The Problems with Marketplaces

Web3 has been making waves in the fashion and collectible markets. From Gucci to Adidas, companies big and small have been jumping into the new technology. NFTs and the blockchain have achieved mainstream attention and are poised to fundamentally change the way that consumers interact with products. At a glance, one might attribute the industry shift solely to hype and speculation — and the web3 space is certainly filled with speculation. However, much of the change we’re seeing in the collectibles and fashion industry actually predates the NFT and web3 craze. For existing brands, this is a course correction. For web3 brands, it’s a foot in the door to a booming global industry.

Retail Brands’ Failings

Particularly over the past decade, retail brands have ultimately failed to address shifting consumer needs in two major ways.

The subprime mortgage crisis, wage stagnation, global pandemic, avocado toast; whatever reasons you cite, many young consumers and collectors are simply priced out of high-end luxury products at the retail level. The lack of access at the storefront does not equate to a lack of interest in these products, though. The rise of secondary marketplaces shows that a lot of consumers are more enthusiastic than ever about these products, but on terms that they are comfortable with. These markets create a niche for collectors hoping to spend less by buying secondhand, as well as those who seek to monetize their hobby by finding rare collectibles to resell in the future.

Consumers are also considering the climate when it comes to where they put their money. The trend has been away from fast fashion and unsustainable, unethical, or overly opaque supply chains. Rather, consumers are happy to pay a premium for high-quality products that align with their beliefs. Transparency, sustainability, and the ability to adapt to consumers in real-time are more valuable than ever. Many companies have aligned themselves, and their marketing strategies, with these values to great success.

Secondary Marketplaces

Secondary markets fall at the intersection of savings and environmental consciousness, and their success has been tremendous. Platforms such as TheRealReal, StockX, and Grailed have been doing the heavy lifting when it comes to meeting these changing consumer needs, but their business model is not without its flaws. While it sounds like a win-win for consumers hoping to participate in the collectibles market, these secondary marketplaces introduce another glaring problem to the equation.

Authenticity

If you haven’t participated in the collectible or luxury fashion markets, or done much shopping online, the scope of the authenticity problem can be shocking.

“according to one study done last year by the Government Accountability Office, in a sample of commonly counterfeited products bought on the websites of Amazon, Sears, Walmart, eBay, and Newegg, about 40 percent were fake.”

Secondary marketplaces fall into one of two main categories: custodial and peer-to-peer. Custodial marketplaces, like StockX and TheRealReal, take custody of each product and manage logistics as well. For peer to peer, think eBay. Users sell directly to other users and manage shipping on their own.

Custodial marketplaces devote a lot of resources to verifying the authenticity of products on their platforms, but still come up short at times. StockX uses an authenticity tag system, but counterfeit tags are readily available online. Replicas and counterfeits can also make it through the StockX system. This is by no means a problem limited to StockX. The RealReal, which employs teams of authentication specialists, was served a lawsuit by Chanel over this very issue.

The problem is even more difficult to handle when shopping on peer-to-peer marketplaces. With no inherent checks built in, users resort to online communities such as the LegitCheck subreddit to crowdsource the authenticity of their purchases.

Cat and Mouse Solutions

StockX, The RealReal, and other secondary marketplaces have done a tremendous job filling holes left by luxury retail brands. They have helped countless people enter the collectible market at a lower price point, and they continue to provide an invaluable service. However, the current models of authentication are now outdated. For every new tag system, bad actors will make new counterfeit tags. For each new metric of authenticity, counterfeiters will take note for the next iteration of their replicas.

Authentication checks, whether crowdsourced or performed by custodial exports, are not scalable. They are subject to human fallibility and are highly inefficient. There will always be a margin of error, and the struggle to stay ahead of counterfeits is constant. Of course, marketplaces provide customer support and consumer protections, but at the end of the day, money is being leached out of the ecosystem by counterfeit goods.

A Whole New Web3 World

The luxury goods and collectible markets have gone through huge changes in the past decade. Collectors of today have moved much of their business away from department stores and retailers to secondary marketplaces and applications. Global pandemic has cemented online shopping as a part of life for many people around the world, all the while further obfuscating the supply chain and distribution methods used.

A lot of the excitement around NFT technology is focused on the digital. Memberships to online communities, access to global collaboration, and the Metaverse are all exciting concepts worth pursuing. But at Legitimate, we’re focused on the physical, real-world problems that we believe NFTs are poised to solve. No more crowdsourcing authenticity checks on Reddit, and no need to rely on centralized authentication experts.

NFT technology has opened the door for a new authentication paradigm, one built on blockchain technology and within reach of every end-user to verify for themselves.

Join us next week as we dive into solutions and how they can be incentivized to help collectors, creators, and brands.

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