NFTs (non-fungible, meaning non-interchangeable, tokens) are gathering hype momentum. They have already made appearances in the fashion, art, and entertainment industries, with digital fashion brands The Fabricant and RTFKT quickly selling out of NFT clothing items that users can wear in AR experiences, and Christie’s auctioning off a $69 million collaged image file by digital artist Beeple. The value of NFT transactions quadrupled to $250 million in 2020, while non-tangible transactions overall currently constitute a $190 billion market.

But what are these three-letter words actually? Simply put, a file format for blockchain networks. It can take on the form of an art piece, a digital certificate, or even a financial product. NFTs are created when a user uploads and certifies (or “mints”) an item on the (predominantly Ethereum) blockchain, with no two files being identical. Given their programmable nature, royalties can be built into the NFT, ensuring more profits for the creator, who doesn’t need to go through a third party such as a retailer. Since all it takes to create an NFT is a media file, an Ethereum wallet, a small fee to cover creations and the minting process, and a connection to an NFT marketplace, upfront capital or industry connections aren’t a barrier to entry with this medium—although lack of knowledge around the medium is.

One drawback of blockchain transactions has been its large energy consumption, with one transaction surpassing the power use of the average US household, although developers are working to reduce this number to 1% of its current operations. The market’s volatility and misinformation, as well as information gaps around the platforms on which they operate on, and the adaption of each digital item needed for said platform, pose further challenges. NFTs are not a one-size-fits-all approach, only speaking to a highly digitally native consumer (or brand owner) comfortable with the world of Ethereum & co.

“It’s best to think of the NFT as a better digital certificate. Certificates of authenticity are already common, however, often they’re issued on paper, can be digitally forged, or fail to accurately track the provenance of the good that the certificate authenticates,” explains Mason Nystrom, Senior Research Analyst at crypto start-up Messari. “NFTs can be issued alongside physical products (and connected using QR codes) so that a user can understand where their beauty products are sourced from, when they arrived at a location, and obtain a more detailed and transparent record of how those products are made. ” He cites blockchain platform Treum’s recent partnership with online beauty retailer Wholly Kaw, whereby skincare product lab results are issued as certificates on Ethereum to ensure greater transparency. LVMH, Microsoft, and blockchain engineering platform ConsenSys recently created AURA, a platform which authenticates luxury goods by tracing products from design to distribution. A similar concept may prove helpful in the battle against counterfeit cosmetics, or authenticating sustainable production practices for beauty brands.

Digitally focused companies will have a more natural progression with the medium than those that aren’t. “The most successful brands create NFTs that provide value, whether that’s from a utility standpoint (possessing the NFT rewards the owner with a service or information), monetary (NFT holder earns a cash flow), or social (the NFT holds some type of social status or brand benefit),” Nystrom adds. “NFTs are no different in that they provide a new way for brands to connect with (and monetize) their customers. Each brand will have to create its own strategy since no definitive NFT strategy has been developed. However, the first brands to successfully integrate NFTs and to a larger extent blockchain technology will likely find themselves ahead of their competition.” Possibilities could include digital cosmetics to be used in gaming or virtual-reality platforms, ethical supply chain verification via NFT certificates, or even NFTs coupled with limited-edition physical product releases.

As one sector of the industry continues to embrace digital mediums, non-fungible tokens are likely to grow in form and frequency. Nystrom states: “NFTs are definitely here to stay since this file format capitalizes on the benefits of blockchain networks, primarily their transparency, security, programmability (it’s all just software), and permissionless (anyone can use it) nature.”