In the past 3 months, we’ve seen an explosion in interest in digital collectibles on the Ethereum blockchain.

Digital collectibles have been explored by the crypto community for years (Spells of Genesis and Rare Pepe are two of the pioneering projects in the category launching back in 2015), but a confluence of factors have brought the category to the forefront this year. We may now be at the start of a digital collectibles boom similar to the ICO boom we saw in ’16 and ’17. This piece will explore how we got here and where digital collectibles may be going.

The origin of digital collectibles on blockchains

The Bitcoin blockchain serves as the ledger that maintains ownership of one fungible token: BTC. Fungibility means that BTC is interchangeable — all BTC are considered to be the same. While 99.9% of the value in the blockchain ecosystem has accrued to fungible tokens to date, a blockchain can also serve as a ledger that maintains ownership of non-fungible tokens (NFTs).

Bitcoin itself has a limited scripting language and is not designed to natively support the creation and transfer of new tokens, but layers on top of Bitcoin like Counterparty were built to support new token types like NFTs. Counterparty enabled the first generation of non-fungible collectible-based projects like Spells of Genesis and Rare Pepe.

This unique digital representation of Homer Pepe sold for ~$39K (data via http://rarepepedirectory.com/)

The UX for the first-generation of digital collectibles was bad and the friction involved has likely prevented them from gaining broader adoption. A bitcoin user that wants to buy a Rare Pepe must buy a new cryptocurrency on a different platform designed specifically for one type of non-fungible asset. There is no interoperability in UX or standards for this first-generation of collectibles and there’s also not much programmability to enable gameplay or other dApp experiences on blockchain.

Despite the poor UX, interest from users on first-gen projects like Rare Pepe was strong (generally a good sign). Homer Pepe (pictured above) sold for $39K last year and a community emerged around the project, with a foundation, a wallet, and a directory all supporting it.

Enter the digital collectible token standard: ERC721

If there’s one thing that we’ve learned from the ICO boom of 2017, it’s that a robust script language, standards and interoperability can be powerful catalysts to broader adoption when there’s global liquidity. Crowdfunding via tokens had existed in various forms pre-ERC20, but the ERC20 token standard kickstarted an unprecedented boom in global crowdfunding that the world has never seen before (to the tune of $4B+ in 2017 alone).

The ERC721 standard may have the same catalyzing effect for NFTs. The standard was created by the team behind Cryptokitties, and the standard now has lots of contributors and implementations. Today there’s over 100 Cryptokitties variants of NFT systems that have since been created (see all of them here: https://dappradar.com/).

This unique digital representation of a cat sold for $110,707 (data via https://kittysales.herokuapp.com/)

But why would you ever care about digital collectibles?

To some, Cryptokitties looks like a meaningless fad for the Ethereum-obsessed. But in my view there are a few reasons there’s real substance to the NFT movement:

Humans have a fundamental desire to own things that are scarce that other people want

The ERC721 standard makes it easy for developers to create scarce digital assets that anyone in the world can easily own without relying on a trusted intermediary, tapping into a massive global liquidity pool

Competitive gameplay, partnerships and licensing deals that underly unique digital assets and unique art are categories of digital collectible projects that will lead to sustainable demand from users over time

As we’ve seen with physical collectibles (e.g. Beanie Babies and baseball cards), fads are quite common in the collectibles world. The same will be true in the digital collectibles world to be sure, but I think there will also be categories of digital collectibles that are likely to persist over time.

Digital collectibles today

Digital collectibles today reminds me of Bitcoin in 2012 in the sense that most of the 100+ digital collectible projects on Ethereum appear to be led by developers trying to make a quick buck rather than developers who are serious about building for the long-term. There’s no gameplay, no partnerships, and no unique digital art associated with the vast majority and in some case they are multi-level marketing campaigns or outright scams.

But also similar to Bitcoin in 2012, despite the current shady market environment there is clear interest from users in the category. On Cryptokitties, over $22.3M worth of digital cats have been sold since launch in Q4 of last year. There’s now thousands of transactions happening in digital collectibles each day (~99,000 in the past 24 hours) and lots of new projects popping up.

Digital Collectibles in the Future

These categories may produce really compelling digital collectible-based products

Cryptokitties shows the promise of combining unique digital art with basic gameplay mechanics (mating). In it’s current format, it may lack the competitive dynamics necessary to make it really compelling long-term, but it is clearly pioneering the category and has sprung up lots of variants like EtherTulips and CryptoFighters.

Ethercraft, still in early development, shows signs of combining rare digital goods and a competitive game dynamic (think World of Warcraft). This is an interesting approach and I expect more projects like this to emerge. The traditional game makers like Activision Blizzard have historically tightly controlled their platforms and so I think it’s pretty unlikely that they enter this space anytime soon. But maybe in 5 years they will have to.

The holy grail in digital collectibles is a combination of the three categories described above: competitive gameplay, IP from premium content providers (think sports leagues, entertainers, etc), and unique digital art. We may need better infrastructure and tools to build this type of project before we see it working at scale, but it might happen quicker than most expect.

Learn more on digital collectibles:

Rarebits : One of the companies leading the charge at making digital collectibles easy to use for the masses

One of the companies leading the charge at making digital collectibles easy to use for the masses Cryptokitties: The first popular Ethereum-based crypto collectibles

The first popular Ethereum-based crypto collectibles R/digitalcollectibles: There’s no active project-agnostic subreddit to chat about crypto collectibles exclusively, but maybe r/digitalcollectibles will be the first. I will be on there to chat about the space if you’re interested

About the author: Nick Tomaino runs 1confirmation, an early stage crypto fund. Sign up for The Control newsletter and check out the next Token Summit in NYC in May 2018 (we’re having a panel on digital collectibles).