Long Take: Luxury and Fashion market structure applied to finance, NFTs, and DAOs
Hi Fintech futurists --
This week, we cover the following:
Thesis: Luxury and fashion markets are structurally different from finance or commodity markets in that they seek to limit supply in order to generate value. This increases price and social status. We can analogize these brand dynamics to what is happening in NFT digital object markets and better understand their function as a result.
Companies: PleasrDAO, Flamingo DAO, Aspiration, Step, FTX, Christie’s, CryptoPunks, Robinhood, Aragon
Topics: eCommerce, DAOs, NFTs, social media, marketing, branding, influencers, microeconomics
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We’re not cool. That’s why we’re in finance.
But people want to be cool. As highly social and intelligent animals, we want and need to belong, differentiate against each other, and negotiate for status. We create signals and hierarchies to create pockets of relational capital, which we then cash in for real world benefits.
Such mammalian realities are contrary to the economic rendering of the homo economicus, the abstracted rational agent making choices in financial models. In 2021, our financial models are waking up and instantiating themselves, becoming Decentralized Autonomous Organizations (DAOs), spun up by DeFi and NFT industry insiders, and implemented into commercial actions onchain. We can see the swirl in real time. Browse either of the Twitter threads below to get a flavor.
Behavioral finance goes a long way to finding out all the edge cases where reason ends and our hormones take over. But we can also look at the structure of two types of markets and the narratives within two types of stories: (1) the democratization and commoditization of everything, and (2) technologically accelerated fashion and luxury. It is the latter of these that we will explore today.
The first story you know well. Technology removes barriers, borders, and allows endless, free access. Fintech and DeFi give high finance to everyone. The iPhone is both the best and the most widely phone. Let’s just summarize and say that technology layered on top of finance is turning crafted, expensive products made out of human time into commodities built by automated processes. Commodity prices collapse to the cost of production, and voila, zero economic profit.
The second story we know less well, though we may confuse it for “market bubbles”. However, it has many other, better names — like, art, culture, and fashion.
Alexander McQueen’s gorgeous couture above pulsates with one-of-a-kindness. It is created to be a singular object, a one-out-of-one edition at the very summit of high art. There is nothing else like it. One can trace these threads throughout human history, making a pit stop in the artistic period of Rococo, rich and abundant with decoration and style.
There are countless other symbols we could evoke, but these give sufficient feeling to the point. Uniqueness, wealth, singularity, abundance.
You can see these threads appear in the wildly gorgeous and popular work of Billelis ($3MM in artworks exchanged). Perfect for the NFT age. To own a treasure, you must have it. It’s not enough to have picture of a treasure. No, you must hold it in your digital hands on the blockchain.
Luxury in a Market
One intuition is to sell things to as many people as possible, and to make those things as cheap as possible. This is the intuition of an attention economy, created and warped by the last two decades of Internet advertising and venture capital blitz-scaling logic.
This is also the complete opposite of what you want to do with a branded, luxury good.
Rather, you want to sell as few things as possible, and for *as much as possible*. That means instead of having everyone running around with your product, making it commonplace, a select prestigious few will be the beneficiaries. By excluding everyone else, those beneficiaries accrue cultural capital. They are admired for their “having”, and it is precisely the “lack of having” on the behalf of everyone else that makes the luxury thing valuable.
Taken together with a brand narrative — a qualitative and consistent messaging about personal values that the brand represents — this creates intangible but highly valuable brand equity. That brand equity is destroyed with actions like cutting price or making the luxury goods feel less exclusive to access. This negative is what is highly priced in the first place.
As younger generations rise towards luxury consumption, new challenges arise. It is no longer mere exclusivity and price point that drive purchases. Instead, emerging luxury brands and goods have to connect to the “zeitgeist”, the cultural heart of the global conversation. That might mean being backed by the largest musician or sports influencers. As an example of that, see the neobank Step being backed by TikTok megastar Charlie D’Amelio, or the green finance company Aspiration get funding from Drake, or the cryptocurrency exchange FTX working with Tom Brady.
Purchasing social clout from the right people, plugged into the right story, will turn whatever goods you make from commodities for consumption into emotional avatars for the owners. If your target audience is price-insensitive, then you should charge their maximum willingness to pay, as well as protect their purchase by pricing out people who are not like them.
This is partly why limited editions NFTs have been accruing unbelievably value. The below charts shows the cheapest set of CryptoPunks moving between $20,000 and $70,000, and the more rare punks selling in the multi-million range at Christie’s.
As practical finance people, some might be wagging their fingers right now at irresponsible investing practices. What kind of pixelated asset allocation is this, one might ask? But that is entirely the wrong question — one about money, financial planning, and mathematical outcomes. The right question is instead about the size of the luxury market. Knowing what we do about the preferences of the human animal, let’s measure how these preferences are commercialized today.
