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What: NFTs are an application of blockchain that is entering and changing the fashion industry as we know it.

Why it is important: Brands such as LVMH and Nike are leading the way, innovatively implementing NFTs into their business models for the long run.

The global pandemic has accelerated trends, especially in terms of technology and transparency.  Although many buzzwords are being thrown around, it is not very easy to understand how blockchain technologies, cryptocurrencies, and NFTs (non-fungible tokens) could impact the way businesses offer their products to consumers. The big question that arises now is do we need to act fast, or can we ride out this latest tech wave until it passes? In order to answer that, we first need to understand what exactly the technology offers and what opportunities have arisen since its inception.

What are NFTs?

NFTs (Non-Fungible Tokens) are an application of blockchain technology that is said to be the future. A blockchain is an open and distributed ledger that captures transaction data between two parties in a permanent and verifiable way without using a central point of authority. In the example of a supply chain, the blockchain would capture all information pertaining to each stakeholder from a raw material supplier to producer to wholesaler to retailer. At each stage of the journey, a new block of information is created and cannot be altered. Blockchain enables the existence of cryptocurrencies and other mediums of exchange, like NFTs.

NFTs are individual tokens that are part of the Ethereum blockchain. What makes them different from cryptocurrency is that its tokens contain extra information, including ownership history, allowing art, music, and videos to be sold in the form of JPGS, MP3s, videos, GIFs, and more. Because they hold value, they can be bought and sold just like any other types of art with the price being largely dictated by demand.

Just like a physical piece of art, there can be copies of the original item put up for sale by the creator, but the original will hold the most value on the market. Although downloading these digital items for free can be easily done, the value of ownership lies in the information held in the Ethereum blockchain. Each item is unique and cannot be copied, which is what makes NFTs so valuable.

NFTs are making waves as in-game purchases across different video games that can be bought and sold by players, and include assets like unique swords, skins, clothes, or avatars. This has opened up the NFT world with new players entering the NFT marketplace every day. The big leap is to take this concept from tech circles to more mainstream consumer audiences, gaining acceptance among brands and influencers.

What’s in it for retailers?

Retailers and brands have tried to enter the market with the hope of understanding how they can turn the trend into a marketing opportunity. NFT use cases are still in their infancy, especially for fashion. Their entirely digital nature puts them at odds with fashion being historically all about physical products. Currently, NFTs in fashion are art rather than utilities, but this is shifting quickly. The present-day application of NFTs of GIFs and digital clothing to be used in virtual realms might not be the right fit for fashion brands. Future implications of using the technology to track and authenticate high-end luxury goods are more likely to have long-term benefits in the fashion and retail space.

Nike is among the companies dabbling with NFTs, but they have taken its application a step further. Nike is using NFTs as a patent for its footwear through its NFT, Cryptokick, which removes the barriers between the physical and digital world. The NFT of the shoe is linked to its physical counterpart. When a customer buys a physical shoe, a digital version of the shoe will be made available in their “virtual locker” and can be used in video games, thus extending Nike’s brand in the virtual realm. If the owner of the shoe were to sell their physical shoe, the sale would be mirrored in the digital realm as well. This application of NFTs is novel as it gives retailers additional avenues to connect with their customers.

LVMH has also understood the future implications of the information that blockchain technology can provide for luxury goods. The idea has brought together competitors in the space such as Prada Group and Cartier, among others, to develop a blockchain platform created specifically for the luxury industry to verify and authenticate goods. The result is the nonprofit Aura Blockchain Consortium, built by Consensys and Microsoft, which is open to any luxury brand to track and trace products with a unique digital identity based on an NFT. Brands pay licensing fees and a fixed fee per product, but they also get full access and control over their data (brand and client data are kept private) and contribute to the blockchain governance and strategy.

