What exactly is a fashion NFT? How do global brands produce millions of it?

Want to spend $449,000 on a pair of sneakers? Let’s rephrase that: Would you spend $449,000 on a pair of virtual sneakers you can’t wear? You may or may not “just do it”, but someone did. Nike sold a pair of virtual sneakers from the Dunk Genesis Cryptokicks line – a line of non-fungible tokens (NFT) priced between $2,500 and $449,000 for a pair.

That’s not all. The iconic footwear brand has already earned $185 million in revenue through NFT drops. Dolce & Gabbana (D&G), Tiffany, Gucci and Adidas have also joined Nike in raising $240 million through NFTs so far, as they look to turn the digital asset into a serious source of additional revenue.

Taking a cue from their global peers, Indian fashion brands also jumped on the bandwagon at the peak of the NFT craze last year. Ace designer Manish Malhotra launched a five-part NFT collection – three hand-drawn sketches of garments, an old photo of former model Lisa Ray taken by the designer and a video from one of his shows. Designers Anamika Khanna from the luxury brand AK-OK, Raghavendra Rathore and Pankaj & Nidhi were also among the famous names who launched their digital artworks. Most of them were sold within minutes and for hefty sums. Malhotra’s sketch of a custom outfit designed for Kareena Kapoor called “Illuminous Showstopper” was sold for Rs 2.8 lakh.

But what is a fashion NFT, you ask? NFTs or non-fungible tokens are blockchain-based digital assets that cannot be replaced or exchanged for a token of similar value due to their unique characteristics. Sure, they can work for abstract categories like art or music or games. But how does an intangible digital asset make sense of tangible items like clothes and shoes? Do they have a purpose?

“While the concept of spending real money on clothes that don’t physically exist is a bit confusing, virtual assets are generating real sales,” says designer Malhotra – one of the first designers to launch a fashion NFT in the country. Fashion NFTs, for example, can be virtual garments worn in virtual worlds

Sure, it’s an additional source of income for designers. But what’s in it for the buyers? Not much, it turns out. A year after fashion joined the NFT craze, it has gone no further than offering expensive collectibles. Without valuable use cases for buyers, it has remained an ultra-niche category even within the nascent NFT market. “The unfortunate fact is that at this point most NFTs are only used for market communication to drive the hype. I can think of seven to eight uses. But people just use the word NFT and give away images of something,” says crypto expert Ajeet Khurana, founder of Web 3.0 firm Reflexical.

But why do NFTs need to have use cases at all? It is an asset class that works on supply and demand principles. Every time an NFT is resold, it generates a royalty for the original creator. For that to happen, it must provide impetus to the NFT holder to continue trading with them. “You can’t come, drop it and disappear. It doesn’t work. It is a responsibility to ensure that the person who bought it can sell it again. But brands (in India) have so far used it only as a marketing gimmick,” said Sandesh B. Suvarna, vice president of WazirX, which has an NFT marketplace. Any popular NFT collection has only made its millions by constantly providing value to its NFT holders, he adds, giving the example of Nike. The footwear giant acquired Web 3 company RTFKT in December 2021 to up its metaverse game. Half of the NFT revenues of $185 million are royalties earned through subsequent trading by holders. In addition, it generated over $1.3 billion in secondary volume.

But the overall NFT market is down in the dumps as trading volumes have crashed 97 percent since the start of the year, based on data hosted on crypto-related data platform Dune Analytics. Also, the Indian government has imposed a flat 30 percent tax on profits or income gains from virtual digital assets such as cryptocurrencies and NFTs. The NFT hype seems to have lost its initial euphoria, but some believe the crash is a necessary jolt out of an overheated market before it can find its footing.

Nike has already created a store “Nikeland” in the metaverse, and Adidas has purchased virtual land in the blockchain-backed virtual world of The Sandbox. Another virtual world, Decentraland, has also hosted Metaverse Fashion Week which had the who’s who of the luxury fashion world in attendance. Meanwhile, brands are also working on physical-digital bridges. D&G, for example, has used its NFT as a digital twin. Five NFTs from the series came with custom physical parts designed by Domenico Dolce and Stefano Gabbana themselves. Others are figuring out ways to offer exclusive benefits in the physical world, such as access to content or custom styles to build connection and loyalty engagement with their users. Gucci’s 4-minute film NFT ‘Aria’ gave buyers an exclusive insight into the design and production process by allowing them to experience the goods through virtual reality.

While brands globally are working to discover truly innovative tools to tap into the new class of buyers, that is not the case among Indian designers who are experimenting with NFTs. “It is probably due to the complexity around blockchain technology, obstacles in interoperability and lack of legal framework. The overall concept of NFT is understood, tried and tested, considering all the economics involved in it,” says Malhotra.