Crypto has created a new field of interaction design for consumer experiences.

To date, attempts to represent physical goods onchain have been spearheaded by cryptonative brands for high-end fashion items for authenticity and provenance. Meanwhile, the vast majority of onchain actions such as NFT minting, attesting, trading, and equipping remain limited to digital contexts.

We see a big potential for onchain interactions to be brought to physical environments through digiphysical consumer goods, and believe that digiphysical infrastructure will soon bring programmable utility to any physical product.

Cryptonative digiphysicals are goods that exist in physical form, and maintain a cryptographic link to its digital (onchain) record via NFC technology. This record can be in the form of an NFT, a registry entry, or an onchain identity with signing capabilities.

Chip technology coupled with onchain programmability gives wallet-like abilities (e.g. token-gated access, signing, and asset ownership) to any physical object, unlocking end consumer experiences that were not previously possible.

We are excited about this next generation of digiphysicals because they:

• Bring onchain interactions to physical environments. Embedded scannable hardware allows consumers to verifiably prove their proximity to an object or presence in a physical space. This proof can arbitrarily unlock location-sensitive utility such as live mints, or serve as a record of participation that can qualify the holder for future rewards.

• Give agency and reputation to any consumer product. Chips with signature-generation capabilities let any physical good build its own onchain history and accrue value as its owners engage with brands and communities IRL. Because an item’s onchain record is decoupled from the owner, the item can be sold with its history intact and priced accordingly.

• Create a new distribution channel for issuers. Brands, communities, and creators can give ongoing, dynamic utility to their products and spaces. IRL interactions become a metric used to extend differentiated rewards to the most engaged members, who are in turn incentivized to engage more with the community.

• Unlock fullstack utility for consumers. Owners of digiphysical products can derive value from the good both in the physical (wearing the item) and digital (flex ownership, early access rights, exclusive content) realm.

What did digiphysical products look like in the past?

The first digiphysicals existed prior to crypto. We can think of them as physical products that came “bundled” with its digital form. Think vinyl records that come with digital download codes, or physical books sold with its pdf format. While these bundled products allow buyers to consume the content in multiple ways, the digital and physical counterparts have no strict association with one another and are treated as add-ons, which often go unutilized.

Within crypto, early experiments include selling unchipped “Digital Twin” products through onchain mechanics like burn-to-redeem. Here, the owner has to burn/replace the NFT in order to claim a physical product, or claim an NFT add-on after making a physical purchase. Like bundles, early “digital twin” products treat each counterpart as a secondary offering as opposed to product components that are deeply integral to one another.

While both forms of physical-digital bundling offer incremental benefits to the consumer, there is only a loose coupling between the physical and digital product. Each good can theoretically be sold separately without losing its own intrinsic value or utility.

Embedded chips, coupled with onchain programmability, allow us to achieve tight coupling between a physical object and its onchain record and property rights. This means that the physical and digital are no-longer distinct products, but two sides of the same coin. The physical object is a means for the holder to read or write to its onchain record or exercise the rights that come with it through IRL interactions.

The prevailing mental model for digiphysical goods are IRL fashion items with an NFT counterpart wearable in virtual worlds. While this is one use case, it only scratches the surface of the design space that has opened up.

A better analogy would be a (physical) credit card and the (digital) financial identity, purchasing power, and access rights it grants. The credit card is a means for the holder to make purchases in the physical world, while the bank holds a digital record of card usage and any perks that come with it. The card issuer secures partnerships with vendors to give cardholders ongoing utility, such as airport lounge access and hotel discounts.

The digital record is not necessarily a “mirror” of the physical card, but an important part of its function as third parties read from and update its record through IRL interactions.

Another example is a festival wristband that attendees can use to enter the venue, pay vendors, and claim rewards. The wristband itself makes for a convenient method to pay, but its digital record with access rights and spendable balance is inherently a part of what makes it useful.