This application of the NFT technology has also been implemented by Arianee, an open-sourced traceability solutions provider which closed USD 9.5 million in seed funding in March 2021. The platform’s technology establishes digital passports of products to authenticate and track them throughout the supply chain, using NFTs to ascertain the online value of goods. While Aura was built to allow brands to control their processes and data without a third party, Arianee focuses more on transparency and engaging customers after a sale or resale. The platform attaches digital IDs to its timepieces and uses them to offer special promotions to owners while allowing the customer’s identity to remain anonymous. The Consortium also has a non-profit association, including Richemont, Ba&Sh, Breitling, Audemars Piguet, Verlan, Satoshi studio, and Manufacture Royale.

NFTs are hot…. and so is their impact on the climate.

The resale industry, especially as consumers become more environmentally aware, has boomed in the past few years with 62% of consumers saying that they are willing to purchase second-hand luxury goods. According to Statista, the luxury resale market was valued at around EUR 28 billion in 2020, seeing a 65% increase over the past 5 years.

Establishing an industry-wide blockchain system would bring the needed governance and oversight to secondhand fashion. Resale’s rise has spurred more brands to get involved in the space with Stella McCartney, Gucci, and Alexander McQueen all partnering on second-hand marketplace initiatives. This is a major shift in the luxury market that has been put off for a long time in fear of the impact that resale could have on brand value. This means that the stakes have been raised for brands and platforms to be able to verify the authenticity of resold items. Consistent blockchain use could eventually allow consumers to track the raw materials that their items have come from, ensuring it did not come from a labor camp, for example. This would give consumers the transparency that the fashion sector has not been able to easily provide, to understand the product's total sustainable impact from energy to worker’s rights.

On the other hand, minting NFTs requires a lot of energy consumption. Ethereum has been working on shifting to a less carbon-intensive form of security called proof-of-stake, but it is still in the works with no clear deadline. Some alternative blockchain marketplaces are already using proof-of-stake, but these are less established and potentially less permanent. The Guardian estimated that the sale of 303 editions of Earth, an NFT produced by the musician and artist Grimes, “used the same electrical power as the average EU resident would in 33 years, and produced 70 tons of CO2 emissions.” With impacts like these, the fashion industry needs to consider all implications when choosing their digital platform and understanding their overall digital footprint.

Cashing out on crypto

At the moment, only about 1% of luxury consumers use cryptocurrencies, according to data from Forrester. Although it is not going to be a mainstream payment instrument, it should not be ignored. Cryptocurrencies can be used by brands as a way to connect with and reward their customers. Lolli is a marketplace that allows shoppers to earn up to 30 per cent back in Bitcoin from purchases that they make at participating retailers. Lolli currently works with over 1,000 retailers including Nike, Sephora, Ulta, Bloomingdale’s, Saks, and StockX.

Plutus, which advertises itself as ‘better than a bank’, is a decentralized fintech firm that has partnered with Nike. Customers that shopped at Nike via Plutus received back 10% of the value of the sneakers bought in Bitcoin. Plutus has around 25,000 users, with most being under the age of 35. This shows that millennials and Gen Z have a different view on life regarding sustainability and governance, with trends related to these topics to continue gaining traction.

In this regard, should retailers and brands start accepting cryptocurrencies as a method of payment?  It could be a great strategy in terms of how they can take advantage of existing disposable income. It is basically like introducing a new asset class. Companies like Microsoft and Tesla are already allowing customers to pay in Bitcoin. Microsoft directly converts the Bitcoin payments to fiat currency, while Tesla is betting on NFTs and retains the cryptocurrency. But, there are some risks as cryptocurrencies are speculative assets that are volatile and can potentially be lost.

For the moment, cryptocurrencies exist outside of the traditional global financial system and aren’t considered legal tender like cash issued by governments. But China has become the first country to create its own digital currency controlled by its central bank. The digital yuan is going to be positioned for international use and will be untethered to the global financial system where the U.S. dollar reigns king. This project has caused the United States to make the digitization of the dollar a high-priority consideration. With regulated sectors looking to introduce digitized currencies, NFTs could be a natural addition to the markets of tomorrow.

