Tldr; Consumers have always voted with their dollar. Now they can vote with the possibility of profit.

NFTs are quickly gaining traction in the fashion industry. But what are non-fungible tokens and how do they fit in with the industry’s status quo?

NFTs are a digital asset class that create scarcity in the virtual realm. They can do that by warranting exclusive ownership - an unprecedented capability in the internet’s history-, which in turn makes virtual items unique and tradeable. Scarcity is needed to a) compensate creators in an equitable manner and b) monetize virtual content without creating dependency and sacrificing privacy, on platforms and of consumers, respectively.

NFTs are an essential building block of web3, the next wave of internet culture. Web3 is an evolution of web2, an era of the internet mostly associated with the introduction of the mobile web and social media. Web3 builds on and disrupts some of these advances in pursuit of decentralization, democratization and reorganization of power, capital and ownership, respectively. The goal being an internet with more transparency, equity for creators and incentives for patrons.

Ownership = Power

Before the advent of NFTs, digital ownership had existed in other formats, often tied to specific platforms or networks. Prominent examples include domain names, in-game assets or even social media handles, which arguably were never owned but rather borrowed from platforms like YouTube or Instagram. Ownership had been warranted by a third party, despite transactions being made and with ownership being highly dependent on long-term success or at least existence of the respective middleman. Social media platforms are just one example of centralized power over content. Being able to tokenize items has allowed creators, such as artists, musicians or influencers to monetize ownership rights they previously had no market power over.

Web3 promises a shift in power balance, namely from companies to creators, users or community members, grounded in technology applications that are meant to encourage said balance. As such, NFTs warrant power over owning end-user relationships and controlling means of distribution and monetization of content, thereby lifting the reliance on gatekeepers, empowering creativity and enabling economic sustainability for creators.

Community As a Business Model

Financializing virtual assets doesn’t only benefit creators. It also creates numerous opportunities for consumers, i.e., NFT holders. NFTs make it possible for buyers to become owners, and thereby active participants in the value development of the underlying asset. At the same time, the value of the NFT hinges heavily on the community around it and how engaged they are. The more buy-in a project gets, e.g., the bigger the motivation to get involved and participate, the higher the worth of the token. This is a core dynamic of the cryptocurrency environment, which builds on a common agreement between token holders to promote the token and which typically results in exponential marketing.

Engagement and potential success of an NFT project live off the value they provide to holders. Beyond extrinsic motivators, such as potential financial gains, being part of a community of like-minded individuals with shared interests or even shared investments can be an added value, which buyers can tap into by acquiring specific NFTs.

What are Fashion NFTs?

Fashion brands have engaged with virtual iterations of clothing time and again. Back in 2006, Adidas released a pair of virtual sneakers through a virtual store on ‘Second Life’, a popular online game and life-simulation network. More recently, Louis Vuitton designed skins for ‘League of Legends’ players available to purchase within the game. So what makes NFTs different?

NFTs can be traded seamlessly with their ownership records logged and stored on a blockchain, for provenance and immutability, respectively. These features are what distinguishes fashion NFTs from other, historical types of non-physical fashion, such as items or skins that can only be worn or traded in specific games, commonly referred to as digital fashion, and virtual fashion that can be worn by avatars or used as filters on images but that cannot be traded or ported into other digital realms. Depending on their properties, fashion NFTs may be worn, ported and traded seamlessly, making them far more versatile than their predecessors. Even though non-physical fashion isn’t a new concept, fashion NFTs – like all NFTs – are still in their infancy. As a result, the level of engagement within the industry varies dramatically.

There are various reasons why brands would dive into NFTs, beyond the possibility to generate hype and eyeballs. For instance, some brands may launch NFTs to diversify product categories, especially as covid-induced supply chain bottlenecks threatens their physical product turnover. NFTs are also an opportunity to showcase products and connect with consumers virtually, while physical stores are in lockdown. Beyond that, and in the run-up to become a post-waste industry, virtual fashion could also be a sustainable alternative. As the NFT space gains more traction, brands have an interest in staying in charge of creative ownership and execution and want to protect trademarks and intellectual property (IP) in the digital realm. Staking their claim in this fast-growing economy likely animates brands to set up (virtual) shop quickly, both to experiment and to participate, i.e., to prevent FOMO.

What use cases & utility do fashion NFTs have?

• Fashion NFTs can be used as wearables, loyalty or membership rewards, like access and benefits, can vouch for authenticity and warranty as product IDs and allow brands to gauge demand for physical items.
• Fashion NFTs offer creative, financial, social and multiversal utility. They can be an investment or collectible, can signal status or belonging to social groups, are interoperable and harness creativity, either through expression or co-creation.

What exactly can NFTs & web3 do for fashion?

The potential of NFTs and the promise of web3 are gladly welcomed in an industry notorious for its inequity. Creators are craving more recognition and democratization, while consumers are beginning to grasp the consequences of their ever-demanding clothing needs. Not only do NFTs promote more equity and transparency, they also offer novel mechanisms for consumer interaction and engagement, which have the potential to upend the consumer-brand relationship as we know it. In doing so, they are challenging some of the industry’s core dynamics and offer alternatives to some of its inherent issues.

Brands have long operated on generating attention and using third-party platforms to reach consumers. This notion is being challenged and replaced by offering consumers true value, namely ownership. With the offer of ownership, brands harness consumers’ engagement, while creating the basis for collective brand building. As brands embrace this concept, they turn increasingly community-lead, paving the way for permissionless brand development.

At the same time, granting holders ownership over virtual assets ultimately creates the basis for value-based consumption, where the added value for the consumer lies in the overall interaction, rather than the actual product. This means that consumers choose purchases based on their personal values and interests as well as on how valuable the purchase is in terms of the intrinsic and extrinsic returns it may generate. As a result, consumers a) are more likely to engage with brands they can identify with, see potential in long-term and deem worthy their time, involvement and money and b) treat purchases as investments, or cultural stock. In line with that, consumers are rewarded for their ambassadorship by profiting from the value development of their assets.

The more consumers and creators demand value and equity, brands will have to offer incentives that align with these desires. In the past, brands have acted as demand-generative trendsetters and curators who determine what consumers ought to desire. Web3 will challenge brands to become increasingly demand-responsive, meaning they will have to follow consumers’ desires rather than set them. By adapting their value propositions to allow their community to participate and engage more closely, brands can in turn build stronger relationships.

As with any evolution, web3 also comes with caveats. The more brands open up operations and co-create with their community, they risk compromising cohesion, which could dilute the brand and its equity. At the same time, they might jeopardize community alignment if they choose to remain inaccessible.

In creating a valuable virtual product offering, brands should focus on reflecting their values and considering new metrics, such as community satisfaction and stickiness. If done in an authentic and committed manner, brands can thereby leverage the potential of their community and harness collective power, to develop their business further. Brands that fail to do so, risk tarnishing their reputation and those who dismiss the technology altogether may end up compromised, as they’ll compete with web3-native or -proof brands.

The following factors provide guidance on how to successfully launch NFTs and become web3-proof: