NFTs are here, they’re weird, and they’re having an absolutely surreal and expensive impact on the global economy.
By now, you’ve doubtless seen some bizarre-looking headlines about non-fungible tokens (NFTs), the newfangled blockchain-based instruments that ostensibly allow people to own digital files as surely as they own their socks and shoes. Throughout 2021, bullish investors have snapped up NFTs of every famous JPEG, tweet, and GIF imaginable in a FOMO-fueled feeding frenzy with nary a second thought. Although this speculative bubble may now be bursting before our eyes, the strange capabilities of these tokens mean that they could be particularly well suited for a second life in the brand protection and counterfeit prevention space. Indeed, brand protection solutions that enable a digital/physical bridge between goods and NFTs are already in high demand across multiple markets.
The strange capabilities of these tokens mean that they could be particularly well suited for the brand protection and counterfeit prevention space.
But before we get to that, let’s explore the brief and wild rise of NFTs over the past few months: In February, an anonymous purchaser paid $600,000 to ‘own’ Nyan Cat as an NFT. For the uninitiated, Nyan Cat is a popular video from 2011 depicting a cartoon feline with a toaster pastry body that emits rainbows. The cat in the video was subsequently remixed and memed to death over several years. Now, supposedly, said purchaser owns Nyan Cat. For a similar example, consider the fate of ‘Disaster Girl’. The famous picture of a young girl smiling while a house erupted in flames behind her was taken in 2005, won a North Carolina photo contest in 2007, and took the internet by storm in 2008. In case you don’t recall, we included our own iteration in the thumbnail of this post. That girl, who’s now a college senior, sold the photo as an NFT for $500,000 in May. In a similarly successful auction a few weeks later, the viral 2000s YouTube video “Charlie Bit My Finger” sold for $760,000 (the new ‘owner’ has magnanimously allowed the video to remain on YouTube).
The list goes on. An attendee of the infamous 2017 Fyre Festival is currently trying to auction an NFT-linked tweet of a sad-looking cheese sandwich from the event for $80,000 to pay for a kidney transplant. In March, the New York Times published a piece titled “Buy this NFT column on the blockchain!” and followed it up two days later with “Why did someone pay $560,000 for a picture of my column?” The Perhaps most jarringly, a digital work of art was sold as an NFT-backed JPEG for $69 million at a prestigious Manhattan auction house in March. The most expensive painting ever produced by Salvador Dali garnered less than a third of that.
Make no mistake: NFTs are here, they’re weird, and they’re having an absolutely surreal and expensive impact on the global economy. While most of the action so far has been in the rather whimsical speculation of viral digital files such as those profiled above, the prospect of tying NFTs to physical objects is also being seriously explored for the purpose of brand protection. For our purposes, the most interesting potential application hereof is in the world of luxury goods, where the notion of using NFTs to track and authenticate high-value products is already making a splash.
For our purposes, the most interesting potential application hereof is in the world of luxury goods, where the notion of using NFTs to track and authenticate high-value products is already making a splash.
In a virtual Vogue Business conference in March, an executive at a prominent luxury brand opined that luxury brands will “inevitably” incorporate NFTs into their business models, a sentiment which was echoed by others. “There’s no reason today you couldn’t buy a bag, get an NFT,” said a former digital officer for a major luxury conglomerate during the same event. In late April, a consortium of top luxury brands announced their intent to cooperatively adopt an NFT-esque security system with the goal of creating an industry-wide defense against brand degradation and counterfeiting. One of the first real-world examples of this idea came to fruition when a specialty winemaker recently began selling their bottles with companion NFTs. The market was swift to follow, with new companies debuting NFT services specifically designed for fine wines.
At this point, it’s worth backpedaling a bit to explore what precisely NFTs are and how they actually work. It’s difficult to briefly summarize something that’s as novel, complex, and high-tech as NFTs for brand protection, but we’ll give it a shot here: essentially, NFTs are a variation of blockchain-based cryptocurrencies like Bitcoin. Blockchain, of course, is the extremely secure method of storing information in a communal database that’s been every tech bro’s favorite conversation topic for the last ten years. The “token” in NFT is the same as a crypto “coin”, except these tokens are programmed with unique characteristics that differentiate them from other types of crypto:
Non-Fungibility: As the name suggests, the most important distinction between NFTs and other types of cryptocurrencies is the fact that they are not fungible, but are instead deliberately designed to be unique, identifiable, and representative of differing items of unequal worth. This differentiation makes it possible to create a link between a particular token and a specific item that someone is willing to buy. This contrasts with both fiat currencies like the U.S. dollar and mainstream cryptocurrencies such as Bitcoin, in which identical denominations are identically valued and made to be seamlessly interchangeable with each other.
Indivisibility: Unlike Bitcoin and other types of cryptocurrencies, NFTs cannot be divided into smaller parts for use in transactions. Much as U.S. dollars can be broken down into cents to pay for small purchases, it is possible for a consumer in 2021 to pay for a pizza delivery with 0.0004 Bitcoins. NFTs are different because they only exist as singular, indivisible tokens. One whole NFT is representative of one single item, or a single bundle of multiple items.
Smart Contracts: One of the most significant aspects of NFTs is their ability to secure royalties for their creators in perpetuity. If desired, an artist or company who sells an NFT-linked product can decide that they get 10% of proceeds generated from all future sales and program the desired functionality into the NFT itself. First purchasers could also collect royalties from other downstream purchases, earning passive income as an item is sold to a third or fourth or fifth owner over the course of many years. Royalty rates are automatically enforced upon anybody legally purchasing the NFT-backed asset in question, enabling the creation of a recurring revenue stream for the complete lifetime of a product, no matter how many times it has changed hands or how many years have elapsed.
At this juncture, some obvious follow-up questions begin to present themselves. For example, how exactly is an NFT linked to a particular digital or physical item? Who is producing the NFTs that are used in these sales? Can’t I just download any of these digital files and have the exact same thing as an NFT owner does? How exactly could NFTs be used in a brand protection service? Not to fear: all of these questions (and more!) will be answered next week, in part two of this entry.