Tokenization in 2024: Opportunities for Brands
This year, major brands have started connecting physical goods to virtual counterparts to create 'phygital' experiences. Here are the key trends, brand adoption, and what's next.
2023 has been a year of reckoning for Web3.
What started as a technology called “NFTs”, representing unique digital files that users can trustlessly own and trade over the internet, transformed into a breeding ground for new, consumer-oriented business applications.
Over the last two years, almost 50 of Interbrand’s Top 100 Global Brands started small-scale, isolated, and relatively simple digital collections.
Most of the activations clustered around two main categories:
Phygitals (tokenization of real-world assets)
Today we’ll focus on phygitals and cover:
Why now? Key trends for phygitals
Brand adoption in 2023
What’s Next: phygital opportunities for brands in 2024
Let’s jump in.
Phygitals: Why Now?
The popularity of phygitals, and even more broadly “tokenization of real world assets (RWA)”, is driven by three key trends:
A changing narrative
New regulation in the EU (Digital Product Passport)
Next-gen, digital-first consumers asking for new forms of engagement
Let’s look at each of those.
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As the next bull market emerges, so does a new crypto-rich, Web3-savvy demographic, who are demanding authentic Web3 commerce experiences. Uniquely, with Boson, you can sell physical things as NFTs, with a slick Web2 experience while running on a fully decentralized Web3 backend. No more Web3 washing required!
1. Changing Narrative
Those of you who’ve been around for a while will remember that “tokenization” was already a big narrative in 2020, after which it fell asleep again.
In 2023, The narrative around “Phygitals”, or the tokenization of “real world assets” (RWAs), emerged with new momentum.2
AB Bernstein projects $5 trillion in assets could be tokenized over the next five years.
Boston Consulting Group (BCG) estimated tokenized assets could reach $16 trillion by 2030.
Roland Berger projects it to reach $11 trillion by 2030.
BlackRock thinks that tokenization will be the “next generation for markets” and “monumental in shaping our ecosystem.”
Be smart: When Blackrock’s Larry Fink says tokenisation will revolutionise finance, it’s worth a listen.
Zoom out: This momentum was driven by several factors.
Growing institutional interest: Major financial institutions, including Goldman Sachs, J.P. Morgan, Franklin Templeton and Vanguard, have announced initiatives or investments in tokenized assets. This signals increasing institutional confidence in the technology. Catch a full breakdown here.
Real-world asset (RWAs) classes gaining traction: Tokenization is not limited to cryptocurrencies; it is being applied to a wide range of RWAs, including real estate, commodities, private equity, and art. This diversification is attracting more investors. RWA protocols, such as Centrifuge, Truefi, Goldfinch, Clearpool, or Maple Finance have attracted substantial interest in 2023.
Regulatory advancements: Regulatory bodies worldwide are developing frameworks to support RWAs, which is further encouraging institutional participation (cf. MiCA in Europe).
The big picture: Tokenization could redefine asset ownership, lower transaction costs and bring greater liquidity to otherwise illiquid assets.
At this point, however, the full potential of Web3 technology is not yet being realized, since most RWA tokenization platforms require trust in an issuer to honor the redemption of the tokenized asset.
2. New Regulation: Digital Product Passport
Upcoming EU regulation mandates a Digital Product Passport (DPP) for product traceability and life cycle information. Blockchain is one of many technologies enabling this.
State of play: To prepare for this, major luxury brands are working with the Aura Blockchain Consortium to bring digital twins of their products on-chain. This ensures product traceability and authenticity and access to information on a product’s lifecycle for consumers.
Zoom in: Aura Blockchain Consortium is a non-profit organization that aims to create an ecosystem for sustainable digital products.
DDPs are hosted on their own chain or on a public chain (e.g. Ethereum)
As of now, they’ve already created blockchain-based IDs for more than 20 million products.
3. Web3 Savvy, Digital Native Consumers
Gen Z, the next generation of consumers, spends more time online than any other generation.
Roblox: Most of their time, they spend in virtual worlds, such as Roblox.
An average user spends around 2.6 hours on Roblox – every day!
About half of Roblox’s 200m monthly active users are Gen Z.
56% of them prioritize styling their avatars over their real-world appearance.
Zooming out: The more time people spend online, the more digital value they create and consume, including virtual assets and phygitals.3
Why it matters: Grown up in a world that is both hyper-connected yet paradoxically lonely, next-gen consumers value culture and community and use brands as a means of self-expression aligned with their values. Phygitals will be a tool for that.
This year, major brands started connecting physical goods to virtual counterparts.
Zoom in: "Phygitals" are tokenized products from consumer brands enabling experiences that connect digital and physical elements.
Often, this means that owning a physical product unlocks a corresponding digital ID or collectible, or vice-versa.
Users connect their “wallet” to the physical product connected to a visual or electronic tag (RFID or NFC).
Phygitals can also be tokenized and exchanged on trust-minimizing protcols such as Boson, which don’t require hardware.
In 2023, three use cases for this technology emerged:
Authenticity & traceability: To ensure product traceability and authenticity in the context of the upcoming European Digital Product Passport (DPP).
Genuine limited editions: Digital twins can transparently limit collections on-chain, removing the need to rely on the brand's word.
Post purchase marketing: Owning an NFT and a physical piece connected to it unlocks unique post purchase experiences, and generates a wealth of data through a direct-to-consumer channel for brands.
Understanding the market
At the moment, we have three types of technology providers enabling this:
Niche players such as Sol3mates, who partners with leading brands to facilitate exclusive phygital drops. Sol3mates is part of Chalhoub Group, one of the leading luxury retailers in the middle east.
Context: Most often, these projects are a collaboration of many solution providers and include additional players like Crossmint or Aura Blockchain Consortium.
An example: CollectID.
How it works: The whole experience of connecting a clothing piece to your app (soon wallet), is extremely easy.
Once in the app, users unlock unique branded experiences and brands establish a direct-to-consumer relationship.
Meanwhile, the authenticity and limitability of the product is guaranteed on-chain.
Soon, CollectID will enable users to transfer NFTs out of their app as a Polygon NFT.
Zoom out: Once a product has a unique ID and is on-chain, it’s traceable, intelligent, and more valuable. The potential is limitless.
Let’s look at a few examples of what brands are doing with this.
Last month, Louis Vuitton dropped its second phygital, called “VIA Tile Trunk”. Extremely limited (200 pieces) and priced at 6,000 EUR. It's available exclusively to LV’s group of Treasure Trunk NFT holders. The physical trunk will be available in February 2024.
In June this year, Louis Vuitton launched a limited sale of $39,000 VIA Treasure Trunk. Holders of these "soulbound" NFTs, which are non-resellable (similar to Nike’s .SWOOSH IDs), gain access to exclusive digital creations, such as the VIA Tile Trunk.
Treasure trunks are iconic to the Louis Vuitton brand, historically symbolizing the company's origins as a trunk maker in the 19th century, and continuing to represent its legacy of luxury travel goods and craftsmanship.
Beginning of this year, Nike launched its Web3-enabled platform .SWOOSH, Nike’s hub for digital community, co-creation, and virtual products.
In April, it announced the OurForce 1 (OF1) collection, which was part of a co-creation contest, inviting users to design future virtual footwear. A few weeks later, dropped OF1 Boxes, containing OF1 collectibles. On the first day, Nike sold 55K+ virtual sneaker boxes for $1m+.
In October. Nike announced its first .SWOOSH physical sneaker called Air Force 1 Low “TINAJ”, which stands for “This is not a jpeg.” TINAJ dropped in November to .SWOOSH ID NFT holders who purchased and revealed an OurForce 1 box.
Read the full Nike case study here.
July 2023, Gucci rewarded 2,896 holders of the Gucci Material NFTs with an exclusive offer to exchange their tokens for physical, limited-edition Gucci products (either a wallet or a bag) at no cost.
The Gucci Vault Material NFT was a reward for participating in a 10KTF mission in Battle Town. 10KTF is a digital fashion store by artist Wagmi-san, with which Gucci collaborated in March 2022 to create the 10KTF Gucci Grail project.
This is a very simple example of how brands start connecting digital and physical.
Read the full Gucci case study here.
In June, Dior introduced a line of sneakers that come with digital twins. The B33 sneaker line has an authentication system based on an NFC chip embedded in the right foot's sole.
This encrypted key grants access to a personalized and secure online platform, developed in collaboration with the Aura Blockchain Consortium. Customers are able to verify the authenticity of their shoes, follow the various stages of production, and receive early notifications about future releases.
