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Pudgy Penguins Plunges into Retail with Novel Phygital Business Model

In what could be the easiest phygital NFT offering for ordinary consumers to experience (and for enterprises to leverage for their learnings), Pudgy Penguins launched its physical toy collection into 2,000 Walmart stores across the United States in September 2023. This move not only marked a significant milestone for Pudgy Penguins but – somewhat reminiscent of real-world co-ops – it also set an NFT-based business model precedent for other brands to explore when it comes to the integration of blockchain-related physical goods in traditional retail spaces.

Blockchain Customer Experience (BCE)

NFT

Toys and Craft Supplies

By Sophie Waldman

Published: February 1, 2024

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7 min read

One of the more unique business aspects of the project has to do with how the owners of a small subset (16) of the 8,888 total Pudgy Penguin NFTs – the subset that the Pudgy Penguin team handpicked to also be made available as physical toys – earned annual royalties from the sales of those physical toys.

Pudgy Penguins is a Web3-native brand that originally launched as a super cute collection of 8,888 penguin-themed NFTs in July 2021. In April 2022, during the so-called “NFT crash,” Luca Netz and a group of asset holders acquired Pudgy Penguins in hopes of turning the digital collectibles into a leading intellectual property (IP) brand across content, merchandise, toys, and collectibles. The company now officially operates under the name LSLTTT Holdings but does business as “Pudgy Penguins” of which Netz is CEO.

Months following the acquisition, Pudgy Penguins announced its venture into the physical world with its first edition of collectible toys and plushies. The brand sold more than 20,000 individual toys, worth more than $500,000, in the first two days of sales.

Months later, Pudgy Penguins announced that the physical toys would soon be available outside of e-commerce channels and stocked on shelves inside Walmart retail stores – alongside other legacy consumer brands. The physical toy production was made possible through a partnership with PMI, a global toy manufacturer for companies and other IP-licensors such as Fortnite, Nickelodeon, WWE, and more.

As Pudgy toys aimed to become the first mass-market NFT-based IP product licensed directly from the community (the owners of the NFTs that were handpicked for physical production and retail sale), each of the toys would be connected to one of the original handpicked NFTs. Once the selection of those NFTs was complete, the owners of those NFTs were notified that a physical toy would be made using the IP of their asset.

The NFT holders of the selected Pudgy Toy IPs were then eligible to receive a royalty on the toys sold in perpetuity. “The 16 holders that had their NFT licensed, receive a royalty annually. We licensed them from the community through a back-and-forthback and forth process and every year their toy is sold they will get a licensing check,” Netz told Blockchain Journal. According to the Pudgy Penguins team, the toys are the first-ever mass-market product licensed directly from the community. Pudgy Penguins has not only taken a leap from NFTs to a custom metaverse experience, but it also opened the doors for other brands to explore the potential of blockchain-backed physical goods in traditional retail spaces.

A physical Pudgy Penguin figurine in its original packaging.

Walmart is currently selling the 16 different Pudgy Toys, including exclusive figurines and Blind Boxes, which have 1 of 12 random mini Pudgy characters inside. The toys are sold at a relatively low price point (between $3-$12) and are also available for purchase online. The decision by Walmart, the largest retailer in the US, to include Pudgy Toys in its inventory speaks volumes about the evolving landscape of consumer engagement and desires in the digital era.

Gateway to Pudgy World

The Pudgy Toy collection is not your typical toy or collectible. Each physical item includes an invitation to explore a new digital brand experience, Pudgy World, which is an interactive multiplayer environment that allows users to play, socialize, collect, and customize digital companions – separate from the original Pudgy Penguin NFT collection.

Pudgy World is powered by the zkSync Era blockchain, a layer-2 scaling solution for Ethereum. Zero-knowledge (ZK) rollups move part of the contract computations and transactions off-chain, while still verifying data on Ethereum’s Mainnet.

