The Capital
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The Capital

Crypto Collectibles

Follow me on Twitter @ordcryptoguy

“An image can be worth a thousand pounds”

Since the beginning of time, humans have accumulated items in behavior that contradict rationality. What use does a copper coin that dates back to 2500BC have in today's society when wealth can be expressed with binary bits? What use does a 500-year-old painting have when a modern-day rendition is both better quality and impervious to the elements? What use does a specific cotton hoodie with a red logo have that another doesn’t? (you know which hoodie I’m referring to) As technology progresses, humans adapt yet parts of us remain the same. What is the compromise? We simply just collect different things.

Enter the space of crypto-collectibles…

Overview of Crypto Collectibles

Crypto Collectibles in the form of Non-fungible-tokens (NFTs) at a high-level definition are units of data stored on a blockchain that certifies the uniqueness of a digital asset. NFTs can be used to represent digital files such as photos, videos, and audio. NFTs initially gained traction on the Ethereum network due to the system of token creation available via its smart contract capabilities. Mainstream awareness of NFTs would come after the release of CryptoKitties, and gradually by 2021, NFT interest would spike off of the 2021 Crypto Bull Run with many high-profile sales (Beeple, Jack Dorsey’s Tweet, etc.).

Beeple’s collage, Everydays: The First 5000 Days, sold at Christie’s for $69 million.

The ERC-721 standard

In 2017, the EIP-721 proposal put forth a standard for NFTs on the Ethereum network. ERC-721 refers to the contract standard, which functions to ensure that a contract is distinctive where the pair contract address, uint256 tokenId must be globally unique. Besides this, it includes the standard functionalities such as token transfer, token balance, ownership, and total network supply. “Visuals” of the NFT are essentially just dApps converting the tokenId as input and outputting a digital file. To learn more, visit the EIP proposition. You could argue, to officially be an NFT by the Ethereum standard, your contract must satisfy the ERC-721 specifications.

Cryptokitties was one of the first NFTs to use the ERC-721 standard in Beta.

The Market of NFTs

The 2021 NFT wave saw the launch of thousands of NFT projects on Ethereum from the clear pump and dump schemes by creators looking to capitalise on the craze to attempts at creating NFTs with a value proposition such as Hashmask. Many of these NFTs sold for record prices someone paid $390,000 for a 50-second video by Grimes. All of which though with roughly the same idea of guaranteeing the owner unique ownership of whatever they purchased. Nevertheless, the market is here to stay.

An example of a Hashmask NFT (that sold for 650k).

The risks involved

Nonfungibility presents a significant risk of market manipulation. Since peer-to-peer sales are over a unique item, this allows owners to generate fake “value” for their NFTs by buying from themselves at a higher price and repeat the process to generate fake “interest.”

Another risk factor lies with the representation of the NFT itself. What is the guarantee that websites to show the nfts will still exist 20 years from now? How can you be sure there is only one representation of the NFT? Besides a standardised contract for post ERC-721 NFTs, there isn’t necessarily a standardised protocol on how they’re represented, instead, the validity of the NFT relies heavily on the creator and community who own them. Whereas you can guarantee your First Edition Charizard will look the same in 20 years (assuming you’ve taken good care of it), it’s harder to guarantee that Token 1132 will show a spinning egg in 20 years’ time as the NFT may only work with a specific site.

This raises the question, with all these NFTs launched and the nature of such an opaque market, surely, not every one of them is a collectible worth collecting, so how do we know what has value and what doesn’t?

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