The Potential of Web3 Commerce for Brands

Leading brands have started linking physical products to digital counterparts on-chain. “Real” Web3 commerce brings tremendous opportunities. Here's what brand leaders need to know.

In the past two years, almost 40% of Interbrand’s Best Global Brands have ventured into Web3. 

Brands like Nike, Gucci, Alo Yoga, Breitling, Adidas or Prada are exploring linking their physical products to digital twins to unlock new capabilities around:

• limiting supply

• authentication & provenance

• marketing and data

• secondary commerce.

Yet, we’re just scratching the surface.

We may be witnessing the dawn of a new era in commerce that could unlock trillions in value for brands.

Today, we’ll look at:

• Tokenization

• Phygitals

• Why brands are doing this

• “Real” Web3 commerce

• What’s next

Let’s untangle this. 

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This article is published in collaboration with Boson Protocol.¹

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The Foundation of Physical Web3 Commerce: Tokenization

In October 2021, I tweeted: 

Web 3.0 will open a metaverse in which all digital objects will live on the blockchain and most physical objects will have a digital twin.

Still, this is what’s playing out in front of our eyes.

The process of doing this is called tokenization. And its potential is huge: 

• Boston Consulting Group estimated last year that the market for tokenised assets could reach $16 trillion by the end of this decade.

• Roland Berger estimates the value of tokenised assets to reach $11 trillion by 2030.

They write that “Tokenization promises to redefine asset ownership and investment and we might just be on the cusp of a major breakthrough in its global adoption”. 

They also mentioned how tokenization could “overhaul traditional frameworks ownership, lowering transaction costs, bringing transparency and greater liquidity”.

Let’s make this more concrete.

Phygitals

During the last bull market, consumer brands have started to explore tokenization during by pairing physical products with their digital counterparts – often called"phygitals" or "digital twins" – on the blockchain.

The connection happens through NFC chips, QR codes or AI image fingerprinting². Users would verify ownership of a physical product by keeping a digital twin in their wallet. 

While various terms like "phygitals," "digital twins," "tokenized products," or "real-world assets" are in use, they all refer to similar concepts.

Take Nike as an example: 

• Nike pioneered the phygitals by acquiring RTFKT, a virtual sneaker brand, in 2021.

• In December 2022, they launched the Cryptokicks collection, offering 20,000 customizable sneaker NFTs to MNLTH holders (MNLTH is an NFT that Nike distributed to holders of its CloneX NFT collection, Nike’s first major collection). [Video]

• Owners could later exchange their NFTs for actual sneakers through Cryptokicks iRL.³

Other brands like Gucci, Breitling, and Alo Yoga are also blending digital and physical realms:

• Gucci offered 2,896 holders of its Gucci Material NFTs the chance to swap their tokens for limited-edition physical items (either a wallet or a bag) at no cost. 

• Breitling pairs some watches with a digital passport (an NFT) that unlocks special services and ensures secure trading and traceability.

• Alo Yoga provides NFT certificates for each piece of its Aspen Collection to verify rarity, authenticity and ownership. The NFT also unlocks VIP experiences, e.g. a personalized private client manager, admission to one Alo House, or a personal training session at one of the Alo Wellness Clubs.

To bring these concepts to life, brands collaborate with startups specializing in digital creations (such as The Fabricant, DressX⁴, RTFKT, Col Virtual Fashion⁵, etc.) or those linking physical goods to the blockchain (such as Arianee, KORE Technologies, IYK, Endstate, CollectID, Aura Blockchain Consortium, etc.). 

The world’s first piece of digital couture created by The Fabricant and worn by Johanna Jaskowska sold for $9,500. 

Why are brands doing this?

Tokenization allows brands to enhance their traditional business models with physical goods by leveraging Web3 technology.

But why Web3 ?

1. New audiences: It attracts a new, virtual-first, crypto-savvy audience.

2. More engagement: It boosts brand desirability, a brand's appeal and its perceived value in the eyes of consumers, through fresh, innovative experiences and personalization through data.