But wait, there is more

As NFTs originally gained popularity in gaming worlds, there is still a large community and marketplace for this type of use case. As the application of NFTs is virtually unlimited, the retail experience could be fully reimagined. There are already virtual worlds, like Decentraland, where you can buy virtual real estate and even create a business with a virtual storefront where you hire real humans to interact with customers.

Decentraland, also powered by the Ethereum blockchain, is set to open museums where people can display their NFTs, with the next move into retail and virtual shops. This will allow companies to buy virtual real estate to set up virtual storefronts where merchandise could be sold. This virtual store would be yet another channel that brands could reach their target audience and extend their image.

Virtual real-estate is yet another application of NFTs whose future implications, if any, are hard to comprehend. Virtual lands could bring in additional possibilities of what can be done using the land in the future like building art studios, doing advertisements, or renting it out for others to build on. As of February 2021, there have already been 116,943 transactions in virtual land totalling USD 40,814,665 on Decentraland.  There are users building casinos with big retailers that are exploring possibilities to open shops in virtual land. As many stores are starting to offer virtual reality shopping, virtual stores could be the final piece that brings together the physical and virtual shopping experiences.

NFTs: powering the future of commerce?

NFTs are still in their infancy, but there is no doubt that they have already made a big impact in financial sectors with implications in the fashion industry. NFTs reduce friction in transactions and offer greater transparency and decentralization. The issues that remain with NFTs are that there is no single common network or agreed upon platform, there are various cryptocurrencies and tokens that exist in the space, and there are no regulations or legal frameworks in place yet. But all of this will be sorted out in due time as countries, like China, connect digital currencies to their central banks.

Just because there remain a few things that need to be worked out, NFTs still have the potential to be a valuable extension of a brand as they can connect and extend a consumer’s physical experience to the virtual one. Luxury houses especially need to stay alert so as not to miss the chance to connect with consumers on this new channel, as seen with LVMH’s Aura platform. Whether or not NFTs are here to stay, they have certainly piqued the interest of the rich, and there is money to be made and opportunities to be developed. The high prices of sales indicate that it is a real part of the future of art, fashion, and collectables in general. But, this does not mean that NFTs are a one-size-fits-all for retail or the fashion industry.

For the younger generation, cryptocurrency seems like a brave new world that they are excited about exploring. But before launching a full NFT summer collection, brands and retailers need to understand their current customer base and the customers they want to attract. Diving too deep into NFTs and cryptocurrencies too quickly could scare away loyal paying customers. Although this technology should definitely not be brushed under the rug as something that will pass with time, implementing and adopting it into a brand strategy should be done with a lot of thought and consideration. The risks just might outweigh the opportunities.

With this in mind, how should NFTs be approached by brands and retailers? Although future applications will arise, issuing NFTs that are linked to physical products to extend their value is currently the most strategic application of NFTs facing the fashion world. This allows brands to maintain visibility of their products, even as they go through the resale market.  Blockchain technology also has the ability to grant royalties to the original creators of NFTs for each transaction in the secondhand market. This provides an additional revenue stream for brands that are normally uncapturable. As the application of NFTs is still being discovered and experimented with, retailers and brands would be wise to partner with those who understand its capabilities whether that be to hire someone internally to manage the integration, join a consortium like Aura, or offer products on marketplaces like Lolli that offer consumers rewards in cryptocurrencies.

As the global pandemic has led consumers to demand transparency from all industries, especially related to sustainability and supply chains, this kind of technology is exactly what is needed to bring some light to areas that have historically been blurred. The discovery of NFT use cases is far from over as this technology offers benefits both to brands and their consumers. Although some applications of NFTs will fade, others seem to be here to stay.

Credits: IADS (Mary Jane Shea)