The next phase of e-commerce will be tokengated

Breaking down the emerging tokengated commerce landscape and its use cases

Hi friends 👋 it’s been a while. In the past 10 months, I wrapped my hand around Web3 use cases for brands. With the current economic downturn and crypto markets being at an all-time low, it is now more important than ever to look at web3 applications that go beyond the hype. Tokengated Commerce is an novel phenomenon at the intersection of crypto and commerce that legacy brands like Tiffany, Starbucks and Reddit use to build a strong community of highly engaged customers. Enjoy the read! 📚

Side Info: This article is brief summary of ‘The State of Tokengated Commerce’ report that we released at NiftPad a few weeks ago. The report features in depth case studies and expert interviews with David Rodolitz (Founder, FlyFish Club) and Michael Guerra (CEO, Magnolia Park) who give actionable advice for brands that plan to enter the space. You can access the report here.

The Covid 19 pandemic, rising customer acquisition costs across nearly all advertising platforms and the phase-out of third-party tracking cookies pose significant challenges for brands, resulting in weakened customer relationships.

In 2021, the rise of non-fungible tokens provided one possible solution. Many brands, notably Nike, Coca-Cola, and Dolce & Gabbana initiated NFT projects to boost consumer brand engagement and appeal to a new, younger audience.

In recent months, the concept of “tokengated commerce” has been coined as a novel way for brands to harness NFTs as an “input of commerce” that allows a set of engaged customers to get access to exclusive physical products, content, and communities.

While we are currently in the initial phase of adoption, first brands such as Tiffany’s, Starbucks and Reddit have been experimenting with it. Shopify launched tokengating features for D2C brands at the beginning of this year, with Alex Danco, Shopify’s head of blockchain, declaring tokengating the “future of commerce.”

What is tokengated commerce?

When looking at most NFT projects, it becomes clear that most of the time, the NFT acts as the output of commerce. Either the NFT itself is the end goal, or the NFT together with its utility.

With tokengated commerce, it is different. The NFT can be seen as an input of commerce, enabling NFT holders to buy products, get content, or be part of a community that is unavailable to non-NFT holders.

In other words, token gating can be seen as a method of controlling and restricting access. Tokens are stored in a user’s wallet and work as access controls, giving their owner access to exclusive content, products (physical or digital), or communities. When the user no longer possesses the token, he no longer has access to the gated content.

Alex Danco on the importance of storytelling in tokengated commerce (Source: Twitter)

Usually, tokengating features are integrated into existing e-commerce store systems like Shopify, Magento, or WooCommerce.

In order to get the promised content/product, customers need to verify their identity with their wallet to verify ownership of a specific token. A typical user journey may look like this:

1. The customer acquires a specific token that serves as a key to unlock benefits.
2. The customer connects his wallet to the brand’s e-commerce store.
3. The storefront changes and unlocks exclusive products based on the token in the wallet.

Tokengating explained (Source: NiftPad State of Tokengated Commerce Report)

Why should brands and customers care?

By implementing tokengating, brands can:

• Control access to exclusive, scarce products and boost sales. The token makes a consumable a tradable asset, allowing both the brand and the buyer to benefit from secondary sale royalties.
• Build a community of highly engaged customers who are emotionally and financially invested. When you spend money on a prized NFT, then unlocking the tokengated products feels like an achievement. Customers owning an NFT of a brand are higher invested and therefore higher engaged than non-NFT holders.
• Appeal to a younger, digital-savvy customer base. According to a research report from Civicscience, the average NFT buyer is between 18 and 34 years old.

On the other side, customers can:

• Get access to exclusive, scarce products.
• Proof brand attachment in the digital age, being part of an exclusive community while having access to exclusive products and content that other customers don’t possess. The NFT alongside the exclusive content/product allows customers to showcase their brand attachment in a digital era
• Benefit from secondary sales. Similar to the brand, customers can trade the asset on secondary markets and profit from royalties.

