Business

Real World Brands Are Experimenting With NFTs

Non-fungible tokens, or NFTs, are a lot like sneaker drops: They come in limited quantities, depend on sky-high demand and stir speculative crazes in the resale market. It should come as no surprise, then, that Nike, Adidas and Under Armour have dipped their toes into the market. For brands like Nike or Adidas, NFTs could take the form of a collectible digital sneaker or one that an owner might actually wear in the virtual realm—say, in a videogame or in the metaverse. In some cases, an NFT comes with both the digital shoe and the right to a future delivery of a real one, serving as a kind of tradable ticket for the physical product. Nike made a big step in that direction last month when it acquired RTFKT (pronounced “artifact”), a startup that creates NFTs of sneakers and other collectibles. Early NFT drops have been successful: Both Under Armour and Adidas’ debut NFTs last month sold out quickly, with Adidas selling US$ 23 million worth within hours. Those that own Adidas’ “Into the Metaverse” NFTs, which cost roughly US$ 765 at debut, are now selling them for more than US$ 2,500 on NFT marketplace OpenSea. Under Armour’s virtual sneaker collection Genesis Curry Flow NFTs fetched US$ 333 at initial sale last month and are now priced anywhere from US$ 551 to over US$ 15,000. Eye-popping returns are nothing new in the sneaker market, of course. Air Jordans that had a US$ 65 price tag in 1985 fetched US$ 20,000 last year on resale platform StockX. NFT skeptics abound, but when it comes to a highly sought, expensive item, a digital one stored on the blockchain is far easier to authenticate, transfer and to sell than a shoe or a painting. Perhaps more important, while brands don’t get a cut every time a sneaker is resold, they can do so with NFTs because royalties can be baked into a blockchain. RTFKT, the virtual sneaker creator that Nike acquired, takes a 5% cut of every sale (and resale) of an avatar and 10% for all other products, including virtual shoes. That royalty structure alone probably makes NFTs worth exploring for the likes of Nike, which could use tokens as a way to presell physical products. That is already the case for Adidas’ debut NFTs, which offer the holder virtual wearables and the right to redeem them for free exclusive physical products: a hoodie, a tracksuit and a beanie. Channeling sales through NFTs also would allow companies to take a direct slice of the fast-growing sneaker resale market, which was estimated to be worth at least US$ 6 billion globally as of 2020, or about the size of Nike’s revenue in China circa 2019. Cowen estimates that the resale market could reach US$ 30 billion by 2030. And of course the NFT market itself is growing furiously: In 2020, just over US$ 100 million worth of NFTs changed hands. Last year Chainalysis estimates that grew to US$ 44.2 billion. Virtual sneakers won’t weigh apparel brands down with inventory or supply-chain snags. They do come with other risks, though. Some NFTs are sold on energy-intensive blockchains that charge wildly varying “gas fees” for each transaction. NFT buyers might also face surprise tax liabilities in the future. And digitally savvy crowds also are harsh critics: As much as a great product can garner hype, a shabby-looking one can quickly get “canceled.” Analysts points out that brands will have to think about how quickly they can scale scarcity in the digital realm. Roughly 5% of Nike’s products are “hype,” or limited releases, according to Piper Sandler estimates.