Somewhat reminiscent of the birth certificates and adoption papers that were included in the box with Cabbage Patch Kids, customers who purchase a physical toy are invited to join Pudgy World through a QR code-bearing adoption certificate that’s included with every physical toy. Some of these adoption certificates (but not all, based on some Googling by the Blockchain Journal team) include the following text:

“Scan the QR code to receive your Forever Pudgy Penguin & trait box, this item is [a] one-of-a-kind token that you can show off with pride knowing you’re forever part of our Huddle.”

A scan of the QR code brings users to Pudgy World’s website to redeem a mystery Trait Box and start creating their own digital “Forever Pudgy Penguin” character in the Pudgy World virtual realm. Once created, this base penguin character is represented on the zkSync Era blockchain as a soulbound token (SBT), which means it is bound forever to the Pudgy World user account that created it (and thus, “Forever Pudgy Penguin”). As a result, such tokens cannot be traded or transferred to another user or blockchain wallet address. In doing this, the collection of tokens that represents these base penguin characters are kept separate from the original Pudgy Penguins and Lil Pudgy NFT collections in a way that strategically avoids any possible dilution to holders of those original collections (another deliberate business choice made by the Pudgy Penguins team).

Each digital character includes a pack of different digital traits consisting of attributes like skin color, headwear, facial expression, action, and body (i.e., clothing, outfit). The traits occur in rarity tiers including Common, Uncommon, Rare, and Epic; lucky customers who find a Golden Ticket inside of their physical toy get to unlock the rarest traits.

Pulling inspiration from the Web3 collaborative ethos, there are also exclusive traits from other NFT brands, including Moonbirds, Y00ts, Meebits, and DeGods.

Users can buy, sell, and trade traits as NFTs on Pudgy World through a marketplace powered by Origin Protocol.

Seamless Fusion of Physical and Digital Play

When first visiting Pudgy World, users can choose their preferred method to create an account. In the case that users are already familiar with Web3 technology, they can, at their option, connect an existing self-custodied blockchain wallet through MetaMask or Coinbase. The entire Pudgy Penguin unboxing and onboarding experience can be watched in the video below, featuring Netz as the buyer/owner.

However, as seen in the screenshot below, as Pudgy World aims to onboard users into an on-chain experience as seamlessly as possible, users can also sign up using an email address, which in turn automatically creates and links a custodial blockchain wallet that’s made possible through Pudgy World’s integration with Magic\.link. Magic\.link integrations involve an SDK that – for the non-Web3 crowd – establishes a custodial wallet on the backend that’s transparent to end users. This prevents the need for users to have their own a self-custodied wallet to hold the NFTs.

This allows for a seamless customer experience, which is especially important with the appeal these toys generate for kids and traditional retail shoppers. Pudgy World also presents the non-Web3 public with their first blockchain wallet, collectible SBT, and tradeable NFTs (the traits).

“Walmart’s inclusion of Pudgy Toys in their stores is a testament to the evolution of how consumers engage with brands in the digital era,” said Netz. This fusion of physical and digital play is not only engaging for kids but also signifies a paradigm shift in the way brands can leverage blockchain technology to create phygital experiences today.

“Pudgy Penguins is bridging the gap between our physical and digital worlds of play for kids in a really engaging way,” said Brittany Smith, vice president of Merchandising – Toys at Walmart US.

Pudgy Penguins Go “Retail-Viral”

Pudgy Toys is on a mission to introduce the Pudgy Penguin IP to traditional markets outside of blockchain. However, on the backend, each physical product is a licensed IP from an existing NFT from the Pudgy Penguin NFT collection. While Pudgy Toys originally found its place on Walmart shelves, several additional retail stores have now added Pudgys to their inventory, including Toys R Us, GameStop, Smyths Toys UK, and more.

Then, in November 2023, Pudgy Penguins announced a new Walmart-exclusive toy; mystery clip-on plushies, which will have their display within Walmart stores and a “unique blind box experience both physically and digitally with Pudgy World,” according to the brand. The new plushies also introduced exclusive matching digital boxes consisting of new traits in collaboration with Web3 brands such as Cool Cats, Gutter Cat Gang, Killabears, and more.

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