Benefits of Tokengating (Source: NiftPad State of Tokengated Commerce Report)

How can brands use tokengating?

Although Tokengating is still in its infancy, first use cases are already emerging in the form of tokengated content, communities, products, and collaborations.

Tokengated Content

Tokengated Content is the simplest form of tokengating and does not need any further explanation. Token holders simply get access to content, mostly in the form of pdf documents, pictures, or videos.

Tokengated Communities

The concept of using a token as a membership card is a frequent use case of tokengating among the NFT community.

Token holders get access to special communities where they can get together on either traditional chat programs such as Discord or Slack or newer Web3 native chat alternatives that require a wallet login.

A community membership might come with special benefits like community meetups, events, and voting rights on strategic, brand-related matters. The main advantage of using NFTs for community building is that access to the community becomes tradable and verifiable, as early membership in a community can make a significant difference in social standing.

Reddit’s tokenized community points

Reddit serves as a great case study for tokengated communities. In 2020, Reddit introduced the idea of Community Points as a new method to give back to its online communities.

In mid-2022, Reddit announced a partnership with FTX to roll out “tokenized community points.” Community Points on Reddit are a way for users to track their standing in subreddits.

Because Community Points are on the blockchain, users can take their reputation anywhere they choose on the Internet.

Tokengated Products

This is also trivial. Token holders get access to exclusive products that are not available to the general public. This form is often used for fashion, luxury, and sports brands and is often integrated into the brand’s e-commerce platforms. Tokengated products can be seen as a digital version of the drop economy, allowing token holders to trade their access with third parties.

Tiffany’s NFTiff

The American luxury jewelry house Tiffany made headlines in August 2022 when they sold out their custom CryptoPunk “NFTiff.”

NFTiff is a collection of digital passes that are tokengated for CryptoPunk holders, allowing them to transform their NFT into a personalized, physical, jewel-encrusted pendant. The Public sale was sold out within 22 minutes, generating over $12.5 million in revenue.

Due to the financial success of the project and the fact that Tiffany was the first legacy brand to experiment with tokengating, NFTiff has become the most prominent example of tokengated commerce to date.

“NFTiff” pendants (Source: Tiffanys)

Tokengated Collabs

This could also be called “ tokengated products on steroids” since it introduced an interesting multiplayer mechanic that has not been possible before.

Typically, two brands collaborate and launch a limited, physical product (e.g., a sneaker). In order to buy it, customers need tokens from both brands.In theory, this could work with more than two brands and would boost engagement across all the participating communities.

The Hundreds x Deadfellaz Collab

The most prominent example of tokengated collabs is the limited edition merchandise drop of the web3 native fashion brands The Hundreds and Deadfellaz.

By owning NFTs of Adambombsquad (a famous NFT project) and Deadfellaz, holders were able to unlock limited edition merchandise products such as branded sweaters and t-shirts.

The Hundreds x Deadfellaz Announcement (Source: Twitter)

Conclusion & Outlook

The mass adoption of tokengating is still in its earliest stages and depends on a number of factors, including

• Wallet penetration and seamless onboarding of non-crypto native users into Web3
• New brands entering the space bringing credibility and a massive fanbase.
• Enhanced UX and infrastructure making it easy for brands to tokengate content, products, and experiences.

Overall, the responsibility for driving widespread adoption of tokengated commerce rests with Web3 startups developing the necessary tools, brands launching exciting projects, and customers who take a chance on this new world.

Tiffany’s step into the space presented the first legacy brand and provided credibility for other brands to test the water.

In September 2022, Starbucks announced the introduction of an NFT-based loyalty program.

Shopify, the world’s largest e-commerce infrastructure provider, announced that together with their app partners they will heavily invest in this space, providing tokengating features for their > 1 million merchants.

Further announcements of this nature will make tokengated commerce more popular and will encourage more D2C brands to follow suit.