Would you believe it if I told you that in the past few years, multiple fashion designers around the world have raised millions of dollars to sell clothes that do not exist? Or that an upstart fashion brand, RTFKT, sold 600 pairs of “phygital” NFT shoes for more than three million US dollars in under seven minutes and was subsequently acquired by Nike last year? What are the investors and purchasers of digital fashion and phygitals thinking; are they crazy? NYALA says: Absolutely not!
This article is intended to explain what digital fashion and phygitals are, the enormous business opportunity that they represent, and how NYALA can help you launch your digital fashion brand in the metaverse. If you are a fashion designer and/or manufacturer that is interested in being early to the lucrative future of fashion, contact William at w.bailey@nyala.de to start a discussion.
Fewocious x RTFKT Phygital Shoes
Before moving further, let’s take the time to define what digital fashion and phygitals are. To do that, we first need to talk about the ‘metaverse’, which I will define as persistent digital spaces where people socialize, work, and play. In a way, thanks to social media and smartphones, a large portion of the global population already spends most of their waking hours in a rudimentary form of the metaverse. Advances in augmented and virtual reality technology are pushing us towards a more immersive and engulfing metaverse experience that our senses will increasingly be unable to differentiate from reality. As the technology continues to improve, the call of a simulated reality will be increasingly difficult to resist and more people will spend more of their life in virtual worlds than in physical reality. As people invest more time and energy into their digital identity, they will also place greater importance on social signaling to their peers in the metaverse.
Mockup of next-generation Google Glasses
This leads to the demand for digital fashion, which will be worn by the digital avatars people use. If you want to impress clients and friends in the metaverse, you are unlikely to present yourself with a hideous avatar. Instead, you will want to display that you have the means to dress your avatar in ways that others cannot afford or access. In short, digital fashion is fashion created specifically to be worn by the avatars that people use in the metaverse. Big companies like Meta envision this kind of future, which is why they are already selling digital fashion items from companies like Balenciaga and Prada in their “Avatars Store”.
Digital Balenciaga clothing that can be purchased in the Meta Avatars Store
At this point, you may ask yourself, how can something purely digital be valuable if anyone can make infinite copies of it? The answer is blockchain technology, which makes scarcity possible in a digital context; cryptocurrency is the monetary expression of this breakthrough and NFTs are the medium by which individuals can “own” anything else in digital form, including digital fashion. Furthermore, as the boundaries between physical reality and the digital world continue to melt, more and more consumers will demand that the items they buy can be owned and used in both the metaverse and the physical world. “Phygitals”, physical items with embedded tracking devices that link them to a non-fungible token (“NFT”) registered on a blockchain are now also becoming increasingly common. Existing fashion brands have taken notice and today, it is hard to find a major Western clothing brand that does not have some kind of digital fashion and phygitals strategy. In fact, LVMH, the Prada Group, Cartier, and other luxury brands have cooperated to create their own blockchain, named “Aura”, and are already using it to issue NFT-linked certificates of authenticity with their products.
NFT-linked certificate of authenticity now provided with Prada goods
The next question many have is, who would buy this stuff? The target consumer base for digital fashion and phygitals is still narrow but its constituents are, on average, young, wealthy, and always online. Hype beasts, professional gamers, and cryptocurrency “degens” are three of the most influential Internet-native communities that have developed in the past decade. Their ranks grow at an increasing rate with each passing year, as the percentage of humans that are always online increases globally.
The hype beast spends lavishly on “drip”, intentionally overpriced clothing and accessories with limited supply that often look absurd to outsiders, in order to “flex” on their peers and gain their admiration.
The gamer needs to be able to afford the latest and greatest gaming hardware to maintain their competitive edge and invests in “skins” for their avatars to show off to their peers.
The cryptocurrency degen has benefitted from the meteoric rise of the most profitable asset class in modern history and, despite the recent market downturn, still has plenty of capital to deploy into new forms of speculation while waiting for cryptocurrency prices to rebound.
Of all the possible products that can be marketed to these three groups, digital fashion and phygitals have found the earliest market fit due to the ubiquitous use of avatars in the metaverse. The savvy entrepreneur doing market research will notice some important traits shared by all three groups; they are, on average, flush with cash and eager to spend it on status items that impress their peers. However, what they consider to be a status item is generally very different from what the “normies” outside of their circles deem valuable. The implications of this are that established luxury brands need to work harder than usual to capture their attention and start-up fashion houses have a greater chance at capturing early market share if they can understand their tastes. The fledgling fashion houses that targeted these groups early on, like RTFKT and The Fabricant, have been extremely successful.