**Cryptonative digiphysicals bring this programmable interactivity to any consumer product to be used in a variety of financial, social, and entertainment use cases. **They can be objects that are carried or worn on-person (e.g. clothing items, POAP cards) or tied to a stationary object (e.g. artwork in a gallery, collectables), scanned to pull up its ownership history, proof-of-authenticity, historical interactions, and associated utility. Its onchain record makes the interactivity composable - anybody can distribute rewards and grant rights to any the goods without gated API access.

What use cases do cryptonative digiphysicals enable?

While the popularized notion of the metaverse is a Ready Player One-like VR environment where humans and objects have “digital twins” operating separately in immersive virtual worlds, we believe that it will look more like physical objects and spaces having an onchain record and fullstack utility across physical and digital environments.

Creator Monetisation & Fan Engagement

• Extended Merch Interactivity. Creators can now turn any physical merch into loyalty cards with post-purchase utility. Merch becomes a direct channel to fans and fans to each other, allowing creators to build a deeper relationship with their fans and within the fan base itself. The experience that comes with the merch is programmable so the interactivity is ongoing.

• Fan Segmentation. Today, there is a large information gap for artists about their fanbase as ticketing and merch sales are conducted through third parties who control how much data they share with the artist. By distributing POAPs at events and building a record of IRL interactions like taps and scans, creators get a granular view of who their most engaged fans are.

• Targeted Rewards. Using chipped merch and scannable kiosks at an event, creators are able to reward fans directly. Fans can build their reputation within the community as IRL and digital participation can be recorded onchain. Wearing chipped merch to multiple events can accrue loyalty points to the merch, which can be scanned to unlock access to presales for future shows.

Tokenized Communities

• Proof of Connection & Social Games. Products designed for individuals to have on their person, such as a piece of clothing or a card, can be a way for communities to connect with other members as they meet each other in person. It also enables new types of games around connecting in person e.g. 9dcc Network Points

• Social Graphs. “I met” POAP transfer activity creates a bottom-up social graph that can be used to see which events community members are going to, and the most “connected” members. This can serve as a primitive data point to distribute rewards to members who are most active in evangelizing the community at events.

• Payments & Co-Signing. Because a physical item can now produce cryptographic signatures, it could be used as a signer for a multisig for contactless payments as a DAO member. This could be a membership card, a hoodie, bracelet or anything else.

Decentralized Authentication & Proof-of-Ownership

• Luxury Goods & Collectables. While traditional authentication systems for luxury goods, art, and high-end collectibles rely on centralized servers, onchain authentication standards using chips enable physical products to self-attest their authenticity even if their issuers go away. Once scanned, there is a transparent record of who manufactured the chip, which brand issued the product, and what rights come with it.

• Fullstack Flex. Using standards like physical-backed NFTs, brands can tie a physical garment to a digital wearable that owners can take across the physio-virtual stack. The token standard ensures ownership of the NFT and physical items remain tightly coupled, allowing owners to verifiably flex ownership across both digital and physical spaces.

• Cryptographic Autographs. KrauseHause Metafactory jacket that basketball players can tap and sign digitally.

Digiphysical Interactions

• XRL Gameplay. On-chain games can add IRL quests by chipping physical products and updating its record as players engage with one another in the real world. Loot LARP was an XRL larp experience at NFT NYC 2022 where players fight each other with weapons embedded with Kong chips. Points were recorded to the weapons after the interaction.

• Live Minting. Galleries can design engaging, interactive minting experiences at physical locations by having guests scan a chipped disc to purchase editions of displayed artwork or mint a generative piece.

• Tokenized Guestbooks. Audiences can record their “proof of presence” in a digital work. NFT metadata could update with each message from someone who has been in close proximity to it.

Digiphysical Experiments in Web3

2019 - 2021: Early attempts to bridge the onchain and the physical

• Notable experiments using chips are Kong Cash, Signed Star Trek Collectable and MetaFactory’s Genesis Bomber (February 2020) which utilized SiLos chips.

• Redeem mechanics using ERC-20s (Saint Fame $FAME, Unisocks $SOCKS, Zora $TAPE) which traded in the open market prior to a date in which token holders could burn/replace the token in return for the physical product. Aside from showing proof of burn or the redemption token as receipt, there was no way for the owner of the physical product to prove ownership of it in real time, nor can the issuers continue to deliver perks as there isn’t an onchain linkage.

