Not a passing trend but a seismic shift in digital economics and likely here to stay, this new shift in the tech world is catching up faster than anything seen in recent times. From celebrities to brands, everyone is talking about launching their own NFTs. Simply put: it is a digital asset that is impossible to hack into. Luxury fashion just got a new tool.

A recent 2021 headline from a well-known fashion business e-zine reads “Gucci Is Selling $12 (Virtual) Sneakers,” thereby setting the stage for additional creations of digital products which complement their physical twins and feed the current frenzy for NFTs.

The NFT phenomena opens up new revenue streams, creates brand affinities with new consumer segments and keepsakes for crypto art collectors; as such, it’s not a passing trend but a seismic shift in digital economics and likely here to stay.

What’s an NFT?

If these call letters are not familiar to you, no need to embark on a lot of tedious readings to catch up. Here’s the quick read:

•NFT stands for Non-Fungible Tokens. “NFT” means the tokens which are exchanged as proxies for the value of an agreed upon price for the digital twin image item that is being purchased, and do not fluctuate. It is not at the mercy of currency speculation as are standard currencies such as the yuan or US dollar.

•Each token has a unique digital stamp which cannot be altered or forged. As such, they also serve as digital certificates of authenticity.

•Because every transaction is “logged” onto the blockchain, transparency as to source and ownership is in the public domain.

•This appeals to all who are committed to the authenticity, transparency and provenance value in the sustainability quest—most notably, luxury brands.

How is value created?

NFTs create value based on similar psychological consumption drivers found in the non-virtual collectibles market.

•Just as baseball cards are traded again and again, often at rising market prices, or a sneaker culture driven by “sneaker-heads” drives the original cost of the item up many times over, a similar crowd culture exists and trades items in the digital twin NFT aftermarket.

•The original creators/owners retain their trademark, copyright or design patent rights to the original and in fact can collect royalties for all subsequent re-sale transactions. For brands, selling and integrating the physical product with its virtual twin produces an added revenue stream.

•This, and the fact that NFTs converted from digital files can be issued (“stamped”) as ten to a set or 100, etc, creating “limited” editions or numbered copies, both protects the rarity quotient, generating added value, while enabling the market price to be driven by demand by those wanting to participate in a limited community and owning a part of its uniqueness. Both are key value identifiers for luxury brands.

What is luxury’s strategy?

Luxury brands have been innovative leaders in the virtual world where art, fashion and technology intersect with gaming, memes and crowd cultures, and some are beginning to do so with NFTs, as the latter emerge from this milieu.

•The value drivers for NFTs mirror luxury’s enviable resiliency-innovation, rarity, provenance, scarcity and authenticity.

•Initially, luxury will be less inclined to see NFTs as added revenue streams, but more as cultural leadership and loyalty brand plays.

•As such, luxury brands will manage the accessibility/availability fulcrum and apply this brand management strategy to NFTs. Selective access to products and limited editions will continue to ensure that even if luxury consumers may one day bring their NFT handbag into a gaming platform, the value quotient will remain and most likely increase.

How is luxury staging its “grand entrance”?

Launched by LVMH, it begins with the Aura Consortium, a ground-breaking collaboration among competing luxury brands to use a single blockchain to ensure their business values and brand equity are insulated from counterfeits and from the vagaries of sourcing and provenance.

•LVMH, Prada, Cartier, Bulgari and Richemont, among others, are already using the platform.

•Consumers will be able to access the brand profiles on the platform.

•With Gucci seemingly in the lead and some five others poised to follow, the current market buzz says “it is only a matter of time” when luxury brands enter the NFT market. The Aura Consortium offers a staging area for a relatively seamless transition to placing them on this platform as well.

What are the ethical challenges?

Luxury as both a culture and a business model has made the case that sustainability is in its DNA. Its commitment to heritage, craftsmanship and the value of rarity while refusing to accept that fashion necessitates obsolescence and its resulting inherent waste are all values consistent with luxury. Yet, here’s the challenge:

•Creating an average NFT consumes the equivalent in energy of driving 500 miles in a typical gas engine US automobile.

•This generates over 200 kg of earth warming carbon.

•The use of blockchain—the platform needed to “store” NFTs—adds to the carbon footprint excess,

•at unimaginable levels.

•Unless the energy source is carbon free, the added usage does not decrease the effect but increases—it becomes less efficient!

The ethical challenge to luxury will include these realities.

This article was first published in the June 2021 edition of the print magazine.