Augmented reality clothing designed by The Fabricant
So, what value is created by digital fashion and phygitals beyond showing off to your friends, family, and colleagues? Actually, quite a bit!
Phygitals combat counterfeiting and foster the development of healthy secondary markets, which encourages circular use of clothing rather than them being thrown away. While it remains trivial to counterfeit physical aspects of a phygital, it is not possible to counterfeit the embedded chip linked to an NFT on a blockchain. The chip can be scanned with any modern smartphone and verified as authentic by anyone on the spot. Linking physical items to NFTs makes counterfeiting more difficult, which enables more robust secondary markets to trade them because of increased trust in their authenticity. Consumers are then more willing to purchase expensive items because they are confident that they can resell them without issues, which also encourages more reuse of items. The original manufacturer can also benefit from automatic royalties earned on secondary market sales if they choose to include royalties in the smart contract. Luxury brands stand to benefit the most from the utility brought by phygitals due to the higher price point, rate of counterfeiting, and collectability of their products, which explains their speed in adopting NFT technology relative to other industries and segments of the fashion industry.
Blockchain smart contracts also increase capital efficiency. The owner can lend out digital fashion items in a trustless manner to earn yield on them when they are not using them, making it easier to market expensive purchases to consumers as investments. It also turns the fundraising model for fashion on its head: start-ups can raise money from the public through “Initial Fashion Offering” token sales and NFT sales, then use the proceeds to invest in the means of production to create phygital items and physical storefronts. These token investors and NFT purchasers are incentivized to independently evangelize and market your brand for you, as they are financially invested in your success. This dramatically reduces the need for and may be more effective marketing than budgeting for a traditional marketing agency.
Smart contract technology allows for interesting new product features, such as items that “evolve” in response to different digital or physical world stimuli. Nike CryptoKicks, for example, change appearance based off which “skin vial” is applied to them. This is the pinnacle of customization, deeply interesting to younger consumers. It also enables use cases that highlight group membership in interesting new ways, such as exclusive events that can only be attended by owners of the correct phygital items that are scanned at the door. Augmented reality technology can be leveraged such that only other owners of the same phygital item can see certain details and animations attached to your clothing as you walk by each other on the street. Nike’s augmented reality hoodie is a recent example of this concept.
The eight different “DNA” designs of Nike CryptoKicks phygital shoes
Nike x RTFKT’s augmented reality hoodie
Digital fashion is environmentally friendly because it aims to supplant some of the demand for physical clothing, especially “fast fashion”. Survey after survey finds that a shocking percentage of the population in developed countries admit to wearing items of clothing once before throwing them away. Social media largely drives this trend, as users will buy items of clothing to wear in one photo before throwing them away or returning them. The Ellen MacArthur Foundation estimates that the fashion industry generates roughly 10 percent of global CO2 emissions, more than all international flights and shipping combined. Digital fashion is an ideal solution to the fast fashion problem: social media users can superimpose items of clothing on themselves using augmented reality technology. The same photo and likes from followers are generated, without the pollution.
Digital fashion items have many advantages that will drive their rapid adoption but, in addition to their intrinsic benefits, the environment where they exist, the metaverse, is infinite and unbounded by the laws of physics. This opens up a huge amount of retail space that did not exist before and allows for the creation of items that are impractical and/or impossible to create in the physical world. It also eliminates the cost of opening and maintaining a physical retail space, which puts start-ups on a more even footing with retail giants.
NikeLand, Nike’s metaverse store in the Roblox video game
The field of digital fashion and phygitals is still wide open for the visionary and ambitious to capitalize on. The permissionless nature of public blockchains is empowering a new wave of young designers to launch digital fashion brands and raise money to fund their vision in ways that were not previously possible.
NYALA wants to collaborate with European fashion designers and manufacturers to bring a new wave of digital fashion and phygital brands to market. We will provide our market knowledge, German-regulated tokenization services, and simple custodial services needed to safely bring your brand into the metaverse. As needed, we can also help with things like marketing, fundraising, tokenomics design, and NFT brand strategy. If this proposal interests you, please contact William at w.bailey@nyala.com for more details.
Over the coming months, NYALA will publish more articles covering the burgeoning digital fashion and phygital industries from several different aspects. We will examine the technology and product strategies being used by start-ups and incumbents today and how they might change in the future. The goal is to provide the reader with a comprehensive overview of what is happening, where the market is going, and actionable insights that start-ups working with us can leverage for fast growth. We look forward to building this part of the future with you!
