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What the crypto market crash means for Web3 fashion projects

What_the_crypto_market_crash_means_for_Web3_fashion_projects

The past week has been tumultuous for cryptocurrency investors and others in Web3 due to the bankruptcy filing of the centralized cryptocurrency exchange FTX on Monday. As a result of FTX’s demise, more than $1 billion in client assets have vanished, and both the value and trust in cryptocurrencies have plummeted.

Early this year, people who owned crypto had already gotten used to a falling market. Now, investors and business owners worry that this could hurt them in the long run. What does this mean for Web3 development, especially for fashion brands that have been experimenting for the past year?

Andrew Steinwold, managing partner at metaverse-native investment firm Sfermion, says that Web3 fashion is a sub-market within the Web3 ecosystem. This means that the crash is likely to have less of an effect on fashion brands’ projects than on the industry as a whole. “Similar to how traditional market turmoil can impact the physical fashion industry, people will still buy clothes but maybe fewer items because they have less money in their pocket.”

Some people worry that the alleged fraud by FTX founder Sam Bankman-Fried will add to the false idea that crypto and other blockchain-based tokens are not trustworthy as a whole. It could also lead to more rules, which could slow down innovation and mean that Web3 will need more infrastructure to make it work. Others say that this will help show the difference between cryptocurrencies and the larger Web3 space, which has a thriving culture of creative collaboration, transparency, and shared ownership.

Cryptocurrencies are one type of token that is based on the blockchain. But there are other kinds of tokens based on blockchain technology, like NFTs, and other ways to use blockchain-based technology. Even if the exchange rate of a cryptocurrency like Ethereum goes down, NFT collectibles and popular PFPs still have value to their owners because they give them access to events or limited-edition products, for example.

Still, the current chaos could make it harder for brands to get into the mainstream. Even though the Web3 ecosystem as a whole is still fully functional, blockchain or crypto-based projects could be seen as risky. The price of NFTs could go down, making it easier for people to get started, but the crypto-savvy crowd might be less likely to spend.

But the speed with which FTX fell could also push the industry to build more infrastructure, making it easier for customers to join. Lastly, this could help get rid of the “get-rich-quick” image that has been attached to more serious innovations, since flipping NFTs is not as profitable right now. Instead, smart projects will focus on how useful they are and how much value they have on their own. For brands, this means putting the emphasis on the quality of the art, being part of a community, or getting something else of value, like access to the brand.

“There is so much focus on the financial side of crypto, but if we focus on the community and culture side of NFTs and the potential of Web3 for being a wonderful community-building strategy, then that will take away the attention from FTX and separate FTX from what Web3 is about,” says artist Krista Kim, who has collaborated with Louis Vuitton and is a contributing metaverse editor for Vogue Singapore. “It’s the art, it’s the fashion that’s going to help regain the momentum for NFTs.”

Taking crypto out of Web3

Even though the Web3 community isn’t immune to bad things happening in crypto, projects that are already doing well and don’t focus on money are less likely to be affected. “It isn’t just about financial speculation; it’s about exploring a new space for representation, expression and connection. It’s about collecting something for its aesthetics, history, functionality or simply for pleasure,” says Stefania Facciorusso, marketing specialist at digital agency Monogrid.
In other words, NFT ownership is not only about getting rich. The market for NFTs is “driven by emotional and social needs, while crypto markets are purely driven by economic forces”, adds Steinwold.

Web3 gaming, for instance, is robust in a recession, according to Justin Hulog, chief studio officer of Web3 game company Immutable. While the sector is undoubtedly affected, this tendency is reminiscent of Microsoft’s Xbox console’s 2008 performance during the global financial crisis.

There is the possibility of a domino effect for fashion ventures that rely on blockchain-based platforms. “Any virtual worlds that are blockchain-connected, [such as] Decentraland and The Sandbox, may be affected by the reluctance of consumers to get into cryptocurrencies,” says Martha Bennett, VP and principal analyst at market research firm Forrester.

