If you’re in any way plugged into the blockchain space, you’re probably sick of hearing about NFTs by now. Just a few months into 2021, we’ve seen everyone from reputable auction houses to musicians cashing in on this latest chapter of cryptocurrency speculation.
We’ve heard all about the crazy sums changing hands and the escalating demand for digital collectibles – but much less on what NFTs mean for the future of online commerce at large.
Are NFTs just a short-lived online fad? Or do they represent a much bigger shift in how we consume both content and products?
That’s why Whiplash is bringing you this major deep dive into the quirky (and sometimes confusing) world of NFTs and digital commodities. We’re here to answer one key question: What can NFTs offer ecommerce merchants as virtual consumption grows?
NFTs, or Non-Fungible Tokens, are digital assets backed by blockchain technology that can be purchased via a digital wallet or cryptocurrency. A token can be used to represent anything from a JPEG or GIF to an audio file containing a recording.
This is where NFTs differ from ebooks or music on iTunes. When purchasing an NFT, a person is buying the ownership of that particular token, not just a license to access it. This enables them to retain ownership for as long as they want or to sell it to a new buyer.
In essence, an NFT can be used to house just about anything that’s considered to have some kind of special appeal.
In 2021, we’ve seen NFTs go from a little-known blockchain to one of the hottest trends in the art and fashion world. In the space of just a few months, the market has been inundated with NFTs featuring everything from videos of LeBron James to digital artworks by the musician Grimes.
Last month, the graphic artist Beeple sold a digital file for an eye-watering $69.3 million at Christie’s – the third-highest price paid for work by a living artist. It’s hardly a surprise that such big numbers have caught the eye of major brands, with the likes of Gucci now working on bringing their very own NFTs into circulation.
As more businesses selling real-world products look to cash in on this space, this sets the scene for an NFT market that trades in more than just digital commodities.
It’s easy to see the craze around NFTs as completely illogical. Why fork out tens of millions of dollars for an intangible ‘thing’ that you can probably access elsewhere?
NFTs have quickly become the digital equivalent of obtaining original artworks rather than buying a reproduction. They might look identical on the wall, but only one person can have the privilege of owning the real thing.
Moreover, the highly collectible nature of NFTs can be seen in all kinds of tangible consumer goods. A super-rare YuGiOh card is ultimately just a piece of cardboard. But it’s the rarity of that specific design – and the prestige of ownership – that fuels the demand for it.
Because every NFT is one of a kind, this increases the face value of tokens far beyond what they actually represent. Combine this with their relative scarcity, and you have the recipe for a hot new consumer trend.
NFTs are housed within the Ethereum blockchain, the second most popular cryptocurrency after Bitcoin. Ethereum was created as a ledger technology to facilitate smart contracts, which enables an NFT’s exchange of ownership from one individual to another.
Put simply, blockchain is a decentralized method for storing information via massive peer-to-peer networks. Data is held in so-called ‘blocks’ which are stored in chronological order and time-stamped for authenticity.
Although blockchains systems differ, they all have the following characteristics:
For about blockchain, check out our dedicated post on the topic.
It’s undisputed ownership that has made NFTs a sought-after commodity. However, this doesn’t mean that the asset held by an NFT cannot exist elsewhere outside of the blockchain.
If the file is shared on the web, there’s nothing to stop it from proliferating once it’s out there. But regardless of how widely available an asset might be, the NFT will always be considered the ‘true’ or original version.
Technically speaking, NFTs are a form of cryptocurrency. However, the way they function is very different from other mainstream cryptocurrencies.
For example, bitcoins remain the same entity no matter how many you trade back and forth. Although they each carry a unique signature, one bitcoin carries the same value as another. It’s a fungible asset that’s easy to replace.
NFTs, on the other hand, are akin to comparing oranges with apples. Some NFTs hold videos, while others hold images. And if two NFTs did contain an image, it’s not going to be the same one. This is what makes tokens ‘non-fungible’ as their value differs depending on the asset they represent.
On the web, the lines of ownership and IP become increasingly blurred as assets multiply or undergo changes by others. This is a major problem when it comes to creators receiving credit or payment for their work.
NFTs allow artists and creators to distribute their work in a way that retains usage rights. Even if it’s sold onto another individual, the blockchain will still verify the identity of the creator. NFTs can even be set up to allow artists to collect royalties every time an artwork changes hands.
A great example of this is the viral GIF Nyan Cat. Its creator Chris Torres sold an updated NFT for the equivalent of $587,000 USD in February 2021. Nyan Cat first gained fame in 2011 after another creator combined the animation with a Japanese pop song and uploaded it to YouTube. By selling ownership of the GIF, Torres effectively reclaimed his status as the original artist while giving fans the opportunity to literally own the beloved character.
As we mentioned earlier, the appeal of NFTs is that they’re the perfect collectible; the blockchain makes it easy to verify authenticity and ownership, no matter how many versions of that asset might exist elsewhere. In essence, buying an NFT gives that person bragging rights to the ‘real’ version of an asset that’s considered cool or desirable.
When they develop widespread recognition, brands themselves can become valuable commodities – even when it’s divorced from something tangible. Why? Because the impression of a particular good can still confer the owner with higher status. Paired with the scarcity of the NFT market, this inflates the perceived value of a product or design.
By this point, you’re probably wondering: How can NFTs possibly be useful to online sellers who trade in physical goods?
On the surface, the move away from tangible products might appear to pose a threat to ecommerce merchants. But as NFTs transition into tokenizing physical as well as virtual items, they represent an entirely new source of revenue opportunities.
