The unspoken truth about NFTs and ERC721 tokens
Cryptokitties’ success story has created a huge hype over non-fungible tokens (NFTs). Everybody is talking about NTFs and about the ERC721 protocol as if they magically create value and therefore, greater gaming experience. If you look at any new blockchain game, NFTs are at the core of the gaming system where users buy NFTs in hopes of selling them later at higher prices.
I would like to debate two topics here. One is about the technical problems that current NTFs have which are not widely discussed, and the other is about the dysfunctional supply-demand market dynamics of the non-fungible gaming assets.
The unique and scarce properties are created and stored in centralized servers
Most of blockchain games create unique items (a.k.a NFTs) in their servers. The data stored on the blockchain, however, are mere numbers. In other words, both the uniqueness and the scarcity of an item are defined by and stored in centralized servers. So, if the game stops operating or if the company goes back-rupt, the only thing users end up owning on the blockchain are numbers and not the cutie bizzare cats they thought they had bought. This is a single point of failure very critical to the whole game which needs to be addressed and solved. Unfortunately, this topic is hardly ever discussed, but it will become a hot issue as soon as a gamer files a complaint over a blockchain game that stops operating.
If a game developer wants to claim that the unique items they offer are fully owned and controlled by the players, the very same uniqueness has to be recorded on the blockchain, as well. Otherwise, what’s the point of owning 1, 2 or 9 on the blockchain? How can players still claim that the 1, 2, or 9 value they own is unique when those centralized servers are gone? There needs to be a way to solve this, but sadly the ERC721 is not the right standard.
Is the scarce value of an item created and appreciated by the users?
As for the market dynamics of the NFTs, developers claim that the unique and the scarce characteristics of the game items provide value. Interestingly, the unique and scarce values are created solely by the supplier and the items’ unique characteristics are stored only in their centralized servers. All of this tell us that the value creation driven and semi-controlled by the supplier makes it quite artificial. The artificial value creation is one of the reasons why most of crypto-collectibles, including Cryptokitties, have an average of 200–400 DAUs, an insignificant number even compared to any mini indie game.
It is the demand-side of the market that has to appreciate the scarcity and the uniqueness of the digital assets, and only when this happens, an objective scarcity will be naturally created. In order for this to happen, the technical issues I mentioned above also need to be solved.
A value is appreciated and objectively created by the market, not by the suppliers
What I have learned from GoCryptobot is that in order for a game item to be unique, it has to be somehow related to the users’ personal experiences. The item does not even need to be non-fungible from the beginning. Let’s think of a real world example.
There is a baseball ball manufacturing company that makes balls. All the balls are different one from another, and each one has a unique color. So they tell you that each ball is unique and that it’s more valuable than other fungible baseball balls that look the same. Will the consumer buy this story? Maybe yes for a short period of time especially if he/she can profit out of their rising prices. But this phenomenon will not last as there isn’t a real value here. Just like Cryptokitties.
Now, there is another factory that sells only 1 type of balls at 1 dollar each. Consumers will buy these balls as if they were just another commodity. Nothing special about this business, but now let’s add a new scenario. Michael Trout made his first home-run with one of these balls at the MLB All-Star Game 2018, he signed on it, and gave it to a fan. The whole story changes now. The ball has the same characteristics to the millions of balls manufactured by this company, but everyone will agree that it is a unique asset with a very scarce value. This value is created by the market through an event that a lot of people experience and appreciate. And any fan of Michael Trout will be willing to pay a much higher price for it. This is the value that is truly created by the demand-side of the market, and therefore, the one that will last much longer even if the MLB disappears and even after the player retires.
Conclusions
The solution is quite straightforward. There needs to be a new type of transaction on the blockchain that enables a better value creation of the NTFs. In the case of CodeChain, we are currently polishing the specification of a transaction that allows users to store and track special data on chain. The baseball ball example inspired us to add a feature that converts a fungible token into a NFT by adding on-chain data, so that the unique characteristics are not created nor stored in central servers.
There is no doubt that non-fungible tokens represented by Cryptokitties are just a start of a bigger revolution. Every new big technology starts as a new toy and I certainly believe that the technology and the businesses around it will evolve to an extent that nobody has ever imagined. This is really exciting. For that evolution to happen, however, we need to properly identify and address current loopholes and problems. Let’s put the hype aside and think how we can improve them.