3. New products: It also paves the way for novel products, services, and business models, such as co-creation and token-enabled utility.

4. More revenue: Virtual sales have higher margins; secondary sales generate revenue for brands.⁶

Ultimately, it helps brands to increase their ROI.

Let’s make this more tangible with examples. Once a product is on-chain, the potential becomes limitless: 

• Genuine limited editions: Digital twins can transparently limit collections on-chain, removing the need to rely on the brand's word.

• Authentication & Provenance: Luxury brands such as Hublot, Bulgari, Dior, LVMH or Prada are working with the Aura Blockchain Consortium to bring digital twins of their products on-chain to ensure product traceability and authenticity. Upcoming EU regulation mandate a Digital Product Passport (DPP) for product traceability and life cycle information. Again, consumers wouldn’t need to rely on the brand's word and could easily verify the authenticity of a product.⁷

• Post-purchase marketing: NFT-based loyalty activations, discounts, event access or other token-gated experiences that are tied to a physical product. Brands such as 9dcc from GMoney, for example, track⁸ how often and when a clothing piece is worn and reward passionate wearers with additional benefits.

IYK’s “Links Module”: Owning an item is like holding a key that leads into your unique wwworld. It helps brands to reveal secret product drop pages, distribute unique discount codes, send exclusive event invites or tase new products

• More data: Physical products generate digital records of ownership and transaction. Start-ups like Addressable.io link wallet data to personal information, such social media handles. Others, like Web3Sense, analyze NFT holders behaviour, allowing brands to understand secondary sales and owner behaviors to create more personalized experiences.

• More revenues: For the first time, ownership of physical items can be verified and tracked online. Protocols enable consumers to trade their items peer-to-peer or use them as collateral. For brands, this creates secondary revenues. For consumers, products become liquid and tradable.

This is called Web3 commerce.

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Web3 Commerce

Sounds good, right? Here’s the catch: The benefits I've described hinge on the assurance that digital-to-physical redemptions are backed by decentralized protocols. What does this mean?

It means that if NFT holders can't be certain they'll receive the physical product without trusting the issuing brand or a centralized marketplace, then the NFT serves little purpose.

Web3 Washing

Without a blockchain guarantee, an NFT is essentially an IOU – a paper guarantee – from the brand.

Consider two scenarios:

• Primary commerce: Adidas and Bugatti recently collaborated on a limited-edition football shoe, auctioning 99 NFTs that correspond to physical items. Buyers must trust Adidas to deliver the actual shoe, risking receiving an NFT but no physical product.

• Secondary commerce: If you buy a Nike X RTFKT CryptoKick NFT and its physical counterpart on an exchange, there's no guarantee you'll get the physical item. You must trust the seller or the exchange to enforce the deal.

Many brands experimenting with phygitals have used this centralized trust model, which could be dubbed "Web3 washing."

So, how can we enable “real” Web3 commerce?

Real Web3 Commerce

Ideally, buyers would get a redeemable NFT with a cryptographic guarantee of receiving the physical item or a refund, without needing to trust any party.

Firms like Boson Protocol are building underlying infrastructure that enables this.⁹ Brands like Tommy Hilfiger have used the protocol to sell products in Decentraland, a virtual word, during its Metaverse Fashion Week.

Such protocols provide an answer to the fundamental question with the tokenization of any off-chain asset: What is the mechanism for claiming the good?

If a trusted intermediary is required, this retains costs, counterparty risk, friction, and monopoly power.

Web3 commerce protocols that minimize trust offer strong, verifiable assurances that the token holder will receive the asset or a refund.

This is similar to decentralized finance (DeFi), but instead of trading cryptocurrencies on decentralized apps, users trade real-world assets without needing to trust others.

This assurance could make these tokenized assets a cornerstone of a more programmable, interoperable, and composable Web3 economy.

