For fashion brands, one of the more alluring prospects of NFTs is how they could hypothetically let brands collect royalties — in perpetuity — on secondary sales of their physical goods.
At its core, an NFT is just code on a blockchain, and creators can encode their NFTs with self-executing programs, called smart contracts, that are triggered by certain conditions. For example, a brand could sell a physical item linked to an NFT, and anytime the item was resold and its NFT transferred to a new owner, the NFT would kick a slice of the sale value — say 5 percent — back to the brand.
Given the staggering growth of the resale market in recent years, it’s an attractive proposition, allowing brands to benefit from the whole life of the item and not just the initial sale.
While the exact mechanics of how this system could function for physical products are still being worked out, these types of royalties are already widely used in NFTs. They’re often held up as an example of the web3 ethos and why it’s inherently beneficial for creators.
But technical loopholes that allow people to circumvent royalties have left creators unable to enforce them with code alone. They need the marketplaces where the NFTs are sold to step in. In the past they’ve typically honoured royalties, but the recent downturn in NFT trading has left existing and emerging marketplaces competing for what customers there still are. To attract collectors looking for the best prices and lowest fees, more are saying they won’t enforce royalties and will leave it to buyers to decide if they want to pay them.
Creators aren’t happy. Streetwear label The Hundreds, which is behind the popular Adam Bomb Squad NFT collection, abruptly cancelled the drop of its second NFT collection on the largest NFT marketplace, OpenSea, over its royalty policy.
The situation raises a big question for fashion brands looking at NFTs as a path to perpetual royalties: can the technology still offer them a way to capture a piece of every resale, or is the idea already a dead end?
Bobby Hundreds, co-founder of The Hundreds, said in an email that if royalties aren’t guaranteed on existing marketplaces, fashion brands shouldn’t expect they’ll be able to collect them either. Online, he has been calling for marketplaces including OpenSea to honour creator fees.
“Without creator royalties, Web3 loses its meaning and distinction,” Hundreds wrote in his email.
OpenSea, which wields an outsize influence in the NFT market, had said it would launch a tool to enforce royalties on new collections but wouldn’t make any changes regarding royalties for existing collections. On Wednesday, however, it reversed course, saying that after hearing from the community it would enforce royalties on existing collections as well.
But while these policies matter for fashion’s existing NFT projects, they could be moot when it comes to NFT-linked physical goods. That’s because the NFT marketplaces at the centre of the furor aren’t currently set up to trade physical items anyway. They would probably need to build new capabilities so users could include things like photos and descriptions, almost like integrating eBay into an NFT market. That seems unlikely anytime soon.
One possibility is that new marketplaces could eventually emerge specialising in NFT-linked products. Existing fashion resale companies could also add web3 services to their offerings, allowing sellers to list items with their corresponding NFTs. Of course, the same issues with NFT royalties could crop up in those instances too, but brands might have enough leverage to make sure they’re enforced.
Another solution for brands would be to create marketplaces of their own for buyers and sellers to trade their items. After all, luxury brands such as Balenciaga are already introducing their own resale programmes. (It might end up that only a subset of fashion products ever get paired with NFTs anyway, since the concept currently seems most useful for tasks like authenticating luxury goods.)
“This has been my thesis since day one,” said Gmoney, the influential NFT figure who partnered with Adidas on its NFT project and debuted his own NFT-linked luxury brand, 9dcc, earlier this year. “I want to drive all my trading and community experience to something that I can control and curate, not send it to OpenSea where I can’t really control what it shows up next to or what that user experience is like.”
Gmoney’s Admit One NFTs, which grant entry to the community he’s built, are able to be traded on other marketplaces, but he also has two marketplaces of his own: one for Admit One NFTs and one for 9dcc products, which so far just include a T-shirt but which he intends to expand on with upcoming drops.
Gmoney, who is in favour of royalties, said he doesn’t believe there may ever be a guaranteed way for creators, whether independent artists or big fashion houses, to fully enforce NFT royalties. There will always be people who find a way to get around the system. The goal, he said, is to get most customers paying them, and there are different ways to incentivise that. You can punish those who don’t pay royalties by blocking them from the benefits that would otherwise come with their NFT, or you could reward those who do with extra perks.
The topic is one many NFT creators are now puzzling over. Hundreds gave one example of a system where you earn points each time you opt to pay royalties.
“It’s almost like paying your dues. If you are all caught up on your creator royalties, you can access perks or the next set of NFTs or a special event,” he wrote. “As the days go on, the brightest thinkers in the NFT space are tackling this question, on which the balance of Web3 hangs.”
These workarounds make clear, however, that royalties are as much social contract as smart contract, which arguably defeats the purpose to some degree.
Meanwhile, companies still need to work out the best way to keep a physical good and a digital good tethered. Different players are working on these challenges, like Boson Protocol, which is trying to build commerce infrastructure for web3. But there are thorny issues to solve. Blockchain transactions can’t be reversed — an awkward fit paired with physical fashion, which is frequently returned.
Can fashion brands theoretically use NFTs to collect royalties on secondhand sales? Yes. Will they? That remains to be seen.
