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Collectibles on the Blockchain

“Price is what you pay. Value is what you get.” – Warren Buffet

Late November last year, a relatively unknown Ethereum application took everyone by surprise, causing temporary congestion on the Ethereum network. The game allowed users to spend ether for breeding and trading digital felines with other participants. At one stage, this business of breeding and trading digital kittens accounted for $12 million in sales and roughly 14% of on-chain transactions on the Ethereum blockchain, resulting in a significant rise in transaction costs. Crypto detractors were quick to point out that Ethereum, the apparent disruptor of centralized web applications, could not even handle the network bloating caused by something as seemingly benign as ‘Cryptokitties.’ We talked about this at length in previous posts; about the issues around blockchain scalability and the conditions needed for Ethereum to survive and thrive, as well as the solutions currently underway to improve the throughput by orders of magnitude. However, in this whole situation, a lot of people failed to notice this underrated use case for cryptocurrencies – “Digital Collectibles,” which will be our topic of discussion in this issue.

If you are a proud owner of one of the beanie babes toys or baseball flashcards or custom-made sabres from the World of Warcraft, the importance of owning something so scarce, unique and close to your heart is a no-brainer. According to Deloitte, the wealth allocation to Arts and Collectibles is expected to be ~$2.6 trillion by 2026. However, physical collectibles capture most of the value and digital collectibles account for only a tiny sliver of the total market size of collectibles. There are tons of in-house articrafts offered by online games that can be purchased and, perhaps, be counted as collectibles. That said, it is tough to validate if the sword you bought in a game is truly scarce or unique. Moreover, most digital collectibles are hosted on centralized serves and held by the owner of the gaming platform, meaning that if the company perishes, so does your valuable sword or armour. To address this issue, we need a mechanism that allows us to retain the ownership of a collectible in a trustless way. And, ERC721 token standard exactly does that.

Fungible Cryptocurrencies to Non-fungible Tokens?Bitcoin is both fungible and divisible. Fungibility is an important aspect for Bitcoin to become mainstream as a currency. Just as two one-dollar bills, even though one of them is smudged, hold the same value, two bitcoins are virtually indistinguishable and hold the same value, unless one of them was the first Bitcoin to be mined by Satoshi Nakamoto. In that case, it becomes a collectible. In the Cryptokitties example, each cat has a unique set of properties in terms of age, colour, and breed that makes it unique and distinctive.

Most Ethereum tokens out there follow the ERC20 and ERC223 standards a.k.a Fungible Token Standards. The ERC721 token standard was pioneered by the Cryptokitties team to create non-fungible tokens (NFTs). The ERC721 standard is better suited for collectibles as its value is unique, rare, indivisible (lucky kitties!) and associated with the characteristics of the token at the time of creation. The ERC721 standard can be used not only for creating collectibles, but it can also be used for tokenizing real life non-fungible assets like houses, cars, etc.

One of the biggest innovators in the space of collectibles and non-fungible tokens is Decentraland. They are developing a new non-fungible token standard called ERC821 standard and using it to design and build in-house virtual games, as well as sell acres of virtual land.

The field of digital collectibles and NFTs is still a fledgeling one and the number of projects is pretty much in single digits. However, driven by changing preferences of millennials allied to ongoing work around the development of trustless designs to hold digital collectibles in a safe and secure manner, we expect this space to witness greater developer mindshare and market size growth in the future.

With that, we are now off to focus on our secret ‘cryptotrumpie’ project. There is going to be a ton of customisation options, and it is going to be ‘yuuge,’ we assure you!


Satoshi&Co Daily Crypto Newsletter

By Ramani Ramachandran and Rohit Alluri

ZPX - Daily Crypto Update