Bull Case for Fashion NFTs (and Why Brands Should Adopt Them)

NFTs have been in the limelight throughout 2021 and 2022, with PFPs leading the charge. However, looking toward the future, fashion NFTs have a lot of untapped potential. We will be looking into the bull case for fashion NFTs. To understand the potential of fashion NFTs, we have to, first, examine the current state of the fashion industry.

The Sustainability Crisis

As we can see from the Business of Fashion Sustainability Index, we are far away from sustainable fashion supply chains. Brands are especially lacking in the “Waste” category. This paired with environmentally unfriendly manufacturing methods has led brands like Gucci to commit to reducing their carbon footprint by 40% by 2025. While brand sustainability is slowly getting better, the growing market for fashion keeps on rising (see graph below). Keeping up with the growing demand while maximizing all-around sustainability will be a tough task to accomplish for brands.

However, what if a part of this demand for resource-intensive physical fashion, could be replaced by digital fashion? Developing consumer trends point out that this isn’t so far-fetched.

Generational Shift: Digital Identity

Gen Z spends roughly eight hours per day on mobile or desktop. Assuming they sleep eight hours on average, this is 50% of their waking hours.

Thus, it’s no wonder that 48% of players have paid for in-game skins with in-game currency (see below).

What this data indicates is that identities, experiences and fashion are increasingly shifting online. As a consequence, the wastefulness of the fashion industry paired with increasingly digital identities, mean digital fashion is not a question of if but when. Digital immersion will only increase with the advancements in AR and VR. As seen in the graph below projected AR/VR revenues in China alone will grow exponentially. By 2024, AR and VR revenues are projected at 300 billion Chinese Yuan or 44.53 billion USD, or more than double from 2022.

So how do NFTs play into this?

Authenticated Trading

The generational shift and increased preference for secondhand clothing have two important takeaways: 1) they indicate the sustainability-mindedness of younger generations, and 2) they’ve brought the resell culture into the mainstream. A thredUP (an online thrift store) report suggests that the secondhand apparel market will grow 126% by 2026, outpacing the growth of the overall apparel market.

So what is driving this growth? According to YouGov data, the biggest drivers of secondhand sales are value and affordability. Sustainability is a close third on the priority list.

The global secondhand apparel market is projected to reach $116 billion dollars in 2022. Crucially, not only is the secondhand market used to find apparel, it has increasingly been used for investment, or flipping, purposes, especially footwear. Exclusive grails such as Jordan 1s and exclusive Nike Dunks already fetch astronomical tens of thousands of dollars and as high as 103233% premiums.

Younger generations (according to StockX 60% of Gen Z males report using the platform) are beginning to see fashion as an equally, if not more, legitimate investment category as stocks. This is not surprising as culture is something they gravitate toward and often understand better than balance sheets and income statements. Moreover, the premiums for buying the right shoes are much higher than for most stocks. For instance, the RTFKT x Nike Cryptokicks NFTs play into this narrative. Yet, even with the success of secondhand platforms like StockX, Depop and Vestiaire, authentication of apparel is still imperfect as authentication is still performed mostly manually. This is why LVMH, Richemont and Prada have a private blockchain venture aimed at tracing and authenticating luxury goods. More importantly, NFTs could act as the perfect authentication. For instance, Louis Vuitton uses RFID tags in their bags in unison with blockchain to verify the authenticity of the items. Potentially more innovative than private blockchain solutions is the physical-to-NFT (i.e. public blockchain) technology. AmericanaNFT has developed a proprietary chip containing RFID technology that connects a physical item to the Ethereum blockchain, creating an on-chain counterpart of the physical item. It’s only natural that the secondhand market would start using NFTs in one way or another due to the improved authenticity, convenience and tradability that NFTs provide.

Why Would Fashion Brands Want to Issue NFTs?

First, from the legacy brand perspective. In addition, to the aforementioned sustainability, counterfeiting and digital identity potential, NFTs have the potential to 1) create deeper communities and 2) to target customers in new ways and receive secondary revenues from secondhand sales.

