How NFTs Can Solve Authentication & Why Brands Will Never Use Them
You seemingly cannot have a conversation these days without the word “NFT” being thrown into it. There’s no doubt that they are the flavor of the week, and everyone is trying to figure out just what the fuck is going on in the world when a picture of a cartoon ape is selling for $7M. There are people who have quit their job and dumped their life savings into NFTs saying that they are the future and there are people who think this is the biggest ponzi scheme since Madoff. The fact of the matter is, both groups may actually be right. The conceptual technology behind NFTs is sound, and there are no doubt real use cases for it. It’s also true that everyone benefits from getting the next guy to buy in, the literal definition of a ponzi scheme. I can debate NFTs with people for hours, but I want to focus in on one aspect of NFTs, which is that they are the perfect modality to replace the certificates of authenticity that we all receive with our watches, and yet I don’t believe that any major brands will actually implement them any time soon.
An NFT (non-fungible token) is essentially, for lack of a better analogy, a unique item that lives on the blockchain forever. The blockchain is like a database, except that it isn’t controlled by any one person or company — it is decentralized and distributed across millions of computers across the internet. Think about it this way — when you buy a Patek from the boutique, there is some sort of database in which the sales rep is logging the fact that you bought a certain model with a serial number. That database however is controlled by Patek or perhaps an authorized retailer, which means that at any point, someone has the ability to go in there and muck with the data if they so wished to. That database is also siloed and only the brand has access to the data in it, none of us in the general public can access it. If instead Patek was using the blockchain, an entry would be made on the blockchain saying that wallet XYZ purchased a certain watch with a certain serial number, and that record would remain on the blockchain forever. It is (in a perfect world) immutable and incorruptible, and also always accessible for anyone to lookup.
You can see now why an NFT would serve as the perfect replacement for paper-based certificates of authenticity. A brand could mint an NFT the minute a certain watch was manufactured and link the NFT and that watch via the serial number. When the watch is allocated to a certain retailer, the NFT of that watch would be transferred to the retailer’s wallet, and when the retailer sold that watch, the NFT would be transferred to the end consumer’s wallet. Along the way, there would be a chain of custody on the blockchain that could be viewed by anyone with an internet connection. You might not know exactly who the person is that currently owns the watch (wallet addresses can be kept anonymous), but you can at least see when it exchanged hands. In a perfect world, if the monetary transactions were also taking place on the blockchain via cryptocurrency, we’d be able to see exactly what price was paid each time the watch exchanged hands as well.
The benefits of this system are obvious — we can stop wasting paper and killing trees right off the bat (in a perfect world of course as currently the energy consumption of blockchains is kinda nuts). More importantly, paper can easily be lost and even more easily faked. The blockchain would solve a number of operational headaches while making transactions safer for everyone. Now this isn’t to say that this is a perfect system with no loopholes. An obvious one is that someone could still make a fake watch with the same serial number as the real one, sell the fake along with the NFT, and keep the real piece. However, that real one will now have very little market value as there is no certificate of authenticity in the form of an NFT that comes with it (and no way to get a replacement), and so while the person does have a real watch in their possession, its market value is potentially that of a fake now. When you think about it, even in the age of traditional certificates, it’s the paper in many ways that holds much of the value as it proves that the watch is real (or at least it is supposed to). It’s so much easier to fake paper certificates though, and ideally NFTs that have been minted on the blockchain will make the process of faking certificates significantly harder. All this should make you think that it’s an absolute no-brainer for watch brands to adopt NFTs — they will make a dent in the authentication problem (even though they won’t be able to fully solve it) while also solving the flipping problem that they all claim to have, as they would immediately be able to see a transfer of the NFT on the blockchain when a watch was sold. So why won’t they do it?
Leaving aside the fact that these are not tech companies, the biggest reason that I don’t believe major brands will embrace the blockchain is because they absolutely do not want the transparency that comes with it. The watch world, like many other industries, thrives on the opaque nature of the business. The blockchain would shine a massive light on the actual transfer of these pieces in real time, and that is very likely something that brands simply do not want. Take for example a distributor who never even sends product to the retailer and instead sells it to the gray market for over retail. Or the retailer who never sells the product to an end consumer and instead lists it as pre-owned at 2x retail on their own site or on chrono24. These are all things that would become very obvious if we could see the chain of custody of the watch on the blockchain. But perhaps the #1 reason none of these brands want the blockchain is because it would immediately highlight their reliance on the grey market.
The grey market is nothing unique to the watch industry. Probably the best analogy is what happens in the ticket market in the US. If you’ve ever wondered why you can’t buy a ticket at face value even to see the trash ass New York Knicks over the past decade, it’s entirely because of grey market ticket brokers — these are people who cut a deal with the ticket sales group at the team on day 1 before the season has even started, and commit to buying say 500 season tickets. Let’s say the average price of these tickets is $250 a pop x 41 games x 500 tickets = $5.1M. Not a shabby haul for 1 day of work for the team, and that’s before anybody even knows how the team is going to perform that year. You end up with your star player tearing an ACL, and all of a sudden demand for tickets drops dramatically. The grey market essentially serves as a hedge for the team against a poor performing product on the court. Pretty much every single pro sports team in the US cuts a deal like this every season to guarantee a certain amount of ticket revenue. They have no downside now — all the risk falls on the grey market, but if the team continues to perform well, they will use dynamic pricing to jack up the price of whatever primary inventory is still available, to match what the secondary market prices are. Meanwhile, the grey market dealer is going to lose money on the games when shitty teams are in town, but will make a killing when Steph Curry and the Golden State Warriors come through.
With watches, it’s pretty similar, albeit the supply is much smaller than tickets, though the average price is several standard deviations higher. An AD will offer a grey market dealer a package of a million dollars worth of watches that will include complete duds that nobody wants to buy as well as hype watches. The grey market dealer is essentially taking a bunch of risk off the table for the AD by doing this, but is being rewarded by the ability to sell the hype watches for a massive profit while potentially losing money or breaking even on the duds. This is no different than the “bundling” that many stores offer to end consumers to be able to get hot pieces, it’s just that it’s being done at scale here, many many times over the course of a year. And this of course is the #1 reason why retailers, distributors and brands are going to continue to fight the adoption of NFTs and the blockchain, because there will quite literally be a paper trail of exactly where these watches have gone and the time frame in which they moved.
For years I heard sports teams give lip service about how it was so unfortunate that fans can’t get access to games at face vaue and they blamed the scalpers and bots for buying up all the tickets. I always thought it was so ridiculous that the teams couldn’t find a simple tech solution in conjuntion with the ticketing providers to solve the problem. Then I realized it isn’t because the solution doesn’t exist, it’s because they don’t want to use it. I anticipate we will continue with the status quo in the watch market for the foreseeable future. Grey market dealers serve an important purpose — whether you think what they do is right or wrong is simply a matter of personal opinion. We live in a free market society and watches are not regulated. All stakeholders from the brands down to the consumers are free to do as they please with their products. If it takes away from the joy of the hobby for you, well, as the saying goes, don’t hate the playa, hate the game!