Consulting company Bain tells us that people are spending $1.2 trillion per year on luxury goods, of which $34 billion is fine art and $550 billion is cars.
Within that, the luxury goods market is around €300 billion per year, growing at nearly 8% annually. It is no surprise then that such trends would make their way into our digital world, as the digital world reformats physical reality into the metaverse. There is nothing especially rational about people that find themselves on the Internet — they are just as impulsive, tribal, and mercenary as those in the physical world.
The Function of Fashion
It’s a big opportunity, and there is one more attribute we want to highlight, which is the connection between luxury and fashion. Let’s review the microeconomics of exclusive goods:
What do you do if the demand for a high-priced luxury good is not there? The right answer is not to discount and sell to the masses. Rather, it is to destroy the unsold inventory.
What do you do if the demand for your high-priced luxury good is extremely high? Do you create more prints or permutations? Nope. You raise the price of access so fewer people can afford the special status.
But it is hard to build a business with recurring revenue on such ground. You do not know the state of demand, or how successful the brand's positioning is going to be. Mistakes are irreversible. And there is no reason for engagement from the millions of losers (in the sense that they are not winners of some auction) if the exclusive thing is permanently defined, and permanently owned by the elite.
Fashion is the solution that creates an industry.
Fashion makes things popular and then unpopular. It catalyzes consumption. That means that if you did not hit the right notes this season, there is always another season. Turnover creates hope for the masses and a constant need to re-invest by those with high status to keep their status. Therefore, revenue becomes recurring. The artistic or cultural value of the object from the prior season is no longer guaranteed as being in style in the following season. Further, there is a motion around a creative process, and an engagement around the unveiling of new creative outcomes. You can have an entire industry of stories, brand narratives, and collaboration with non-exclusive participants.
And this is now exactly what we are seeing with digital objects.
NBA TopShot was extremely popular early in the year, and is materially slowing down. Axie Infinity, a blockchain insider collectibles game is gaining some real steam. CryptoPunks have cemented their position as the premier luxury asset for crypto avatars, and their price is rising and falling with the rest of the markets. Demand for some projects, like Art Blocks, is rising organically. Other things are almost poisonous in how uncool they are, like the common CryptoKitty we hold.
All these sentiments are likely to flip, twist, and change as the social hive processes new thoughts and positions on its own evolution. They are not market bubbles selling vapor to unsuspecting investors. Rather, they are art fashions, some of which may be everlasting Mondrians, while others are meaningless decorations that will fade over time.
As Silicon Valley ethos and technology permeated finance, one hypothesis was the fear of media companies becoming financial companies — see Google. But something else is happening too. Financial products and financial distributors are taking on media DNA. They are natively social and sentiment-oriented. They are massively retail, transactional, and FOMO driven.
Take this thread on the average Robinhood user, driven by crowd momentum and story-telling.
Robinhood is a financial expression of Reddit and Twitter, translating cultural feelings into investment warfare. Financial memes are the natural equilibrium of democratized investing. People are buying the social status of a meme investment, rather than its financial outcome.
Or take this thread on only buying NFTs that are formatted with ASCII art decoration.
What can we make of this but acknowledge the flags of technology tribes and their language of social belonging? One puts money into exclusive ephemera tagged with the marking of who they want to be. For what it’s worth, we gravitate more to the ASCII crowd than the Robinhood one.
All of this brings us back to DAOs. For a good nuts and bolts analysis, see this article by Linda Xie or our 2018 meditation on the topic. As new DAOs start to number into the thousands, one has to ask the question of what exactly they are. We could try to look at a sum of the parts. For example, governance software provider Aragon suggests that DAOs are loosely defined whereas companies are tightly so, are more grassroots rather than hierarchical, transparent rather than opaque, open rather than closed, and global rather than local.
The early DAOs are almost entirely financial in nature, coordinating the running of DeFi protocols. New entrants either resemble investment syndicates, artistic communes, or some beast in between. But they all have the glue of Internet culture and memetic connection between them. Unlike regular organizations, they are born of technological utopia even if some day anchored in human law.
Because DAOs anchor to the blockchain world, which enforces digital scarcity, they must manage the concepts of luxury and scarcity that we’ve explored. Code and data have no cultural meaning, and thus that meaning must be manufactured by a social layer of people organized for the purpose.
Not everyone can afford to be a market maker. But lots of people can govern the protocol that allows market making, create stories around it, and profit from keeping it fashionable. Not everyone can buy an NFT. But lots of people can pool together in order to do it, while also building a meta-influencer entity that signals the cultural relevance of the purchased object. With this alchemy, a DAO could turn seasonal financial fashion into timeless investment art.
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