork or other visual material that highlights the Givenchy brand or products. The artist may receive compensation for their work in the form of a fee, royalties or a cut of the sales revenue from products containing their work. The artist can also gain visibility and recognition for their work, which can strengthen their personal brand and attract new business opportunities for them to profit from their art.

This new technology has revealed some ways for collaboration across creators, developers, brands and their consumers using Web3 design foundations.

Are phygital NFTs better than conventional NFTs?

Proof of Physical Presence (PFP) NFTs have been the poster child of the NFT paradigm. Can phygital non-fungible tokens dethrone the king by virtue of their utility?

The PFP NFT acts as a certificate of authenticity, enabling the owner to prove they own a unique, one-of-a-kind item, and can be used to verify the authenticity and ownership of physical items in the same way as traditional NFTs. used to verify the authenticity and ownership of digital assets.

Their value depends on the demand and utility around NFT. While phygital NFTs also bring a physical touchpoint to the digital realm, the value of an NFT and its value is dependent on a number of other factors, not to mention the appeal of art.

So it is hard to say that phygital non-fungible tokens are better than conventional NFTs. Both have their advantages and disadvantages, and the ideal solution may depend on the product being monetized and the intended use of the NFT. However, phygital NFTs promise to be the bridge between the digital and physical worlds. They also bridge Web2 brands with Web3 fundamentals.

Is phygital NFT the future?

The world may become tokenized and NFTs may be the way we do business. Could it be the future?

Fygital non-fungible tokens have a strong value add and can be part of any brand’s community initiatives. Considering they are new, there is a buzz around them that brands can take advantage of. With many established Web2 businesses and digitally native companies jumping on the bandwagon, phygital NFTs are poised to become an important part of the community and marketing efforts of companies.

However, the widespread use of phygital NFTs is likely to depend on the development of practical and cost-effective solutions for the storage, tracking and verification of physical objects represented by the NFTs. In addition, phygital NFTs will also have to compete with conventional NFTs, which offer many of the same benefits without the added complexity and cost of tracking physical objects.

Moreover, it remains to be seen how these initiatives can be scaled sustainably and add value to the brands that use them. Legal and regulatory frameworks around phygital NFTs also need clarity before phygital non-fungible tokens can become a household phenomenon.