If adopted broadly, this could unlock immense value, as real-world assets linked to NFTs could be traded over the Internet trustlessly.

The thesis stands that the next cycle will attract a wave of crypto-savvy consumers eager for genuine, innovative Web3 experiences, offering them a full range of uses for their virtual assets without being confined by brands or platforms.

Soon online? (Courtesy of Highsnobiety).

What’s Next

Across the internet, time spent in virtual spaces is on the rise, especially among Gen Z and millennials.

In the U.S., 38% of Gen Z spend over four hours a day on social media, and even more time consuming content or gaming—more than any other generation.¹⁰ As of February 2022, Roblox had nearly 55 million daily users. Minecraft has about 140 million monthly active users, and Fortnite around 80 million.

70% of Fortnite players said they’d bought special outfits and characters – for no in-game benefit other than looking cool.

In the latest Roblox study, 56% of Gen Z users now say styling their avatar is more important to them than styling themselves in the physical world. 50% “very” or “extremely likely” to consider a brand in the physical world after wearing or trying a brand’s item virtually. In 2023, total avatar updates grew 38% YoY to 165 billion, and people bought nearly 1.6 billion digital fashion items and accessories, up 15% YoY.+ 

McKinsey & Company estimates that by 2023, the metaverse could be worth up to $5 trillion, with its e-commerce impact alone ranging from $2 trillion to $2.6 trillion.

Today's consumers, particularly the younger generation, are always shopping, blending and experiencing multiple channels at once: social media, online platforms, in real life, on phones, laptops, and beyond.

The more time people spend online, the more digital value they create and consume, including virtual products.

These products become tools for self-expression. For brands, they become tools for richer storytelling and brand experiences.

The quest for identity and social recognition is universal – whether it’s offline or online, young or old. This urge is strongest among Gen Z. They are purpose-driven and constantly seeking out brands that match their values or help them express themselves better.

For these digitally-native consumers, owning a brand’s virtual products might just be a top-of-the-funnel gateway drug, as they spend increasing amounts of time online to create, earn, and invest in virtual assets.

Real Web3 commerce can offer brands a new way to authentically extend their reach and engage with consumers where they spend their time and express themselves: online.

Talk soon,

– Marc

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1. As the author, I maintain full editorial integrity and the views and insights expressed are my own, ensuring the content remains unbiased and authentic.

2. This is done by using only visual cues such as color, size, shape, and skin patterning to create a multidimensional reference image, unique to that item.

3. Those sneakers are equipped with smart technologies, including auto-lacing, enhanced lighting, haptic feedback, walk detection, and artificial intelligence algorithms. 

4. DressX, a pioneer in the digital fashion sphere, recently unveiled its new line of apparel on Roblox. Furthermore, this year saw the successful execution of the second-ever Metaverse Fashion Week, hosted in the virtual world of Decentraland.

5. Renowned for its innovative tools, CLO Virtual Fashion offers a range of resources, including fashion design software that integrates seamlessly with Epic’s Unreal Engine.

6. Secondary revenues are enforced through royalty fees encoded in an NFT. However, royalty fees have come increasingly under pressure. Read more here.

7. Aura Blockchain Consortium is an example of how blockchain can used to create digital twins or passports that contain the required data. They also create traceability tokens on the Blockchain linked to NFC chips, QR code or AI image fingerprinting. They are blockchain agnostic and support their own private blockchain and public blockchains.

8. This happens by linking POAPs to NFC chips.

9. This is done in the form of a forward contract, encoded within smart contracts and tokenized as redeemable NFTs. The majority of disputes are managed by a game-theoretic algorithm embedded in the protocol's smart contracts. Any escalated disputes are directed to decentralized dispute resolvers. The outcome is a trust-minimized process for tokenizing, exchanging, and settling real world assets.

10. Nearly all (95%) American teenagers aged 13 to 17 report using TikTok.