With the consumer marketplace still highly product-centric, pairing NFTs with real-world items offers brands a way to appeal both to early adopters and their more traditional customer base. By enticing more consumers to dip their toe into the world of blockchain, customers can be primed for bigger virtual experiences in the future.
Nike is making the biggest strides into this space by securing a patent for an NFT-based line of sneakers known as ‘Cryptokicks’. Using its own blockchain system, Nike will pair real-life sneakers with an NFT counterpart so that customers can enjoy using their purchase in unique ways such as digital artwork.
It’s worth noting that sneakers have become some of the most in-demand NFTs. Metaverse designer RTFKT was one of the first to take advantage of the existing demand from ‘sneakerheads’ for one-of-a-kind footwear offerings. In 2020, one real-life/virtual pair was sold was for the equivalent of over $13,000 USD – a space that Nike is clearly hoping to cash in on.
As the NFT market grows, there are going to be numerous opportunities for other product categories to cash in on this demand for hybridized products.
eCommerce has always experienced one major disadvantage to brick and mortar; no matter how rapid home delivery becomes, it will never be able to compete with the immediacy of buying a product in-store and taking it home.
Even with same-day delivery options, consumers still experience the friction of delayed gratification. This means it’s becoming harder and harder to compete for brands that cannot meet such tight delivery deadlines.
A hybridized product catalog of NFTs and physical goods allows merchants to fill this experience gap. If tangible products come with a virtual NFT, customers have the ability to take instant ownership. Even if there’s a wait of several days for the actual item, its virtual equivalent allows consumers to engage with their purchase on a more creative level.
By offering products that don’t have shipping or storage costs, merchants can also increase the scope of their product catalog while increasing their profit margins on each sale – overcoming many of the logistical challenges present in ecommerce.
Loyalty programs have been present in online commerce from the very beginning as a way to incentivize repeat purchases. But their current allure is more limited than many businesses may realize. According to RetailWire, nearly 40% of consumers choose not to join loyalty programs because they are seen to lack value.
Perks such as discounts on products are lacking appeal when it’s so easy for consumers to shop around elsewhere for a better deal. For a loyalty program to be successful, it needs to offer genuine value. This means flexibility and choice over how consumers redeem their hard-earned points.
Offering NFT collectibles adds an entirely new dimension to your loyalty program. Rather than just redeeming points on products that everyone has access to, NFTs are entirely unique offerings that customers cannot obtain anywhere else. This creates exclusivity, which adds value to your program by not limiting it just to monetary exchanges.
As NFTs become increasingly mainstream, their blockchain-backed verification systems are also likely to become appealing in industries that struggle are frequently undercut in a competitive online marketplace.
For example, couture designers are often undermined by fast fashion brands, who can launch cheap copycat items at their stores within weeks of a fashion show. If garments also came with an NFT that functioned both as a personal signature and deed of ownership, their perceived value would increase.
Augmented Reality already has widespread applications within ecommerce, especially by D2C brands that lack physical storefronts to showcase products. Warby Parker added huge value to its brand back in 2017 by developing an AR app that allows prospective customers to ‘try on’ different styles of eyewear before purchasing.
NFTs allow merchants to take this a step further by offering 3D visualizations of their own products as offerings in and of themselves.
We’ve already seen this form of virtual self-presentation work in the realm of in-app purchasing, where gamers can pay for additional perks that enhance the in-game experience. Final Fantasy players, for example, now have the option to purchase from a Louis Vuitton collection designed exclusively for the game.
Our digital selves carry just as much weight as our physical selves – if not more – in the social media era. Wearable NFTs rendered properly for AR allow consumers to ‘dress’ themselves in the very latest fashion trends, without the lag caused by manufacturing or distribution. This has the potential to bring activities such as influencer marketing to a whole new level of accessibility.
Consumers love scarcity. The sudden popularity of NFTs is a prime example of how perceptions of value are shaped by supply. The harder something is to obtain, the more desirable it is. As NFTs grow more mainstream, they challenge perceptions of digital goods as being ubiquitous and lacking in material value.
Content is still king. Despite their complex blockchain foundations, NFTs need one thing to exist; content. Without the high demand for unique and interesting content, NFTs would have little reason to exist. It’s a big signifier of how engaging content has become a necessity for brands to maintain consumer interest in the face of such intense marketplace competition.
Some analysts are saying that the NFT ‘bubble’ has already burst, with the average price of NFTs in early April having dropped 70% from their peak in February 2021.
But does this really mark the ‘end’ of the mainstream NFT market so soon after it began? Or, can take it as a sign that it’s ready to mature into something more than just cat cartoons and videos of NBA legends?
With such a broad spectrum of potential applications, NFTs are definitely not going to disappear anytime soon. This so-called ‘first wave’ of NFTs has demonstrated just how eager consumers are to embrace virtual experiences that are neither products nor services.
But as the buzz surrounding the concept of undisputed digital ownership begins to die down, we can expect to see something of a bottleneck before brands are ready to debut their NFT offerings en-masse.
The short-term challenges to widespread NFT adoption are obvious; at the current time, relatively few consumers own any form of cryptocurrency. Until there’s greater understanding and trust in blockchain systems, NFTs will continue to have niche appeal.
However, are there some promising developments in this area. Australian startup Neuno is at the forefront of developing a platform that allows consumers to buy wearable NFTs via credit card. As the barriers associated with blockchain transactions are removed, we’re set to see NFTs hit ecommerce in a big way.
Furthermore, it’s clear that our definition of ‘real’ is rapidly changing. As consumers invest increased time and effort into how they present themselves virtually, monetary investments into how we appear online will become more regular. As the virtual becomes a bigger extension of the real, the idea of spending currency on intangible goods will cease to be a radical concept.