The NFT market has crashed. Long live NFTs.
Could NFTs be the next big thing in the crusade against counterfeiting? Non fungible tokens (NFTs) and the blockchain technology behind them have serious potential to change the definition of 'ownership' forever. However, many unknowns remain. In the previous entry, we promised to answer several questions about how NFTs work, both in the context of the ‘ownership’ of digital files and in linking NFTs to physical objects for the purpose of brand protection. Let’s jump in!
Virtually all of the NFTs that you’ve read about throughout the first half of 2021 were produced via a blockchain network called Ethereum, which is managed by the nonprofit Ethereum Foundation and other developer groups. The individuals who owned the IP for Disaster Girl, Nyan Cat, and the other popular assets covered last week were able to substantiate their ownership and use the Ethereum network to monetize their assets. This allowed the digital files in question to be stored inside designated NFTs and sold in online marketplaces. When a sale is made, Ethereum facilitates the transaction and moves the NFT from the digital wallet of the seller into the digital wallet of the buyer. Because the entire transaction is taking place within Ethereum’s infrastructure, they are able to impose smart contracts as a condition of sale. While Ethereum spearheaded this type of transaction, other entities are capable of performing similar operations.
While the NFT market for memes, tweets, GIFs, and YouTube videos has plummeted in recent weeks, the same type of transaction can theoretically be applied to physical assets as well. Indeed, the wild digital speculation over the past several months has set an important precedent. Now, it’s understood and accepted that actors in the private sector can create NFTs, arbitrarily assign them to particular assets, and substantiate this connection within real-world economic systems. While it’s not totally clear whether one can truly ‘own’ a GIF, it has been proven that one can own a unique digital token which is agreed to be exclusively representative of said GIF by the GIF’s creator, the NFT’s producer, and a non-trivial share of the global investor class.
If it works for a GIF, would it work for a handbag? Or a car? Or any other physical object? The short answer is: nobody really knows yet. The obvious difference between the two use cases is that you cannot simply download a perfect duplicate of a physical object (like how you can totally download the Disaster Girl image that sold for $500,000 here whenever you feel like it...). However, this might mean that tangible luxury goods are actually a better fit for NFTs than digital files are.
The wine company mentioned in the previous entry is one of the very first corporations to attempt this in practice. Interestingly, it appears that they have decided to auction bottles and their companion NFTs as two separate lots, writing that “The [price] estimates below are for the wine only. The value of the NFT will be decided by the market and is not included in any estimate”.
The best way to connect an NFT to a physical object, if such a thing exists, is not currently known. However, in this case it seems reasonable to assume that the company in question is taking unique identifying information that’s already present on luxury alcohol bottles and simply duplicating it within the code space of digital tokens. So while it’s not possible to store the bottle itself inside of an NFT (in the same way that one can store a Nyan Cat video), it is possible to store serial numbers and other information that can be used to authenticate the product or object in question.
Now that we’ve covered the ‘What’ and the ‘How’, it’s time to address the ‘Why’. Aside from the transient free publicity that may accompany this buzzy system, why would a company want to incorporate NFTs into a brand protection or anti-counterfeiting system? Our short list is below:
1. NFTs are extremely secure, immutable, and long-lived
The security of a properly developed blockchain infrastructure cannot be overstated. Once minted, it is essentially impossible to alter the information contained within an NFT. NFTs continue to exist inside of their respective blockchains in perpetuity, outliving more conventional forms of documentation.
2. NFTs can offer an ironclad proof of purchase and authenticity
If an NFT is definitively tethered to a product (granted, this is a big “if”), it is prohibitively difficult to create a convincing forgery or knockoff. Think of NFTs as deeds or titles that are protected by unbreakable encryption, instantly accessible by those who legitimately hold them, are not made of physical matter, and cannot altered, changed, or destroyed. It is easy to see how this would erect an enormous barrier for would-be counterfeiters.
3. NFTs create and reinforce scarcity and exclusivity
NFTs have already managed to generate substantial demand for digital files that can be instantaneously and perfectly duplicated by anybody at any time! NFTs for things that are actually scarce or exclusive, such as luxury products, would likely have a salutary effect for those who control their supply and production.
4. NFTs can create an enduring, brandable digital experience
The code space inside of an NFT can be used for more than just unique identifying information. A consumer interacting with their NFT would see whatever the issuing company or companies want them to see, and it would be impossible to alter or omit this content once the NFT is minted. For example, in addition to a wine bottle’s serial number, the seller and even Ethereum itself could use NFTs to store their logos and brand materials, links to their websites, advertisements, information on the precise type of wine in question, the location of the vineyard where it was produced, comments and reviews by others who have tried the same wine, etc.
5. NFTs can provide a workable economic model for the resale of high-value products with long lifespans via smart contracts
The programmable royalties offered by smart contracts are compelling for corporations not only because they offer a clear path to recurring revenue for items that have long lifespans and multiple owners (imagine a car manufacturer imposing a 1% fee on all resales of all their vehicles forever), but also because they would disincentivize some consumers from knowingly purchasing counterfeits. Would you rather buy a knockoff luxury watch for $150, or a real luxury watch for $800 that you could sell for $500 and collect royalty payments on for years afterwards?
At this time, it’s difficult to parse out whether NFTs are really a silver bullet for brand protection. The idea of linking physical products to NFTs is only just beginning to be explored, and there will likely be many practical hurdles to work out in the months and years ahead. However, it does appear that the characteristics of NFTs lend themselves well to the brand erosion problems faced by many large corporations – particularly those of luxury brands. The industry is already taking action on this front, so don’t be surprised if NFTs have a long and prosperous second life that’s very different from what we saw in the first half of 2021.