Blockchain in Luxury

What is Blockchain?

?Blockchain is a system to recording information in a way that makes it difficult to change, hack or cheat they system.

Blockchain is essentially a digital ledger/ record of transactions that is duplicated and distributed across the entire network of systems in the chain. Every time there is a new transaction, it is recorded on all systems across the chain. This decentralizes system of information managed by multiple participants in the chain is known as DLT (Digital Ledger Technology).

Blockchain is a type of DLT that uses a unique cryptographic signature called Hash.

Hash is an algorithm that converts transactions into a unique set of numbers and letters, something akin to a random password generator. Once a transaction is verified, it goes through a Hash algorithm, to create a hash. And the process continues. Then 2 hashes are combined to create another level of Hashes. This process continues till there is just one hash remaining called a “Root” hash. The process is called a “Merkle Tree”. (Figure below shows a simplified Merkle tree)

Hashes are unidirectional in nature. Same data will always create the same hash, and they cannot be “un-hashed”, that is, the process cannot be reversed, to decipher the data. This means that anyone in the chain can verify the data/ transactions because the same data will always create the same hash. If the data has been tampered with, this will create a new has and the “Root” hash will change.

The more blocks there are in the chain, the stronger is the security of the ledger. If hackers wanted to corrupt the data, they would have to change all the blocks in the entire chain.

Why is Blockchain important and relevant to Luxury?

Most normal databases like SQL are managed by an administrator, who can change the entries. Blockchain has no such administrator. It is run by those in the chain – transactions cannot be hacked, changed, or duplicated.

·?????Data Management: Data management is key for businesses, yet silo-ed data leads to suboptimal processes and reconciliation issues. Blockchain can circumvent this issue. Information can be appended on a blockchain and shared across business lines, processes, and teams, especially when trust is at stake.

?·???? Supply Chain optimization and trust: Blockchain technology can reduce operational costs significantly by enhancing data management, better supply chain management tools and reducing impact of counterfeit and grey markets. Tagging physical objects with IoT, RFID tags, QR codes etc. enables the creation of “digital twins” on the blockchain. This allows brands to mitigate counterfeit risks by digitally tracking products along the supply chain and after the point of sale. This digitalization of the product is called “Tokenization”, and it allows the brand to access tracking data without compromising sensitive information.

Customers can know the provenance of the product and check its authenticity. As the process becomes a standard, it will make it difficult to sell fakes because it will not be possible to generate a digital certificate or a token which proves authenticity. Ownership can also be transferred, and a lost/ stolen item can be declared, rendering it challenging to cross borders with it.?

·?????Transparency: Transparency is more in demand than ever by the growing Gen Z and millennial consumers. DLT allows brand to better manage the supply chain processes from Raw material to final consumers by identifying and removing redundancies. Brands can leverage blockchain to better manage large data sets and bring transparency to the whole process, which would align with the consumers values even more.

·?????After-sales experiences can be improved including express warranty, maintenance, repair, return, exchange, trade-in, recycling, remanufacturing, and much more— giving rise to a new range of exclusive and premium product packages.

·?????Enhance Loyalty programs: Traditionally loyalty programs presented challenges for customers as well as companies. Brands are concerned with liability, personalization, improving conversion rates, and customer data. Consumers, on the other hand, are have challenges like rules & restrictions, reward options and the biggest on of all, losing track of accumulated reward points. Blockchain potentially brings solutions to these challenges.

