2 – Introduction to Hybrid NFTs
Hybrid NFTs are generally defined as unique collectibles that can be redeemed in both physical and digital format. It's an emerging category of NFTs that has mostly been untapped. Although it appears our society is trending toward a place where most of us will regularly interact in the “metaverse,” many agree that it’ll likely be a while before we realize our Ready Player One destiny. So, in the meantime, people will continue to crave IRL (In Real-Life) items, benefits, and experiences. And businesses and projects that leverage blockchain technology to improve the (real) lives of their communities will win in the near-term.
Before I get started it’s important to note that (a) Hybrid NFTs differ from (b) Utility-linked NFTs. Examples of the latter include LinksDAO and Flyfish Club where the NFT owners receive benefits such as joining a golf club or dining at an exclusive NYC restaurant, respectively. As you’ll see below, Hybrid NFTs don’t necessarily offer utility but rather present real-life alternatives. To help paint the picture, I’ll use the rest of this piece to dive into four examples of Hybrid NFTs – all of which are in different stages of growth:
The Currency | Flying: Renowned artist Damien Hirst's 10,000 mint art collection where owners must decide between keeping their NFTs or trading them in for physical editions
HRO by DC | Running: HRO (pronounced “Hero”) is a trading card platform that gives collectors a physical and digital version of their card
WAX's vIRL | Walking: This technology links real-world items with NFTs so that users can transfer ownership without needing to physically ship anything
10KTF | Crawling: 10KTF allows owners of select PFP collections to create derivatives of their existing NFTs (e.g., a BAYC owner can generate a new one-of-one NFT accessory – such as a backpack, socks, boots, etc. – featuring their Bored Ape)
While each project offers its own spin on the hybrid approach, they each need to overcome one common user challenge: as a seller/buyer on the secondary market, how can a user ensure the physical collectible successfully changes hands? For purposes of this blog, I'll call this issue the “Physical Trading Dilemma.” I believe this is the main question that needs to be answered for a Hybrid NFT project to find long-term success in this space.
My goal for this post is twofold: I want to (a) introduce multiple flavors of this budding category known as Hybrid NFTs and (b) highlight the key challenge that projects within this category need to overcome.
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THE CURRENCY
Project Description:
Each of the 10,000 NFTs is tied to a corresponding physical artwork. Owners of the NFT have the choice to keep the NFT or trade it in for its real-life twin. By deciding to keep the NFT, owners opt to burn (yes – using fire) the physical version (and vice versa). They have until July 2022 to make this decision.
Why is it in the fly stage?
Because of its simplicity. It was a one-time drop with a limited decision period. There is no roadmap for The Currency, the project is easy to understand and requires minimal time commitment from its investors. Owners of their respective piece choose its destiny based on their individual preference – there is no right or wrong decision. It will be interesting to see how many NFTs exist after the deadline in July.
The Physical Trading Dilemma:
Damien Hirst and the HENI team solve for this challenge by holding onto the physical copies until the owner trades in their NFT. But what happens when the owner of the physical piece wants to sell it? As far as NFT projects go, The Currency is as close to a “traditional art collection” as it gets. And these pieces are not cheap. As of today, the floor for one of the NFTs is greater than four ETH (~eight thousand dollars). I think the real-life pieces will mirror the price of the NFTs and (due to the high price) will experience trades via formal channels such as auction houses, art shows, dealers, etc. The Physical Trading Dilemma is unlikely to inhibit The Currency's long-term success.
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HRO
Project Description:
Imagine growing up with an online counterpart for all your Pokémon cards. Instead of lugging your binder to your friend's house, you'd be able to boast your collection around the globe. You'd see where you ranked on the leaderboard, scan your friends' collections, and seamlessly trade, buy, and sell cards of your choosing. This is exactly the experience that HRO introduced in March 2022 with a focus on DC characters like Batman and Superman.
Why is it in the run stage?
HRO is a working product – they have a slick app and recently released the first chapter of cards to users. Prior to selling out, users had the ability to buy packs online or in stores like Walmart. The app is also interoperable with Layer Two solution Immutable X (so you don't technically need the app to buy the NFTs). The project has accomplished a lot in a short period of time, however, they've also had setbacks. In one example, some users received blank cardboard in packs as opposed to cards. In another example, a few users received a mismatched mint number upon scanning their physical card to create its digital twin. With each setback, HRO has been quick to right the ship and address the issue. They also have an ambitious roadmap which includes future Chapter releases, app incentives, the introduction of auctions, etc. It's a promising company with a long way to go before it can fly.
The Physical Trading Dilemma:
So what happens when a user buys a digital card on the HRO app today? The buyer receives the NFT, however, he or she does not receive the physical copy. The buyer would need to work with the seller offline to find a solution to exchange the physical card. There are many reasons why this is problematic for HRO – the big concerns being trust and safety. At the bottom of this post, I dive deeper into HRO's Physical Trading Dilemma and propose a solution for how they can overcome it with future Chapter releases.
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vIRL
Project Description:
Created and patented by WAX, vIRLs (virtual, and In-Real-Life) represent physical goods that are linked to NFTs. The technology allows users to easily and sustainably purchase, exchange, and trade consumer products. vIRLs lay the foundation for v-commerce, which WAX has defined as the act of buying, selling, and trading virtual items linked to real-world merchandise and services. Here's an example of a project where vIRL technology was used:
- Back in August, FUNKO – a company well known for producing licensed vinyl figurines and bobbleheads – dropped a Teenage Mutant Ninja Turtle NFT collection
- Post-drop, FUNKO leveraged the vIRL technology to reward top collectors with a Redemption Token
- These collectors were then given 30 days to decide whether to keep the Redemption Token or trade it in for a physical vinyl
Why is it in the walk stage?
