The beauty of NFTs

Posted on 27 October 2021

NFTs – non-fungible tokens – have become a buzzword of 2021, with newspaper headlines frequently featuring the latest NFT release. However the narrative has been somewhat dominated by the sky-high prices that some NFT collectibles, such as NBA Top Shot, have achieved at auction, leading some sceptics to question their wider relevance and potential longevity. Now, however, beauty brands are pivoting the conversation, as an increasing number are successfully deploying NFTs to boost customer engagement, enhance the customer experience, and foster brand loyalty across a much wider fan base. In this article, we outline three key issues brands should consider prior to launching an NFT.

NFTs and Beauty: The Opportunity

Brand engagement

As we discussed in a previous article, an NFT is a unique, non-divisible token, often linked to an object (e.g. a collectable or digital art) which uses blockchain technology to record ownership and validate authenticity. Examples in the beauty industry include E.l.f Cosmetics' launch earlier this year of NFTs representing digital gold renditions of its three best-selling products, and NARS Cosmetics' commissioning of three artists to create NFTs inspired by its infamous 'orgasm' product line.

Both beauty brands adopted three key strategies to engage a broader cross section of consumers, (beyond the world of crypto and gaming):

  1. Leveraging their hero products to tap into an existing fan base and create a hype around the NFTs. E.l.f marketed the NFT with a Tik Tok activation to ensure wide circulation.
  2. Limiting the number of NFTs to foster a sense of scarcity and drive up demand (E.l.f only released 9 NFTs altogether).
  3. Restricted the price in a bid to define the NFT beauty marketplace as accessible to all. In contrast to a typical collectibles auction, NARS sold its NFTs at fixed prices, with one artwork being given away for free. Similarly, E.l.f sold its NFTs for the same price as its retail counterparts.

Whilst NFTs clearly present customer engagement and publicity opportunities in the short-term, brands who find ways to introduce an element of utility into their NFTs are more likely to see longer term benefits which will endure even past this stage of the hype cycle. Let's take a look at wearable NFTs and social tokens.

Wearable NFTs

We have already seen the rise of digital clothing in the fashion industry with the success of Gucci's virtual trainers. Now the beauty industry is also starting to tap into the potential offered by combining digital assets with augmented reality ('AR') to enable consumers to showcase beauty products within the metaverse.

As part of the Crypto Fashion Week, held in September, NYX Professional Makeup unveiled an NFT minted in the format of an AR filter. The NYX Cosmetics look was created in real life by special-effects makeup artist Mimi Choi, with an avatar created via a hologram capture. A digital version of Choi modelling the makeup look was then featured in the fashion show and site visitors could enter to win the NFT in a giveaway.

The amalgamation of AR and NFTs offers brands potential new revenue streams and provides consumers with the opportunity to interact with their NFT purchases. For example, we may see more beauty products available to buy as in-game purchases or the option to have your make up done by a professional, have it digitalised and then worn as a filter on social media.

Social Tokens

Social tokens are tipped to be the next big trend in crypto assets. Social tokens are digital assets on the blockchain which are backed by the reputation of a brand. Rally, a social token platform, launched a token specifically for brands, celebrities and crypto influencers. Japanese soccer player, Keisuke Honda, was an early uptaker of the token, offering exclusive video updates and private chats with token holders.

Within the beauty industry, social tokens could be used to revolutionise cumbersome loyalty rewards programs and improve consumer engagement. A token could be issued each time a customer makes a purchase or when they sign up to a brand's newsletter. Token holders may then be granted access to exclusive discounts or perks such as early access to new product drops. In addition, the tokens are dependent on supply and demand giving customers a stake in the brand and, in turn, fostering loyalty.
 

3 things beauty brands need to know about NFTs

The Environment Factor​​

The rising popularity of NFTs has shone a spotlight on their environmental impact. A significant proportion of NFTs rely on the 'proof-of-work' model to verify each transaction on the blockchain, which involves participating users (miners) competing with one another to solve cryptographic puzzles in exchange for units of currency. This process can consume vast amounts of energy.

Beauty brands built on their clean credentials should be particularly mindful of this issue before implementing any NFT strategy, otherwise it could risk a public backlash from its fan base. Using a blockchain based on a 'proof-of-stake' model is currently considered a 'greener' route.

In addition, brands could explore offsetting the emissions from each NFT. For example, Gucci partnered with Offsetra to purchase 10T of Carbon Offsets to reduce the environmental impact associated with its NFT which it auctioned via Christie's.

An Educational Piece

Despite the hype, there remains relatively little understanding in the general public about what NFTs are, and the implications of owning one. When someone buys a digital artwork that is authenticated by an NFT, they are not buying the artwork itself. Instead, they are purchasing a digitally authenticated note stating that they are the owner, like a receipt. This means that the purchaser will not obtain ownership of any intellectual property rights in the digital artwork itself without an express assignment. As we discussed in a previous article, there is unlikely to be any intellectual property in the NFT itself as an NFT is simply metadata.

Brands will therefore need to inform customers about what they are actually getting for their money. In accordance with the transparency requirements under the Consumer Rights Act 2015, any terms governing a customer's purchase must be in plain and intelligible language. This means that brands should provide clear explanations of any crypto terms used such as 'blockchain' or 'crypto wallets.' Brands may wish to present this information in an FAQ-style document to increase accessibility.

A document should also be put in place setting out what rights the purchaser has with regards to the underlying digital asset in order to protect the brand's intellectual property. For example, the terms may restrict the purchaser from commercially exploiting the digital artwork. Further, brands considering entering the NFT space for the first time should check whether their existing trade mark registrations extend to digital tokens.

The Storage Conundrum

Finally, it is important to remember that digital assets are not registered on the blockchain themselves. Usually, the NFT will include a link to a stored file on an external web server. An issue can arise if the platform that issued the NFT stops hosting the digital media or providing access to it. This could leave a purchaser with an NFT that only directs them to an error page, potentially giving rise to a customer complaint or reputational damage. If a brand is selling its NFTs through a platform, it should seek clarification as to where the assets are stored.

Platforms which publish the digital artworks to the IPFS (which stands for an InterPlanetary File System) may offer more protection. The IPFS is a peer to peer network for storing and accessing files and data in a distributed file system. Brands would also have the option to pin the artwork themselves on the IPFS, rather than relying on the platform, which at least offers a brand some control over this particular risk.

For more details and other key considerations click here .

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