Thinking Through NFTs For Luxury Goods

Oct 7, 2022 | From Wolf Pup #0

Our mission in The Guardian Academy (TGA) is to help people navigate the Web3 world. We utilize education to help bridge the gap between the blockchain and the real world.

Here is a guest article written by Wolf Pup #0 from The Wolf Den.

Table of Contents

    The Adaptive Dilemma And Function Over Form

    As a precursor it may benefit you to understand what the adaptive problem is before diving into the bulk of this article.

    Here is part 1 of 4 to get you started

    The rest of the Adaptive Problem videos can be found within the Wolf Pack Leader Tier. To learn more about the tiers and how to get started you can reference this article.

    Thinking Through NFTs For Luxury Goods:

    Recently a company came to me with an idea that they had been kicking around for months. They did not ask me to poke holes in it, because they believed that they had spent months poking holes and it was already bulletproofed.

    The company:

    High-end and/or custom sculptures handcrafted from rare and exotic wood.

    The idea:

    Sell their sculptures via NFT, which doubles as proof of ownership.

    In theory, NFTs as proof of ownership of high-end goods makes sense. It may very well be the future of luxury goods ownership — or at least part of it. The reason this is an adaptive dilemma is that that it stems from the assumption that; “this tech fixes this problem” without considering the second, third and subsequent order consequences of human behavior.

    A Few Considerations

    1. Margins

    Most NFTs are going to be sold for ETH, which fluctuates wildly, even from hour to hour. If you have payroll, cost of goods, inventory, and other expenses without a massive reserve these fluctuations can put you in a tight spot cashflow-wise.

    ie. $10,000 collected in ETH could be $8,000 tomorrow when it comes time to pay for something critical. It could also be MORE than $10,000 but the risk is volatility/lack of reliability which is crucial for a small business or boutique luxury goods seller.

    There are many feasible solutions to this, I’ll just share the ones that come to mind right away:

    • Hire someone to convert ETH to a stable coin immediately upon sale. This would require someone to be monitoring it full-time. Additional labor and additional risk (as swaps do carry some risk including making a mistake or getting funds locked in exchange).
    • Do it yourself. Additional time working and same mistake and fund-locking risk.
    • Sell/ Collect in the stable which gets into point #2.

    2. Customers

    Customers will fall into two buckets:

    a) Knows how to purchase NFTs already.

    b) Doesn’t know how to purchase NFTs already.

    If they already know how to purchase NFTs this section can be disregarded, for the most part. If they do not we are now assuming the following additional work/effort and risks:

    • Responsibility of teaching them how to set up a wallet and safely buy ETH.
    • Teaching them how to buy NFTs.
    • Teaching them how to transfer money into crypto (which also adds, potentially, a few days to when they can make a purchase. More days to purchase = more volatility in final price if set to ETH).

    This create an additional job or department in your company and introduced a tremendous amount of reputational risk. What happens if someone, guided by your company, pushes the wrong button and loses tens of thousands of dollars?

    Now, you could be targeting existing NFT buyers as a NEW audience, which could make sense in certain scenarios. But that leads to number 3:

    3. Logistics

    To sell a physical good to an NFT buyer you would need to collect the mailing address. MOST NFT buyers prefer to stay anonymous — that is one of the things that attracts many to the space. On marketplaces like OpenSea there is no “Enter information here”, so you would have to come up with a way to collect their address AND they would have to know it exists and how to do it.

    This is where it can get interesting:

    Let’s say the buyer buys a custom piece for $50,000 by purchasing a $50,000 NFT and then has it mailed to them. Now, the original buyer has an item and an NFT to prove ownership of the item. Unless it’s something like a car or a home where it’s already obvious/understood that we need a title this is the risk we are running:

    The original buyer could sell the NFT to another buyer for any price they choose and NEVER send the actual piece of art. They could keep it, sell it on eBay or at a garage sale or gift it to a family member.

    When the second buyer gets an NFT with NO proof of ownership, both the NFT and the art value go down significantly and that reflects on the original seller (the artist/company). The risk here is reputational and potentially, a legal nightmare.

    Now are there ways to manage this?

    Perhaps. But I cannot think of any that do not require ANOTHER full-time job just to track down and enforce these things. Especially since NFT collectors are, once again, largely anonymous.

    In this scenario:

    • NFT prices tank
    • Value of artwork tanks
    • The reputation of artist/company takes a big hit
    • The company has new full-time job trying to make it right/reputation damage control

    This is not a technology problem.

    It’s a human problem, an amalgamation of:

    • Fear of missing out
    • Wanting to get into the “new thing”
    • Not understand how the new thing works
    • Fitting a square peg into a round hole

    Ultimately, I believe it stems from focusing on doing new things instead of solving the most immediate problems. In THIS particular case, NFTs do not help solve the main problem but create a ton of other problems.

    This will not always be the case. I believe that NFTs for luxury goods will be a big part of the future as some of these things are figured out and people no longer view NFTs as “new”. “New” makes people a little stupid.

    This Is The REAL Problem

    Many individuals and companies will do this; make the mistake of thinking that NFTs are an industry they need to get into. That is like saying hosting your event on zoom means you are in the internet industry. But you likely are not, you are in some industry that uses zoom for some reason, it FUNCTIONS as a tool to solve a problem. The FORM (zoom) is not the main thing, it’s just the means to an end.

    As long as people fault to separate function from form and continue to put form first, they will make mistakes like the examples above. The more mistakes like the example(s) above made, the more difficult it is to diffuse an incredible technology.

    Individuals and companies will continue to blame technology (and the tools) without addressing their own behavior, the behavior of others , and or application of the tools.

    This is kind of ridiculous, IMO.

    Let’s pretend that everyone started using hammers for everything and posting how awesome it is, so we try and get in on the “hammer industry”…

    If your office door is a giant, glass window and that window was dirty would you pick up a hammer and ask “how can I use hammers to clean these windows?” And then go on a public tirade about how hammers are dangerous and serve to practical purpose because they didn’t clean your windows? Sure hope not.

    When people say “How can I use NFTs in my business?” it is the equivalent of waking up and saying “How can I use hammers in my business?”.

    Function (what is the best way to clean this glass?)

    Must clearly come before

    Form (I must use hammers for stuff).

    But, humans gonna human.

    Final thoughts:

    New technology is almost never the right answer when you start with trying to find out what it does or how to use it (form over function). Asking: “How can I use NFTs in my business” is not a good question, IMO. The answer(s) will likely introduce more risk and effort than they eliminate.

    However, when “NFTs” is the answer to “what is the most efficient/effective way to accomplish this thing that is very important within my business” (function over form) the asymmetry swaps to the upside — since the upside is solving a critical problem/bottleneck.

    Original tweet

    Nic Peterson- Wolf Pup #0

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    DISCLAIMER: These articles are for educational purposes only. Nothing in this article should be construed as financial advice or a recommendation to buy or sell any sort of security or investment. Consult with a professional financial adviser before making any financial decisions. Investing in general and options trading especially is risky and has the potential for one to lose most or all of their initial investment.