How Digital Fashion Will Accelerate Mainstream Adoption of NFTs

The NFT market is growing exponentially and creating massive market opportunities for both virtual consumer products and enterprise infrastructure. I recently wrote about fintech use cases for NFTs, specifically exploring how NFTs can be used to generate passive, supplemental income for their owners. While I’m convinced that the market for consumer fintech NFTs will be huge, I think a different category will incentivize broad NFT adoption in 2022: fashion.

Before diving into this hypothesis, some quick context on the fashion industry and precedent for fashion-oriented NFT applications.

While NFTs were arguably a media darling of 2021, the percentage of consumers actively buying NFTs remains extremely small, relatively speaking. As mentioned in my earlier post, “as of June 2021, roughly 4.1M Americans, or just over 1% of the population, had bought or sold NFTs (source). Comparing this utilization level to other technology adoption cycles helps illuminate the nascency of the NFT market. In 1991, for example, internet penetration was ~1.2% (source).”

I think the fashion industry has the ability to massively increase the number of people actively participating in the NFT market for a few reasons.

First, fashion is a highly ubiquitous market — put simply, everyone buys clothes. (While deeply nuanced, measuring by number of users, a market doesn’t really get bigger than this). In 2019, in the US alone, consumers spent nearly $380B on fashion.

While most NFT applications, to date, have been oriented around collectibles, art, and gaming, several noteworthy fashion-oriented applications for NFTs launched in 2021. High end designers catalyzed this movement, likely because their offerings have considerable overlap with art and collectibles from a valuation and potential appreciation perspective. This year, Rebecca Minkoff launched a NFT collection at New York Fashion Week and Dolce and Gabbana dropped its first NFT project, generating over $5M in sales. The collection most notably featured a glass suit NFT, which sold for over $1M. The owner will also receive a “real world” version of the piece, custom tailored to his measurements. (source)

This fall, more “mainstream” brands have followed suit. Adidas launched a project in conjunction with Bored Ape Yacht Club (source) and last week Nike also acquired RTFKT, a virtual footwear brand. (source) Details of the sale were not disclosed, but it was projected to be in the $300–500M range from friends in the industry. In 2022, I think we’ll see dozens of “everyday” consumer labels get into the web3 and NFT space.

Lastly, historically speaking, digital clothing has been largely gaming oriented — specific use cases range from simply “flexing” a cool style to unlocking special in-game abilities and features. What’s important here, however, is that there is an established precedent for consumer spending on digital wearables. (I wouldn’t consider myself a gamer, but The Sims did consume a meaningful part of my allotted computer time in elementary and middle school. Interestingly, in reflecting back on why I was so obsessed with purchasing “expansion packs,” it wasn’t for the additional game features, but rather for the associated digital clothes, hair styles, accessories, etc.)

With this context in mind, looking to 2022 and beyond, there are a subset of specific drivers that I believe will motivate brands and consumers to adopt wearable NFTs in a meaningful capacity.

Why Brands Will Adopt Wearable NFTs:

Brands will be compelled to adopt digital fashion and NFTs for both “reputation/perception” and “business” reasons (which are often deeply interwoven and correlated). More specifically, I think the following three motivators will catalyze mainstream brand implementation of NFTs: cost reduction, novel marketing opportunities, and customer retention and loyalty, largely driven by new methods of authentication.

Cost Reduction:

It’s relatively easy to wrap your head around why producing and distributing virtual fashion pieces is cheaper than doing so in the “real world”. To produce digital products, brands don’t have to spend on physical supplies, labor, equipment, etc. Furthermore, as highlighted by massive Covid-19 induced supply chain complications, selling digital goods gives brands back control of their production and distribution processes (in a sense, the ultimate vertical integration).

It’s also worth noting that, as digital product revenues become meaningful percentages of total sales, brands may start to be valued more favorably. Generally speaking, companies that sell physical products command smaller revenue multiples (to determine enterprise value) in comparison to their SaaS counterparts. As fashion brands begin ramping up their digital native product offerings, they may start to be valued at higher prices in the public markets.

Novel Marketing Opportunities:

Wearable NFTs also unlock a host of new marketing opportunities for brands. Most notably, NFTs have the potential to completely disrupt influencer marketing. Rather than shipping influencers physical products (which is incredibly costly and time intensive), brands can temporarily grant influencers wearable NFTs for specific use cases, settings, or events. This also introduces opportunities to pay influencers based on “wears”, or wear duration, versus social posts.

Customer Retention and Loyalty:

As we increasingly interact in digital “worlds”, brands must build more multidimensional relationships with consumers that go beyond transactions. NFTs, across categories, are specifically designed to facilitate these types of relationships — owning an NFT has a “basic” utility (you can show it off), but also theoretically a host of additional benefits that are derived from ownership. For consumers, owning a specific brand’s NFT could unlock access to exclusive shows, experiences, opportunities to work on product development, custom pieces, and more. Essentially, NFT projects will become the loyalty programs for web3. (The pressure for brands to build deeper, multifaceted relationships with their customers is further supported by a host of data showing that consumers spend more when they interact directly with brands, versus through resellers. A recent study conducted by The Harvard Business Review projects that this increase in spend could be as high as 86%.) (source)

Offering wearable NFTs also enables brands to “prove” product authenticity. I discuss this further below in regards to consumer motivations for adopting digital wearables. But, to summarize, creating verifiable items increases perceived scarcity, and accordingly loyalty, from customers.

