Blockchain has enabled the creation of novel financial assets. Many tokenized assets come in the form of shares or bonds. Others come in the form of tokenized real assets, such as real estate. The key characteristic that these two asset types have in common is that they are fungible tokens. Thus, if I have one share of a property that is composed of 100 shares, that one share is exactly the same as the 99 other shares. Beyond fungible tokens, there are also tokens that represent unique items on the blockchain. These are known as non-fungible tokens or NFTs, because each of the items that the tokens represent are completely unique.
The applications of NFTs are endless. Real world items can be tokenized on the blockchain to facilitate changes in ownership. For example, someone who wanted to sell their car could simply transfer the car’s NFT to a new owner. This method of ownership is particularly useful for the world of antiques and collectibles, where provenance is important and tokenization of the item into shares is unlikely due to low values and liquidity. For example, a 17th century wardrobe worth $1000, will not have much value as multiple shares.
Real World Collectibles
The idea of putting something in the real world on the blockchain may seem strange. Why would I need to put, for a example, a painting on the blockchain? The use case for such an item involves provenance and ownership. In the case of provenance, antiques can sometimes be faked. Stories always crop up in the media about art historians questioning the dates of paintings in museum collections. Of course, the blockchain cannot go back to the 15th century, but it can prevent any problems with existing collectibles on a go-forward basis and for new unique real-world collectibles.
There are currently a number of blockchain based projects that aim to tackle this issue and help put real world items into an immutable blockchain. One of these projects is Codex Protocol, which has a registry and real world collectible items based on the Ethereum blockchain. In a project like Codex Protocol, every time an event happens in the life of an object, such as a change of ownership, the registry is updated. However, each event requires cryptocurrency to be processed. Auction houses and wizened old collectors do not have the time or effort to buy ETH on an exchange and deal with this process. With an integrated payments solution, this would not be needed. Instead, the user could use a credit card to pay the collectible registry directly and they could take care of the crypto side of things.
But there is also another class of NFTs called digital collectibles. These NFTs do not represent real world items, but represent unique digital items.
The best example of a digital collectible NFT is the game Crypto Kitties. In this game, participants could use Ether (ETH) to purchase a unique kitty ‘pet’ that could be nurtured by the user. Each kitty is represented by an NFT that is present on the Ethereum blockchain. This ensures fraud and the creation fake kitties is impossible, and also means that the process for selling a kitty to another user can be secured.
Despite the initial excitement over the launch of Crypto Kitties in late 2017, the game was not embraced by the wider public, and only users familiar with crypto actually played the game. Why? The main reason is due to a lack of connection between the game and the real world. Users had to hold ETH in order to purchase a kitty, and each in-game transaction required ETH to process. This made adoption beyond an initial code of crypto users basically impossible as the process for buying ETH is so cumbersome.
However, the integration of a payment gateway within games like Crypto Kitties would make adoption among regular users much easier. Instead of having to go to an exchange to buy ETH, and then transfer it to a Cryptokitties account, users could instead buy all the ETH they need within the application using a credit card. This step would divorce the base layer crypto transactions from the user experience and means that users would not over have to deal with vagaries of wallets and addresses. Rather, the entire experience would be seamless.
Future games, such as F1 Delta Time by Animoca Brands, aim to build a wider audience than Crypto Kitties. In this game, all tradeable items will be based on NFTs. Tradeable items will include car parts, drivers and anything that can be owned within the game. A combination of familiar intellectual property and seamless blockchain connectivity should avoid some of the issues that prevented Crypto Kitties from gaining widespread user adoption.
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BCW Group is a global strategy and management consulting firm with a variety of high-profile corporate clients focused on making blockchain use cases come to life. We work as an integrated partner with global payment and technology infrastructure firms to rapidly advance the blockchain industry ecosystem.