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The tremendous potential of luxury NFTs

If NFTs are harnessed correctly, they could transform the luxury industry as we know it.

23 Aug 2021by Geoffrey Lyons

Imagine a company that can turn a profit by selling clothes you can’t actually wear. Look no further than DressX, a “digital fashion” brand that sells augmented reality clothing. Customers “wear” the clothes virtually, through an AR filter much like what one would find on Snapchat or Instagram. Some items, like those in the Atari-inspired fashion line, run for around $30-40. Others, like Gary James McQueen’s gold dress, are ten times as much.

Paying a premium for non-existent clothing may seem absurd at first, but it’s no less absurd than paying a premium for a handbag, watch, perfume, or any other tangible item whose quality is comparable to a much cheaper alternative. That’s luxury, and the predominant hallmark of a luxury good is that people buy it because it’s luxury. According to Investopedia’s article The Psychology Behind Why People Buy Luxury Goods, “people perceive non-luxury goods as inferior simply by virtue of them being non-luxury.”

A DressX webpage
A page on DressX explains the ideal photo conditions for wearing digital clothing ( Image source)

This seemingly circular reasoning rests on a fundamental principle, and it’s the same principle that gives value to non-fungible tokens: scarcity.

“[A]n NFT’s value is set by market demand, and its individuality often pushes this higher,” writes The Drum’s Rumble Romagnoli. “This is the same scarcity principle that the luxury industry uses regularly: for example, how Hermès’ iconic limited edition bags, such as the Birkin, drive a frenzy around obtaining one.”

It’s partly because NFTs and luxury goods both rely on the scarcity principle that so much buzz is being generated around their potentially explosive combination. But there are also some pain points in the luxury industry that NFTs could help resolve, and these are worth fleshing out.

Digital storytelling


“Story, as it turns out, was crucial to our evolution,” writes author Lisa Cron in her book Wired for Story. “More so than opposable thumbs. Opposable thumbs let us hang on; story told us what to hang on to.”

This applies no less to stories behind consumer goods. We already know how important it is for a brand to tell a story — “brand storytelling” is practically its own subgenre in the world of marketing. But according to Grant Wenzlau, Director of Creative Strategy at Day one Agency, consumers are also becoming more and more interested in the underlying story of the items they buy.

For luxury brands, this means demonstrating, for example, that products are ethically sourced, sustainably certified, created ​​using certain materials and artisan techniques. But beyond all that it means showing that products have a past and a future — it means telling a story.

A picture of a Patek Philippe ad
An example of storytelling: Patek Philippe, a Swiss luxury watch manufacturer, sells its product as a potential family heirloom ( Image source)

Currently brands rely on marketing to do this, but NFTs offer something better: blockchain. The blockchain is perhaps the best way to tell a story about a product because, in a sense, the blockchain is a story — a complete, unalterable record, beginning with the Genesis Block.

“We’ve come a long way from cave paintings,” writes  Hackernoon’s Mohit Mamoria. “The blockchain world [makes] it easier for everybody to tell a great story.”

While everyday products like a computer or a gallon of milk don’t need a story, many luxury goods, from Rolex watches to Bentleys, regularly use narrative to imbue their products with sentimental value. NFTs, and the blockchain technology that underpins them, will help luxury brands tell these stories better.

Authentication


Just as NFTs are now being used as a way to combat wine fraud, so too can they help in what Jing Daily, a publication covering China’s luxury market, calls the industry’s “perennial fight against counterfeits”. According to the OECD, fake goods represent about 3.3% of global trade, a sizable chunk of which are luxury items (the most seized luxury goods are sunglasses, watches, and leather items).

London-based fashion consultant Adam Andrascik came up with an interesting solution: using NFTs as “digital twins” to physical luxury goods, allowing owners to trace the product’s provenance.

“You can trace who made the item, what raw materials were used, what was the factory that made them,” Andrascik tells GQ. “There's a transparency in the supply chain, from inception of the item all the way to its original sale."

But authentication goes beyond transparency because NFTs are counterfeit-proof. In the words of business lawyer Michael Cea, they’re “indissolubly encrypted”, rendering counterfeit impossible.

“While a Vuitton handbag can be (more or less) easily counterfeited, an NFT associated with the same item cannot be duplicated,” writes Cea, who believes NFTs can put an end to all luxury counterfeiting. “Once the majority or all of luxury goods are correlated to NFTs, counterfeiting will probably be defeated.”

People want luxury because it’s luxury, but the high price is a barrier to entry for most (more on that in a moment). These two basic facts, which fuel the industry, are also what generate counterfeits. In other words, counterfeiting is a feature, not a bug — it’s caked into the luxury business model. If NFTs can be as much of a deterrent to counterfeiting as Cea predicts, then they could transform the industry as we know it.  

Greater access


Speaking of barriers to entry, these may as well be considered a requirement for luxury brands. If some customers weren’t priced out then a brand would lose its exclusivity, which is often what makes it attractive. Economists even have a name for goods whose demand rises as they become more expensive: Veblen goods (named after the economist Thorstein Veblen).

What this means for a luxury business is that lowering prices in the hopes of expanding one’s customer base isn’t just impractical in that it might not cover the costs of producing expensive items, it also can do damage to one’s brand image.

A picture of a Grey Goose ad
Grey Goose vodka is an example of a Veblen good. Sold as a “premium” vodka, its price tag doesn’t correlate with its quality over competing vodkas ( Image source)

But there’s a way around this: a luxury brand could simply expand its range of products. Can’t afford a Mercedes S Class? That’s okay, you can buy a Mercedes umbrella. Tom Ford Tuscan Leather too pricey for you? Try Tom Ford hydrating lip balm.

You see where this is heading. If you don’t have $1,000 for a Paskal designer dress, you can spend $50 for a digital version. If you don’t have $1,000 for Gucci sneakers, you can spend $12 for digital Gucci sneakers.

“Just like how a Chanel lipstick is more accessible to customers than a Chanel handbag,” writes Vogue’s Anna Tong, “luxury brands can use NFTs to give more customers access to their brands.”

What’s more, dipping into NFTs will give luxury brands first-time exposure to crypto investors, most of whom will be equally new to luxury. Depending on what data you look at, the average crypto investor is a 38-year-old white male. Gucci’s target market, by contrast, is 18-24 year-old women. While it may take time for these very different demographics to coalesce in a way that makes sense to each other, NFTs will be the gateway for this merging of worlds to occur.

Introducing Dolce&Gabbana’s digital + physical NFT collection


MoonPay collaborated with Dolce&Gabbana and UNXD, a digital luxury and culture marketplace built on the Polygon blockchain network, on their launch of Collezione Genesi—the world’s first digital and physical luxury NFT collection.

Click here to learn more about the partnership