In August, Ralph Lauren launched its own island on Fortnite called “Race to Greatness by Ralph Lauren”. The brand also released a limited-edition physical version of a digital boot that was first seen in the game. Inspired by the brand’s history, the shoe is priced at $250 and only 300 pairs are available. The digital version costs around $15.
As the digital version of this shoe is sold in Fortnite, it isn’t blockchain based. Nevertheless, it shows how brands are exploring connecting physical and virtual brand experiences to engage with a younger audience.
Phygitals enable brands to create blockchain-secured limited editions, authenticate products, engage in post-purchase marketing, and gather more first-party data.
And I think we’re just scratching the surface. I see two big trends:
Richer, more engaging phygital experiences: As brands adapt to a new wave of Web3 ready, digitally native consumers.
Trust-minimized, tokenized commerce: This will unlock buying and selling of phygitals without relying on intermediaries.
Let’s unpack this.
Beyond crypto: While studies show that adoption of cryptocurrencies is still higher among Millennials than Gen Z, this next wave of Web3 consumer adoption likely won’t touch “crypto” at all:
Users will interact with digital assets without being aware that they’re blockchain based.
The complexity of digital wallets will be abstracted away, and they will seamlessly integrate into the native browsing UX.
At the same time, they’ll demand increasingly sophisticated phygital experiences.
The big picture: Digital assets, including phygitals, will turn from top-of-the-funnel collectibles to powerful experiences within a brand’s ecosystem
Example 1: Nike progressed from simple, digital collectibles (CloneX) to more complex digi-physical experiences (e.g. OurForce 1 contest with OF1 boxes and subsequent physical Air Force 1 TINAJ drop for OF1 holders).
Example 2: FIAT recently launched its Web3 enabled loyalty community. Users purchase an FIAT Pass (digital membership ID), which unlocks a long-term, evolving loyalty experience.
This means: longer, more engaging users journeys and more gamified redeeming mechanisms.
Punchline: In 2024, I expect more brands to launch phygitals with real utility across a brand’s ecosystem and a blend of digital and physical experiences. Done right, brands can produce richer storytelling, new product experiences and revenue streams.
A new wave of Web3 ready, digitally native consumers will own and trade their branded, phygital assets.
Be smart: Brands launching phygitals will inevitably be confronted with phygital commerce.
One one side, that’s a big opportunity for additional data and revenue on secondary sales.
For example: A watch brand equipping its watches with a digital ID (NFT), they could:
start selling NFTs online / in virtual worlds
log secondary market transactions by checking for a corresponding transaction on-chain. If done right, the brand could even earn a royalty fee on that.
The problem: The whole phygital experience – i.e. redeeming virtual to physical – isn’t yet trustless and isn’t yet “real” Web3. This problem is referred to as the physical asset oracle problem.4
Go deeper: If users want to buy (or sell) an NFT connected to a physical product, they have no guarantee that they’ll get the physical items. They must trust the sellers (the brand) or a trusted marketplace to enforce the deal.
This is especially relevant for smaller, less known brands.
For secondary sales, this means:
A brand would have to host their own marketplace, and they’ll need to guarantee “trusted” transactions, i.e. verify the product and facilitate the transaction. This costs time and money and is hard to scale.
If users are forced to use third-party, secondary marketplaces, they’ll sooner or later be confronted with fake products – despite the phygital guarantees.
The same mechanism applies for primary sales.
Trust-minimized commerce: A company that solves this is Boson Protocol, enabling trust-minimized exchange of real world assets without centralized intermediaries.
It allows brands (and literally anyone) to sell physical things as NFTs online, in virtual worlds and on NFT marketplaces.
Users are guaranteed to either get the product or their money back.
The big picture: In 2024, phygitals will gain more traction. Users will demand an easy way for reselling their products and brands will need to address this question.
That’s it for now.
I hope this was helpful!
As the author, I maintain full editorial integrity and the views and insights expressed are my own, ensuring the content remains unbiased and authentic.
What exactly is “tokenization”?
Tokenization of real world assets converts physical asset into a digital token on a blockchain, allowing for secure, efficient trading and ownership transfer.
So, what then, are “phygitals”?
"Phygitals" are tokenized products from consumer brands enabling experiences that connect digital and physical elements.
The vision of a Web3 Computable Economy, is possible only if all assets, including offchain real-world assets (RWAs), can be brought into the Web3 economy with the same ‘hard property rights’ as native onchain assets.