1) Create Deeper Communities

One of the main reasons why NFTs have garnered so much value and attention is their communal nature. NFTs have arguably created some of the strongest grassroots communities. More importantly, a very overlooked aspect is the community value creation capabilities of NFTs. Not only does this mean co-creation and increased incentives for user-generated content (market size of $3.6 billion and expected to grow by more than 5x by 2028), but extends to brand values as well. For the first time, brands can incentivize community activities in a transparent and efficient way. NFTs allow brands to find and reward their biggest fans and contributors, in ways that cannot be accomplished in traditional markets. This is something The Chainsmokers are exploring by sharing album revenue with their most loyal fans. This is important as brands are realizing that the best ad ROI comes from localized micro-influencers and brand champions who inspire authentic user-generated content. Brands can incentivize brand-aligned behavior e.g. by airdropping non-transferrable badges to participants in brand-led initiatives like sustainability campaigns, food drives, etc. These badges could then act as access tokens to a subcommunity or could give holders some sort of additional benefits. Furthermore, a digital community could answer the question: What happens after I buy a piece from Gucci, Prada, Adidas, Nike, etc.? You post on socials, then what? There is a tangible build-up toward buying the product but little tangible benefit after the purchase is made. Brands have so much latent intellectual property that could be used to create Web3 universe/community. Although some brands may enjoy this current model, as it keeps customers coming back for the newest styles, this leads us back to the sustainability question. What if brands wouldn’t have to rely on revenue via creating perpetual demand for physical products? Instead, alternative modes of revenue could come from upgrading existing products, selling digital apparel, secondhand royalties and providing access.

2) Target Customers and Receive Royalties

NFTs give brands the ability to target users based on their NFT holdings (brand or other NFTs), on-chain activity (e.g. staking) and even physical/metaverse activities (via participation POAP NFTs). For the first time, brands can track which pieces consumers hold, how many and for how long. In practice, brands could airdrop an item for collectors who own, say, three pieces from a specific collection. Alternatively, brands could see what customers are into (more historical pieces or the latest fashion?) which helps target their advertising efforts. However, with such transparency comes great responsibility. It has to be taken into account that, one of the reasons for the popularity of Web3 is its divergence away from the traditional platform and advertising models. Excessive (if any) targeting, could be taken as a negative sign by the community, driving down the secondary demand for NFTs. On the other hand, brands could capitalize on the sale of their items on the secondary market in better ways. OpenSea, the most popular NFT trading platform, allows creators of NFTs to set royalties on secondary sales (usually 2.5-7.5%). This means brands could be earning percentages in perpetuity on secondary sales of their items. This would allow e.g. luxury brands to move downstream and reach new customers who cannot afford retail prices. Currently, designer brands have largely no stake in the resale market, yet, the global resale market is set to double by 2025.

3) Digital Native Fashion Brands

The biggest shift in the fashion landscape will be the introduction of new digital native fashion brands. Current notable digital native brands include the likes of The Fabricant, Artisant, Cult&Rain and RTFKT (acquired by Nike). The only shop these brands have is in Web3. They don’t have physical stores, instead, they have digital storytelling and co-creation leading their brand growth. What makes these brands intriguing is the community members’ ability to directly influence brand storytelling and to participate in the upside of the brand, unlike what’s possible in Web2. Digital native intellectual property is created from the ground up, usually involving the community, to cater to the changing fashion paradigm. Especially gaming has introduced us to the need for digital communities and wearables, yet, opportunities for digital brands extend far beyond those. In sum, we are currently at the brink of the textbook Innovator’s Dilemma model. New firms (Web3 native) have entered with disruptive technology (NFTs) and as the technology meets performance requirements, these new companies will end up dominating mainstream markets.

Whether legacy fashion brands remain relevant in a changing world will depend largely on their ability to truly adopt new technologies, such as Web3.

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