• POAP launched as a way for individuals to have an onchain record of their involvement at events.

2021: New layers of infrastructure

• IYK launched tools for issuers to program utility on top of chips, such as tap-to-own and tap-to-mint. This later enabled direct-to-item messaging in the VÉRITÉ Crewneck and POAP mints from 9dcc ITERATION-001 shirts.

• Vaulting solutions like 4k and Courtyard also launched around this time, providing a solution to securing physicals prior to their redemption or during a trade.

• Along with the rise of NFTs and generative art, Bright Moments launched to bring onchain art to physical spaces and soon started collaborating with platforms like ArtBlocks and fx(hash) to bring generative art mints/reveal experiences to the physical environment.

2022 - early 2023: Early applications on top of protocols

Seeded with the hardware and programmability layer, over the past year we saw adoption of digiphysicals in more markets, notably around tokenized communities and creator-fan engagement.

• On-chain communities like Nouns began to issue merch, working with Dopamine to launch chipped streetwear that buyers can scan to gain access to digital rewards. The DAO also approved a budget to launch Nouns Vision, with Nouns members getting pre-mint access to an NFT redeemable for luxury Nouns sunglasses.

• VÉRITÉ collaborated with IYK to launch the VÉRITÉ Crewneck, which can be tapped to gain early access to her next record and other exclusive experiences.

• Token-gating, a mechanism pioneered by Collab.Land to restrict access to Discord and Telegram channels, started being applied to physical spaces. Organizations can use protocols like tokenproof to let attendees verify asset ownership to enter a venue.

• Cryptonative brands outside of fashion such as Azuki made their foray into digiphysicals by utilizing Kong chips in their Golden Skateboards, and authoring a standard for physical-backed tokens (PBT).

• As more cryptonatives got their hands on chipped products, social games emerged around meeting as many people wearing the collection as possible. POAP mints from 9dcc ITERATION-001 shirts are observable onchain as social graphs for the community at Art Basel in Miami. At ETH Denver, Bead DAO formed as a hackathon project where beaded lizards were embedded with Kong chips, and new members could get onboarded as they met individuals carrying lizards.

• We saw the first loans taken out against digiphysicals, with gmoney taking out a loan against a 9dcc IT-001 shirt, vaulted on 4k. In April 2023, a 4k-issued PBT was used in a DeFi loan on a Rolex

The Web3 Digiphysical Stack

Infrastructure Layer

Hardware. The physical interface, such as specialized NFC chips, dynamic QR codes, or stenography, provides a linkage and means of communication to the blockchain to update a digiphysical’s onchain record. It’s important to note that not all chips are made equal. For example Kong*’s latest HaLo chips, unlike its predecessor SiLo chips and typical NFC tags, can generate its own signatures and thus behave like a hardware wallet with its own identity (onchain address) - enabling the payment and co-signing use cases.

Creator Tools, Minting & Generative Engines. The programmability layer on top of hardware infrastructure enable creators to design digiphysical experiences. IYK* provides chip-agnostic software modules for issuers, including post-distribution tooling like tap analytics. Causality is middleware for linking chipped physical goods to digital environments. Metalabel* is a platform for creators to discover each other and co-release work in the form of digiphysical record bundles as well as IRL experiences. fxhash, ArtBlocks provide minting engines for generative art, enabling live minting experiences at galleries and IRL events.

Vaulting, Escrow & Commerce. Escrow protocols like 4k, Courtyard, and Mynaswap provide shipping and storage services for physical products prior to NFT redemption or during a trade. This involves nftokenizing the product through each platform’s own minting service. Americana goes one step further to attach its own chip technology to physicals shipped in to be vaulted. These protocols are critical infrastructure for representing ownership of a physical asset onchain, as token owners must have confidence that the underlying asset exists in the exact form and quantity represented.

Supply & Value Chains. Protocols like Permet and Crowdmuse provide contribution tracking services along the supply chain of physical products from designers to manufacturers, which helps with subsequent value distribution when primitives are reused for future projects.