Overall, I love the concept of vIRL, but the lack of publicly available information is preventing it from hitting the run stage. WAX has held the patent for at least a year, however, it's unclear if vIRL has many partnerships. In the few collaborations that made “headlines,” vIRL's application seemed broad-stroked (and unoriginal) which makes me believe there is room for competition. With that said, I can see how this technology will enhance the physical collector's experience. For example, let's say Kanye decides to leverage this technology for his next YEEZY shoe drop. Here are a few of the benefits:
- When a user lands the drop, she can trade the token instantly instead of waiting for the shoes to arrive to her house (where she'll then list them on eBay)
- Kanye can now receive commission on all secondary sales (e.g., 5% each time the token is sold)
- Exchanging a coin is more eco-friendly than shipping shoes multiple times
The Physical Trading Dilemma:
Similar to The Currency, vIRL solves this problem by holding onto the physical good until the user trades in and/or presents their Redemption Token. vIRL differentiates itself from The Currency in that it is a technology enabler that has potential to support many projects, whereas The Currency is a one and done project. The technology is primarily focused on the initial physical transaction. Once the physical good reaches the owners' possession, vIRL's job is done. So as far as vIRL is concerned, they have solved for the Physical Trading Dilemma.
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10KTF
Project Description:
Each 10KTF item is unique (one-of-one) and corresponds with the parent project NFT. So for a 10,000 mint project, there will be at most 10,000 variations of the item and only one of each variation available (e.g., one backpack per ape). It's important to note that 10KTF can only make derivatives from collections that give commercial rights to their owners (e.g., BAYC, MAYC, World of Women, Cool Cats). Further, the parent project NFT owner determines whether he or she would like to participate in 10KTF. At the moment, the available parent project collections to choose from are limited, though 10KTF plans to grow this list over time.
Why is it in the crawl stage?
In short, this project is in the crawl stage because – as of today – 10KTF projects are purely digital. With that said, the founders have stated that they have “ambitions beyond the metaverse” (i.e., physical accessories are on their roadmap). So in the context of Hybrid NFTs, 10KTF is crawling. Yet, even if the project fails to deliver physical accessories, it still has potential to succeed in the metaverse. Any project with Beeple's (rumored) name on it is worth keeping an eye on.
The Physical Trading Dilemma:
This project does not yet have a physical good, and thus this problem does not exist!
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As mentioned above, I'd like to dive deeper into HRO's Physical Trading Dilemma. In my opinion, there is great potential for the trading card use case of Hybrid NFTs. And as the pioneer, HRO is spelling out issues that followers will also need to solve. Like The Currency and vIRL, HRO should consider distributing their NFTs first, and allow the owner to claim the physical packs afterwards. Here are two illustrative use cases for how that might look:
Use Case 1A
- CHARL13 buys a pack on the app, receives it digitally, then opens it (same experience as TopShot or Candy Digital)
- CHARL13 loves the cards within the pack and decides to claim it
- HRO ships the pack to CHARL13
Use Case 1B
- CHARL13 buys a pack on the app, receives it digitally, then opens it
- This time, CHARL13 receives a valuable card and decides to sell the pack via the app
- PORZINGASKHAN scans the market and finds that CHARL13's pack contains the card he needs to complete his set
- PORZINGASKHAN is not able to buy the sole card, however, he can buy the pack (and has full transparency into the cards within the pack)
- PORZINGASKHAN can either click a “Buy Now” button or place a “Bid”, he decides to click “Buy Now”
- PORZINGASKHAN receives the digital pack and decides to claim it
- HRO ships the pack to PORZINGASKHAN
I'll admit this solution isn't perfect, though I'm confident it's superior to HRO's current state process. Let me briefly address a few questions that are likely to pop up:
- Question: Why does PORZINGASKHAN have to buy the whole pack if he only wants one card?
- Answer: In sum, managing packs (with unique identifiers) is far more scalable than managing individual cards. HRO's Chapter One contains 6.7 million cards across 155 card variants. It's unrealistic to think that HRO is going to inventory each card and ship them out individually. And given the volume of cards, it's expected that most will be worth pennies in the future, which means the price of a pack will typically reflect the price of the most expensive card in said pack.
- Question: Will there be a deadline for owners to claim their packs?
- Answer: I'm not sure how much space 6.7 million cards (times ~10 Chapters) takes up, but I imagine HRO would be able to warehouse cards for an extended period. The economics of this one are out of my league so I encourage those who are curious to present some numbers and feasibility. (Side note: this may be the next evolution of the “how many ping pong balls fit in a 747” interview question).
- Question: What happens if you receive a valuable card (in physical form) then decide you want to sell it?
- Answer: Do it how it's done today. Passionate buyers and sellers have and will always find each other. For legal purposes, HRO will likely take the stance that they can only control what happens within their app. One idea could be to introduce on-app linkage with eBay to hold sellers accountable. Alternatively, HRO could act as an escrow responsible for facilitating trades (e.g., confirming the quality of the physical card). If HRO can't control physical trading in-app, then I think the company will need to opine on off-app trading standards and best practices.
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If you've made it this far, thanks for sticking around. Believe it or not, I feel like I'm barely scratching the surface with this topic. If you have comments, suggestions, or questions, feel free to share your thoughts on my Twitter page (@_CHARL13).
Thank you,
CHARL13