According to Tobi Ajala, founder of digital agency Techtee, who has worked with Gucci, Givenchy, La Perla, and Nike, the NFT and PFP collector communities have been in better spirits than the general public, and fashion collectors have been especially upbeat. “Although a portion of the NFT and PFP collector community acquires assets to resale for a profit, this turnover rate is significantly lower in luxury fashion and culture, due in part to the loyalty and proximity to fashion companies that owning these collectibles affords.”

Crypto expert Sophie Wiberg Holm, co-founder of Dam Finance and advisor to Gwyneth Paltrow and Reese Witherspoon, predicts that there will be less money in the sector invested in Web3 firms, and the startups who stored their treasuries in FTX must now raise capital from investors once more. “You’re not talking about rich investors becoming less rich,” she says. “The company made a huge push in emerging economies, saying, ‘Buy crypto and store it on FTX.’ Those funds are now gone. That is the people it hurts, and we are only starting to see the effects of this.”

Holm says that the “risk appetite” of major corporations and celebrities may also fall victim to the upheaval. “FTX was associated with big celebrity names who made crypto and NFTs fashionable as digital art became en vogue and more valuable,” says Saswata Basu, blockchain expert and founder and CEO of decentralised storage network 0Chain. Tom Brady, who invested in FTX and participated in a 2021 advertising campaign for the platform, has deleted all FTX-related posts from his Twitter account.

More instruction, rules, and infrastructure

“Not your keys, not your crypto” is a common saying among Web3 natives, referring to the personal key code that people use to maintain decentralized custody of their own cryptocurrency wallets. FTX is a centralized exchange, which means that users have entrusted it with their cryptocurrency holdings and not all transactions are public. As it unfolds, FTX’s public demise could lead to greater awareness and education on these principles, as well as the introduction of additional barriers that both aid and impede progress.

Although the impact would cause a dent in the perception of crypto, Basu says, this also “underlies the benefit of custodial wallets and not trusting centralised entities who do not disclose what they do with your money or how much reserves they have”.

Sfermion’s Steinwold explains that if FTX was a decentralized exchange as opposed to a centralized exchange, potentially fraudulent behavior could have been detected immediately because all transactions are visible in real-time. Therefore, he and other experts advocate for a stricter Web3 strategy. “Funnily enough, FTX was a centralised company dealing with crypto and if the company itself was more ‘crypto-like’ — [meaning] decentralised — this would not have been possible,” he says. Artist Kim observes that this demonstrates why the industry might benefit from greater decentralization, an open metaverse, and robust community interaction in order to restore people’s faith in Web3’s future.
Until then, innovation is likely to occur within the realms of security and risk management, as opposed to “crazy new ideas,” according to Holm, in order to solve problems such as cryptocurrency storage.

She worries that broad regulation might not tell the difference between cryptocurrency tokens and other tokens. This could hurt brand innovation and people who just use token-based infrastructure and Web3 products and services, making it harder for the industry to grow. But in the end, says Chris Cantino, co-founder of venture capital firm Color Capital and founder of Crypto Packaged Goods, the success of NFT technology is not tied to the success of cryptocurrencies. Instead, it depends on promises like immersive experiences, digital ownership, customer rewards, and more. “If cryptocurrencies go to zero tomorrow, the capabilities of NFT technology remain.”

There is already a spirit of education among brands, regulators, and consumers. Giants like Instagram and Nike are making educational pledges to help spread adoption. Ajala from Techtee says it’s important for brands to use this “unstable time” to start talking with experts who can help them learn about crypto and incorporate it into their business models. Holm warns that it might be hard because many of the people who need education the most have probably turned away from the space because of recent events.

Still, she is hopeful that the ongoing reset will continue because 90% of her assets are in crypto. “I’m hoping there will be a little more focus now on fundamentals, and a little less on the crazy hype. It’s an incredible opportunity to build for the fashion industry.”

Matt Moorut, a director analyst at the consulting firm Gartner, doesn’t think that big brands that have already put money into the space will start to leave. However, brands that haven’t yet invested may be hesitant. “We’ll see certain fashion brands persevering given they’re looking at Web3 as a long-term play, while others who haven’t stepped in will stay on the sidelines until they’ve got a much more firm picture of where this whole playground is heading.”

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