• Blockchain’s ability to create transparency builds trust and makes it an attractive option to have.
• Improve security - Data security is a top concern for any consumer participating in a loyalty program. Blockchain enables customer to exchange tokens for rewards, without compromising personal data. Data in a blockchain is decentralized and cryptographed, hence secure and un-hackable. Transactions are immutable and time-stamped and thus transparent and trackable. Errors and frauds can be minimized by using “Smart Contracts”. Rather than recording personal information like card details etc., on the blockchain, data is tokenized. When the consumer purchases something, the blockchain stores the transaction and a smart contract can be triggered. Smart contracts work on an ‘If-Then’ principle, which means that the ownership of the product will be passed on to the buyer only when the agreed upon amount of money is sent to the system. All the terms and conditions of this transaction are stored in the smart contract which recorded in a distributed public ledger blockchain, thus maintaining trust.
• Through blockchain, users can receive and redeem loyalty tokens that are interoperable across multiple programs. These tokens never expire or lose value, unlike traditional reward points. Some advantages to having such a system are:

1. Open systems: A blockchain token cannot be revoked due to some internal policy change and is recorded publicly. This is a win for the customer who doesn’t have to worry about the tokens expiring and the brands get higher customer loyalty by providing better customer service.
2. ?Increase Flexibility: Short expiration dates of benefits are one of the main reasons’ customers opt-out of loyalty programs. To eliminate this issue, blockchain can allow reward programs to operate similarly to a cash-back program, where the currency is stored in a digital wallet and redeemable at any point. Blockchain also offers the potential to connect different programs together, across brands, to create a centralized Loyalty Network. The customer accumulates generic loyalty points within a single wallet. These points then can be redeemed through any of the partner companies.

There are some challenges before this can be achieved. Firstly, there are the obvious implementation costs, integration costs and maintenance costs. Secondly, those programs where there are multiple brands, there can be security concerns about personal information and fears about losing control over data.

Case study 1: The Aura Consortium

LVMH, Prada and Cartier unveiled the Aura Blockchain Consortium on April 21, 2020. LVMH had enlisted a full time blockchain development team back in 2019, to create a cryptographic provenance platform. This team worked with Ethereum design studio, ConsenSys.

Among LVMH maisons, Louis Vuitton, Hublot and Bvlgari are already on the platform. Hublot has launched a digital e-warranty, which is stored in the Aura infrastructure and allows customers to verify the authenticity of their watch via a simple photo taken with a mobile phone.?

This platform will provide proof of authenticity of luxury items and trace their origins from raw materials to point of sale and beyond the used-goods market. As reported, LVMH intends to offer the service in a white-label form to other brands including its competitors. So rather than creating a native app, AURA will run in the background of the brands using it.The consortium comes with its fair share of challenges. The biggest one is from an Intellectual Property perspective. It would be hard to convince other brands to join, especially if an influential group like LVMH controlled IP rights.

To counter this problem, LVMH will donate all IP to a separate entity, which would be owned by all participating brands, thus all brands would have equal IP rights. In addition, the platform’s security tool prevents any information to be leaked to any other brands or customers.

Benefits for the clients are:

1. Proving authenticity & ownership of goods
2. Accessing product history information
3. Strengthening client relationship through enhanced transparency
4. Accessing new services provided by brands\

?Benefits for brands:

1. Ensuring products are made & handled according to the quality standards set out.
2. With no intermediaries involved, building client trust would be easy
3. Protecting markets against counterfeiting, controlling secondhand markets

Figure: Aura Consortium Governance, auraluxuryblockchain.com

Richemont-owned Swiss luxury watchmaker Vacheron Constantin is also using blockchain for authentication and anonymous traceability. First tested in May 2019 on Les Collectionneurs series of vintage watches, the blockchain-based certification technology in partnership with ARIANEE consortium has now been rolled out across Vacheron Constantin collections to guarantee authenticity throughout the lifespan of its timepieces.

Case study 2: NFTs in Fashion

?NFTs or Non-Fungible Tokens (fungible is an economic term which refers to any item that has a unique property and is non-interchangeable) are tokens that we can use to represent ownership of unique items. They let us tokenize things like art, collectibles, even real estate. They can only have one official owner at a time, and they're secured by the Ethereum blockchain – no one can modify the record of ownership.