Why Consumers Will Adopt Wearable NFTs:

From a consumer perspective, my hypothesis that fashion will drive widespread adoption of NFTs in 2022 is rooted, in part, in the theory of “competitive consumption.” This theory suggests that many people spend on consumer goods as a means of signaling belonging to certain social groups (that they may or may not be legitimately a part of). For example, a high school student may spend months of her savings on Balenciaga sneakers to “fit in” with a wealthy peer group at school.

Social media has exacerbated the applications of this theory. Consumers can now, theoretically, buy designer clothes, take and post photos on social media, and then return their purchases. Viral social trends such as “OOTD”, or “outfit of the day”, intensify the pressure to utilize fashion in one-off occasions to signal social status.

While I don’t love the utilization of fashion to symbolize social status, the underlying consumer motivations here highlight massive tailwinds for digital fashion and NFTs. More specifically, wearable NFTs provide consumers with three main value propositions in conjunction with this theme: unlimited optionality, social flexing, and verifiable, digital identities.

Unlimited Optionality:

Fashion NFTs will enable consumers to utilize digital clothes and accessories for specific, short term use cases. A great “real world” parallel here is Rent the Runway, but for the virtual world. Because fashion NFTs are digital, they can be rented for minutes or hours as opposed to days or weeks. A consumer, for example, may elect to “rent” a digital outfit for a specific event in web3, and “return” it shortly thereafter.

DressX is an emerging company in this space that’s acting as somewhat of a bridge between web2 and web3 for fashion. The platform enables a consumer to transpose digital clothing onto actual, real world photos of him or herself, which he or she can then share across social platforms. I think we’ll see DressX and others get into highly customizable and bespoke fashion offerings in a way that’s historically been unscalable for brands, and unaffordable for the bulk of consumers.

Social Flexing:

While the “optionality” of digital fashion and NFTs certainly encourages social flexing (e.g. posting a photo of a digital designer outfit that’s been transposed onto a photo), there’s another key attribute to NFTs that make them ideal for digital flaunting: authentification. Counterfeit products pose huge risks to designers, specifically around quality assurance and brand perception. However, these are also risks for consumers. Let’s say you spend $10,000 on a Rolex to flex or subtly communicate something (possibly subconsciously) about your personal brand, status, standing, etc. to your peers. If dozens of others spend $100 on counterfeit, but seemingly authentic, Rolex watches, the “value” of your watch decreases due to a perceived decline in scarcity.

Now, imagine how this scenario would play out in web3 with a virtual Rolex represented by an NFT. The authenticity of the NFT is verified, and that verification is viewable to others via a publicized identification. (Twitter is leading the charge here, with it’s recent introduction of badges to signify NFT profile photo authenticity). For consumers, investing in “flex” worthy pieces becomes much more enticing when an item’s authenticity is clearly perceivable to others.

Verifiable, Digital Identities:

Building on the themes discussed above, I ultimately believe that NFT collections, across all categories, will become the social profiles of web3. Consumers will showcase their NFTs to represent their identities — what clubs they belong to, events they’ve attended, brands they’ve purchased from, and so on. Given that fashion has always been a cornerstone for personal identity, and a tool for social perception, I think this narrative will continue into web3.

It’s also worth noting that in the “real” world, a consumer’s visual identity is somewhat confined to what he or she is wearing at that moment (and more importantly, who sees them wearing it). The inevitable “showcasing” element of NFTs introduces the opportunity to publicize one’s taste and brand preferences through a public, digital closet of sorts. Beyond specific brand names, digital clothes and accessories have the opportunity to communicate what consumer cares about. Sustainability, for example, is a massive concern for Gen Z. NFT wearables will enable consumers to publicize that they’ve elected to support brands that prioritize sustainable production practices. (As an aside, clothing produced virtually reduces waste and emissions by 95%+, which will likely drive wearable NFT adoption in and of itself). (source)

Looking Forward:

There are still hundreds of open questions regarding digital wearables, and how to facilitate adoption for brands and consumers alike. Regarding this macro question, a few sub-themes I’m exploring are:

1. How do we move from web2 to web3 within fashion? Or, taking another step back, how do we move from physical retailers selling physical products to both the retail experience and the products existing in digital settings? I suspect there will be a good amount of overlap before an official jump is made. In other words, consumers will be able to buy digital items in a physical setting (which opens a host of other questions about crypto in-person payment infrastructure needs). Additionally, as we’re already seeing, brands will likely offer products that consumers can own both physical and digital versions of (e.g. the glass Dolce and Gabbana suit).
2. What set of web3 design tools will support and enable the creation of digital goods? Flybridge was an early investor in Fable, a web2 motion graphic design editing software tool. We’re actively looking for the platforms that will support brands and creators in web3.
3. What types of NFT wearables will pull in Gen Z consumers, who are sustainability focused(and thus thrifty versus label obsessed) in comparison to their millennial counterparts? Where is the value of authentication for thrifted or “labeless” digital fashion?

As always, if you’re building in or thinking about this space, I’d love to meet you. You can reach me at julia@flybridge.com