Solving Digital Ownership with… Crypto-Collectibles
By: Brian Burns
Tags: Cryptoasset, Blockchain, Ethereum, Bitcoin, Digital Asset

As a kid, I used to collect and trade lots of things: Baseball cards, comic books, stamps, and even those lovable, err disgusting, Garbage Pail Kids. My tastes have changed over the years, but I still like to collect. There’s just something we humans love about collecting things, from paintings and coins to historic memorabilia.

What if there was a whole new way to collect, store, and trade assets in the digital world? Blockchain has made this possible with a category called Crypto-collectibles.

A Crypto-collectible is a unique, digital asset, which can be limited in quantity by the creator. Recently, crypto-collectibles have been gaining huge mainstream adoption.

However, crypto-collectibles are just the tip of the iceberg when it comes to potential digital asset use cases on the blockchain. One can imagine a world where multiple digital asset “migraine” problems could be solved. The implications are huge, ranging from identity (ex. driver’s licenses/passports), to airplane ticketing (think scarce resource, variable pricing), to items in video games (in-game virtual goods alone is a $50 billion industry).

First came Digital Rights Management (DRM)

Before Bitcoin, there was no way to achieve trustless digital ownership. The first issue was that software files, by their very nature, can be copied infinitely with ease. Remember MP3s and Napster? There was no way to sell and distribute digital assets, such as individual songs, and limit their scarcity. Once a digital track was sold, it could easily be copied and shared with others anywhere in the world.

Companies in the early 2000s came out with a “clever” solution to this called DRM. However, DRM was not trustless (i.e. a centralized entity had to create and maintain the DRM) and users never really owned their purchased content, as you may suddenly lose access to your purchased content if the supplier didn’t keep their servers online or went out of business. Also, if you may remember, DRM was the opposite of user-friendly (ex. you could not easily move your content from one machine or device to another).

The concept of a crypto collectible is a technological leap forward from the failed age of DRM.

Enter Bitcoin

The technology behind Bitcoin was the first step toward making the digital collectible concept possible. Bitcoin is a provably scarce digital asset, as there will only ever be 21 million in existence. It is also trustless, which means there is no central entity that must maintain accounting for how many bitcoins each person owns. However, just like gold, bitcoin is fungible. This means that any one bitcoin is interchangeable with any other bitcoin (just like one ounce of pure gold is valued the same as any other ounce of gold). These are great qualities for a currency to have, making it useful as both a transaction mechanism and a store of value.

Blockchain gives us the ability to own digital assets

However, for Crypto-collectibles there is one additional, but necessary feature required: Non-fungibility. Non-fungible items of the same type may have different attributes, and thus valued differently. For example, someone may create 1000 unique baseball cards representing different players, but the autographed Hank Aaron card may be valued more than the rest of them.

Cool Tech fact: There is an Ethereum specification for these non-fungible tokens: ERC-721. Up until now, this has been the token standard of choice for most projects that support non-fungible assets. In addition, there is also EIP-821 (pioneered by Decentraland) and ERC-875, which offers cheap atomic swaps, aiming to solve the congestion issues present with ERC-721.

Art as an example: Intellectual property and transfer of ownership

Using the digital art market as an example, an artist (or any creator) now has a way to protect their Intellectual Property. For one, they can control the level of scarcity they want their pieces of art to have. And since the art is linked back to the blockchain, once the artist sells the art, buyers can prove that they own the authentic, limited-edition piece.

When owners want to resell the art, it is simply a matter of listing on an online exchange. Anyone who sees the listing knows that the piece is 100% authentic, and if they can pay the asking price, transfer of ownership and payment happens (almost) instantly via the blockchain.

Kitties as the first big use-case… Really??

As silly as it sounds, virtual cats were the first major use-case that proved out many of the digital ownership concepts described in the earlier sections.

CryptoKitties launched in Nov 2017, and emerged as one of the top blockchain apps of 2017. There were times when its transaction volume was so high it brought the Ethereum network to it’s knees.

These kittens really took the blockchain community by storm. Individual felines were selling for hundreds of thousands of dollars (each!) back in December (and still are). On the face of it, these are just images of cats. But the difference is that they are provably scarce, authentic, unique, and owned by only you. In addition, there is a simple “gameplay” element that adds some utility to your cats. Each cat has its own unique DNA. So two different cats can be bred to make unique offspring. Cats with rare traits are highly sought after, so that they can be bred with other rare trait cats, and so on.

So what do you do with the offspring you ask? Well… er… you sell them, or breed them again. But since the cats are your property, you could theoretically use them in other games made by completely separate companies, such as this one.

Recent investments in the space

Though CryptoKitties was the first and most simplistic use case, it shows that if people can value something so highly as these collectible kittens, then there are much bigger implications for the entire collectibles market.

Andreessen Horowitz and Union Square Ventures happen to agree. They just invested $12 million in CryptoKitties (leading a round with highly notable angels, such as Naval Ravikant of AngelList and Mark Pincus of Zynga).

Since then, a number of other digital collectible games have popped up, as well as 3rd party marketplaces to support the in-game assets and tokens. The marketplaces themselves are also getting notable investments. Rare Bits recently raised $6 million from Spark Capital, and BitGuild raised $20 million in 6 hours during its token sale last month.

Crypto-collectibles should be taken seriously

Because the biggest example of crypto-collectibles today is kittens (followed by knock-off robots, pokemon, etc), many people are apt to not take the crypto-collectible space seriously. However, in a way CryptoKitties had to come first, so that people could start using, trusting, and interacting with these digital assets in a very low-risk setting. Not many people would have trusted passports on the blockchain out of the gate.

But the success of CryptoKitties is a signal to those who understand the underlying technology of the incredible value that can be unlocked when the technology is applied to more significant problems.

Gaming — Virtual items, real ownership

As far as games go, CryptoKitties was just a start. The implications of actually owning the virtual items from games is enormous. The virtual items suddenly become real.

Almost all modern games today are centralized, and thus in-game assets you purchase belong to the company, not you. Being able to purchase an asset from someone else on a 3rd party marketplace (and not from an in-game centralized system) to progress in the game, and then later selling that asset to another player in need (on another 3rd party marketplace) is a big deal.

Though it won’t just be images of cats or trading cards going forward. These scarce, in-game assets are starting to possess actual utility and functionality.

Taking it one step further (and as alluded to above), certain characters and assets may soon have usefulness in multiple games. Digital assets will no longer belong to one game. Instead, they will live outside of the game, owned by individuals instead of a single game company.

Imagine, ongoing character development across multiple games, with certain virtual items interconnected in such a way that improving the items in one game improves them in the other. Virtual items that can exist in multiple games increases the functional (and economic) value of those items.

It’s an exciting frontier ahead for the world of digital assets.