How do they work:

NFTs have some special properties:

• Each token has a unique identifier. Which means you can prove you own it, and no one can manipulate it.
• They're not directly interchangeable with other tokens 1:1.
• Each token has an owner, and this information is easily verifiable.
• They can be bought and sold on any Ethereum-based NFT market. So, you can sell it and even earn original owner Royalties.

?And if you create an NFT:

• You can easily prove you're the creator.
• You determine the scarcity.
• You can earn royalties every time it's sold.
• You can sell it on any NFT market or peer-to-peer. You're not locked to any platform and you don't need anyone to intermediate.

Of course, an NFT backed digital artwork can be copied and pasted – but it does not give the proof of ownership and authenticity. Just like how one can copy and print a Monet, it doesn’t mean they own the original.?

Taking advantage of this Seattle based artist Fewocious and design studio RTFKT released a trio of Airforce One’s with his artwork doodled on it for $3000, $5000 and $10,000 online using NFTs. He sold 621 pairs for a net total of $3.1 million. The customers were gifted with the physical goods.

One of the three Nike Airforce One’s designed by Fewocious and Rtfkt

Why are NFTs good for Luxury?

NFTs cancel out concerns of copycats, at the same time increase the value of any physical products linked to NFT purchases, just like the Nike’s sold by Rtfkt. A potential use of NFTs could be the young, re-sale market. The terms of reselling can be predetermined into the NFT and the blockchain, meaning that the brands can get royalties for each re-sale.

This is also a boon for designers – they stand to make profits on perpetuity.

3D-Fashion, is another avenue that will benefit from NFTs. They can authenticate digital assets of any kind as though they were fine art. For example, Designer Anifa Mvuemba debuted a collection of 3D rendered clothes in May 2020. Although her designs did not materialize into a VR runway show, hew designs backed with NFTs would be a worth a lot to fashion buffs or fans as collectibles.

This is not just limited to 3D rendering or in-game designs. It can cover songs, virtual basketball cards or even tweets (Jack Dorsey sold his first ever tweet for $2.9 million). All the Fashion films the brands have, designer’s tweets, Fashion selfies, etc. could be sold as NFTs.

But NFTs do carry a major environmental concern. Mining of NFTs on a blockchain requires huge amounts of energy to run the data and computing power. However, the sky-high prices of NFTs mean this problem probably won't go away anytime soon.

?There’s another concern around NFTs, which has a similar narrative to other price surges like DogeCoin, is that they are speculative bubbles. Investing in NFTs carry “high risk”, even higher than investing in cryptocurrency. The initial hype around NFTs has come down since February but that just means its normalizing. ?

?As is captured in Gartner’s Hype Cycle, which measures the progression of a New technology. In NFT’s case, we are emerging from the ‘Peak of Inflated Expectations’ and towards ‘Plateau of Productivity’. What this means is that NFTs create an opportunity for new business models that did not exist before – new avenues for fashion to tap into.

Purchasing an NFT isn’t easy, which creates an obstacle. Customers must buy cryptocurrencies first, setup a wallet and then buy an NFT. However, this is where China’s DCEP comes in as a solution. Brands can collaborate with the distribution entities, customize their NFTs to be purchased using the digital yuan. Customers who use the digital yuan will already have a digital wallet, hence skipping the requirement of purchasing cryptocurrency.

Brands can create an NFT verified exclusive on-of-a-kind outfit for an individual purchase, along with its digital image, also NFT verified. ?The customer, if desires, can share the digital version online for a price. This could potentially lead to multiple revenues for same design – without diluting its exclusivity and value.

Brands looking to target the young audience who are keen on the resale market, stand to gain a lot by approaching NFTs. That’s because the terms of reselling an NFT can be predetermined and encoded into the blockchain, requiring that brands receive royalties with each resale. And of-course proof of ownership and authentication is embedded within the NFT too.

The pace of the fashion & luxury industry is rapidly accelerating with the ever-changing demands of consumers. Blockchain technology stands to address long-standing industry challenges by improving data management tools, enhancing supply chain operations, and reducing the risk of counterfeit and grey markets.