RWA Tokenization & Digitization protocols serve to give existing physical goods a representation onchain, ensuring linkage either by chipping the object (Mattereum’s Star Trek collectables, Sunya bracelets), or minting a “Physical-Backed Token” and securing the physical object through a decentralized network of Guardians (4k) or centralized service (Courtyard). The PBTs can then be traded on open markets like OpenSea or used as financial instruments in DeFi protocols. Digitization platform Altr gives physical brands tools to upload their archives as high-fidelity 3D assets, enabling virtual try-ons, wearables, and digiphysical redemption options.

NFT Financialization. Physical assets, once represented onchain as NFTs, can be plugged into the existing NFT finance infrastructure. They can be traded like any other NFT on OpenSea, and be used to collateralize loans on platforms like NFTfi* and Arcade. There are also specialized marketplaces such as unxd for tokenized luxury goods, Tectyle for tokenized textiles and fine art, and mntge for vintage clothes.

Generative Manufacturing / Digital-to-IRL. The adoption of generative engines has thus far been in the digital art market. As consumers look to engage with their collections IRL, projects like Trame and Artmatr provide a manufacturing pipeline for creators to transform digital files into physical art. Beyond the art market, these manufacturing pipelines could eventually serve as infrastructure for any generative consumer product. For example, a generative fashion item could first be minted as an NFT, which the holder could then use to purchase the corresponding physical product.

Standards & Registries. Physical-Backed Tokens (PBT) is a standard by which chipped physical goods can assert its own authenticity and maintain a tight coupling with its NFT counterpart onchain. This is achieved through chips that can generate its own signature, and only allowing NFT transfer if the signature of the chip is supplied to the contract (guaranteeing that a token cannot be transferred without consent from the owner of the physical item). Ethereum Reality Service (ERS), spearheaded by Arx (of Kong chips), proposes canonical registries for chips, manufacturers, and service providers which attests to the function of chips and the projects/companies embedding them in objects. It also proposes schemas whereby developers can indicate what claims and functions are possible against chips.

Application & Utility Layer

Token-Gating, Ticketing, & Memberships. Protocols like Collab.Land, Guild, Tokenproof, and Unlock allow communities to build custom token-based logic for who is allowed to access digital spaces, IRL events, and digiphysical perks (e.g. Shopify discounts). In addition to a collector’s onchain history and asset ownership, these tools could be used to extend eligibility to people who own physical products as well e.g. scan your hoodie for early access to ticket sales.

Live Minting. Communities like Bright Moments and VerticalCrypto Art host IRL events around the world centered around showcasing generative art, typically working with artists to design the physical reveal and minting experience for ticket holders and DAO members. Some galleries, like imnotArt, also has virtual world real estate where users can visit and bid on curated artwork.

Community Engagement. While POAP* is widely known to be badges that prove you attended an event, the protocol becomes more powerful when individuals are wearing chipped community merch as they can become POAP issuers themselves. TYB helps brands leverage web3 memberships to drive product development and activation, rewarding in-store visits, token-gating Shopify discounts, and enabling community co-creation.

Conclusion

We look forward to seeing more experiments in digiphysical consumer goods and experiences and anticipate that

• Chips will become cheaper and economically viable to be used in products beyond high end fashion, collectables and art

• Consumers will soon expect that creator and community merch be chipped and able to interact with them in IRL events to access future rewards

• DAOs and cryptonative communities will start using digiphysicals in the form of cards to perform operations like co-signing and payments

• NFTs will increasingly be used to represent ownership of a physical asset thanks to tokenization and vaulting protocols, bringing the cost and speed of trading down to that of purely digital assets. We’ll also see tokenized RWAs like collectables, high end fashion items being leveraged in NFT finance protocols

If you are building something in this space or have additional thoughts on the topic, would love to chat! Please reach out on Twitter @nichanank.

*denotes 1kx portfolio companies.

Many thanks to pet3rpan, Chris Lee, gmoney, Cameron Robertson, Drew Harding, and Richard Li for their time and feedback on drafts of this.