A Simple Explanation of Crypto-collectibles

Wait, did we just put Beanie Babies on a blockchain?

Short answer: kinda, yeah.

Paintings, sculptures, coins, dinosaur bones — people have long put their money into artifacts that help define their identity since the beginning of civilization.

The talk of the town over the last several months has been around digital or “crypto-collectibles”. One definition of crypto-collectibles from Decentraland:

A crypto-collectible is a cryptographically unique, non-fungible digital asset. Unlike cryptocurrencies, which require all tokens to be identical, each crypto-collectible token is unique or limited in quantity. Typically, crypto-collectibles are visualized as real-life objects such as pets or avatars. Each token has variations in specific attributes and there are limits to the number of tokens that can be generated.

While bizarre for Boomers who’d prefer dropping $450M on a canvas at Christie’s, it’s perfectly intuitive for a generation that grew up breeding Tamagotchis and Neopets (and later upgraded to street fashion and video game skins).

The Collectibles category of eBay provides a peak into the world of non-digital collectibles.

What does it mean for something to be “digitally scarce”? 🔄

The reason why digital collectibles are even possible goes back to Bitcoin, as it was the first to establish that trust-less digital scarcity is possible.

The reason that digital scarcity is so remarkable, is because digital assets (which is just made up of software code) tend towards abundance. While the cost of replicating things in the physical world is high, the cost of replicating things in the digital world is simply an exercise in typing “copy+paste” — just ask the music labels.

“Trust-less digital scarcity” refers to Bitcoin’s fixed supply (unchangeable and enforced by code) which is resistant to change, despite motivations of any adversary or corporation that wishes to change it. There’ll always 21M bitcoin, a fact we know and can take comfort in.

In addition to being “scarce”, Bitcoin is frequently described as fungible. Fungibility is described as:

the property of a good or a commodity whose individual units are essentially interchangeable

Fungibility and scarcity are two of the five properties frequently cited as properties of currencies. Gold is fungible — an ounce of pure gold is equivalent to any other ounce of pure gold. It’s also scarce, given there’s a hypothetically fixed amount that we have to pull out of the ground.

Before Bitcoin, it was impossible for us to know that a digital asset was provably scarce in a trust-less way. While many online games and sites attempted to offer an in-house currency, the supply and control of these digital assets were at the whim of the company issuing them. They had the ability to remove or modify your ownership at any point in time.

How do we go from Bitcoin to crypto-collectibles? 💱

Here’s how fungibility applies to collectibles: all new baseballs are fungible (effectively interchangeable) until one is signed by Babe Ruth, at which point it becomes a unique collectible.

A fungible, scarce digital token that you can share with other people has high utility as currency. However, in the collectible context, what if we held much of the same properties but instead tagged tokens with unique identifiers (metadata, for the nerds) so that we could differentiate between two tokens of the same kind? Fungible tokens are identical blank canvases, where non-fungible tokens are the Picassos, Van Goghs, and Rembrandts.

The simple answer is that you get non-fungible tokens (a.k.a. NFTs), a more technical buzzword some people use to describe crypto-collectibles.

While there were many previous approaches to creating digital collectibles, e.g. Rare Pepe cards built on top of Counterparty’s blockchain, none of them caught on with a mainstream audience.

The first non-fungible token to capture significant attention was the CryptoKitties project, which launched on November 28th, 2017. It seized everyone’s imagination and millions of dollars while almost bringing down the Ethereum blockchain in the process.

While the project received criticism for its perceived uselessness, CryptoKitties was one of the first non-currency use cases of blockchains to receive mainstream adoption. It got here through the use of gorgeous design, an easy-to-use interface, and adorable kittens.

Why are CryptoKitties tokens different than ether or bitcoin? 🐱

Because they’re cute and special, duh! CryptoKitties had a number of unique qualities that distinguished them from other tokens built on the Ethereum blockchain:

CryptoKitties could have combinations of a number of properties (age, breed, color, etc.) that made each token unique (and sometimes valuable!). This made them non-fungible, as any one CryptoKitty token couldn’t be swapped as equivalent to another.

CryptoKitties were indivisible as a result. While you can divide bitcoin or ether by infinite amounts, it doesn’t make much sense to divide your CryptoKitty token. Poor kitty!

After launching, users spent millions of dollars acquiring virtual kitties, with some particularly special kittens going for hundreds of thousands of dollars. The market for these unique kitties was so big that community-built auction boards and kitty genome classifiers were created. The kitty markets were so popular that at one point they clogged the Ethereum blockchain to the level that breeding fees had been doubled.

What does this mean for the development of other collectibles? 🤓

[Warning: Nerd Alert] While most Ethereum-based tokens were based on Ethereum Request for Comments proposal #20 (a.k.a. ERC-20 a.k.a fungible token standard), a new proposal was created for the “non-fungible token standard” by the creators of CryptoKitties: ERC-721 — a lot of in-depth, novel engineering behind what looked like a toy.

Many of the new projects identifying as “non-fungible tokens” are working with the ERC-721 specification (and more recently, ERC-821, a more sophisticated approach pioneered by the Decentraland team).

Where do we go from here? 🔮

Since the launch of CryptoKitties, hundreds of non-fungible tokens have started development. Of these, one of my favorite examples is Decentraland.

Decentraland is a virtual reality platform powered by the Ethereum blockchain. Users can create, experience, and monetize content and applications

Contrary to existing virtual reality worlds, Decentraland is building a fully decentralized virtual reality universe that’s wholly owned by users. In this process, they’re making heavy use of the non-fungible from designing in-world games to selling lots of virtual land.

While Decentraland is exploring an extraordinarily ambitious, utopian vision, it won’t be long before real-world assets are represented and traded via non-fungible tokens. This virtual representation is already being developed for art and hard assets while the common design of these tokens will allow for easy trading and shared liquidity: RareBits has already created a market for a number of unique digital collectibles.

While many digitally-native tokens might be fads, this isn’t too different from other (non-digital) collectibles. Cultural value assigned to pure collectibles will fluctuate but with future adoption of non-fungible tokens in traditional games and new types of assets being represented as NFTs, I anticipate that development of “crypto-collectibles” will continue to be impactful going forward.

Some of the kitties with the most likes on the CryptoKitties marketplace.

Where can I learn more? 🙋‍

The best way to play with crypto-collectibles is to actually buy one (or better, create one!). For that, RareBits or CryptoKitties is a good place to start.

Reddit communities are also great, see: /r/DigitalCollectibles, /r/CryptoKitties, or /r/Decentraland.