Crypto Collectibles/Non Fungible Tokens (NFTs) : The Killer App for the Blockchain
Recently, I’ve been to many Cryptocurrency meetups. During these get-togethers, people keep asking the question, “What are use cases for the blockchain?”. I then offer the answer multiple times, “Well, there is a stable coin (makerdao.com), a decentralized exchange protocol (0xproject.com), and of course several smart contract platforms which are used by thousands of developers worldwide (e.g. Ethereum, Neo). However, it seems that this isn’t an answer they’re satisfied with, nor what they are looking for.
We are so early in the blockchain, and only beginning to build the infrastructure that will allow us to build scalable and mainstream applications on top of it. Unfortunately, this does not quite make sense to most people, as its rather abstract and ‘out there’. I empathize with their confusion, so in order to make it both accessible and easy to understand for the average person, we need a killer app which will go viral and grab the public’s attention. The emphasis here is on the word ‘attention’. It seems that since we are living and spending more of our time in cyberspace rather than the real world (e.g., when I take public transport in Zurich or in Munich, nine out of ten people stare at their phone), our attention is the new currency (read the book World After Capital for more information on this topic). The actual price of coins is more defined by the attention it gets from the community — in terms of community size, media attention, and social media — than its actual utility.
Let’s now take a step back and return to the offline world. What “assets” exist such that the price gets more attention than the actual use of the item? I would argue that items like jewelry, art and expensive watches would be good candidates. Sure, some have a sort of utility (e.g., watches displaying the time), but that’s only 0.001% of the value of a Rolex watch! The main function of those assets is ‘signaling’, which grabs the attention of people and forces a message to them. You want to show your status in society by signaling your wealth in different ways. Other offline collectibles include coins, stamps, or for a more modern example, collectible cards under the Yu-Gi-Oh! and Magic the Gathering brands. It seems that collecting high priced items which have little functionality other than signaling attention is a common trait of humanity. From this we can conclude that the rarer an asset is (e.g. Mona Lisa) and the more attention it gets (e.g. Mona Lisa being stolen from Louvre), the more value it attains.
As mentioned in the introduction, we are headed deeper and deeper into a ‘second life’ within cyberspace. We meet people online, play games, purchase items, etc. Even our additional identities (if we have them) are online. For example, you aren’t the same person when you’re commenting as user ‘firedragon1’ on an online forum as you are in real life. But still, at the end of the day, you have the same needs in the cyber world that you have in the real world (e.g. signaling, status, social acceptance, etc.). You still have your ego, so to say.
You want to stick out from the crowd and be ‘special’. But how can you achieve that? Perhaps you can write a blog article and get lots of views; that will bring you some status. If you achieve something in a game, you get some internet fame. That’s cool, but we still lack some sort of ‘digital Rolex’ and jewelry to show off in he digital world. That’s where Digital Collectibles or Non-Fungible Tokens (NFTs) come into play. These tokens are easy to deploy these days with the ERC 721/821 standards, almost as easy as ERC 20.
If you closely watch cyber-worlds space, from lighter versions such as social networks to more extreme versions such as Second Life, World of Warcraft, Minecraft and Decentraland, you’ll likely see fertile ground for this trend. Since everyone is connected with everyone online, why would you only want to signal wealth, status and fame exclusively in your offline life? Even though you might not know or meet everyone in person, you still have Maslow’s Hierarchy of needs to consider in the virtual world. Imagine you own a nice piece of artwork, such as the Mona Lisa, in your virtual house in Decentraland and all of your visitors are very impressed because that artwork has a real world value of 100,000 USD.
It will be even more interesting if these assets have some sort of connection to the offline world. For example, every trade of the Mona Lisa NFT includes a 1% donation to the Louvre in Paris. By holding this NFT, you’re not only someone who shows off, you’re also a digital philanthropist. This all sounds Sci-Fi, but it already exists in an early form and will only continue to grow. There are exchanges who list these NFT’s (e.g., rarebits.io and opensea.io), and the combined market cap of NFT’s is already in the millions of USD:
(find more here: https://dappradar.com)
The central question is adoption. How can we expand the market beyond all of us nerds and get these collectibles on every smartphone out there? How can we reach the non-Crypto people? Ultimately, I believe that the ideal approach is one that combines gaming and collecting. It needs to get as much traction as Pokémon Go (remember that craziness?). Still, there are some roadblocks that will need to be surmounted. Firstly, the Ethereum blockchain needs to be scalable to thousands of transactions per second, and secondly we need great mobile apps that will promote that collection game as user friendly. Number one is the builds: Ethereum has daily improvements on their scaling issues (e.g. Plasma, Ethereum Community Fund), and number two is in the builds as well. The Coinbase mobile wallet app “Toshi” recently announced the support of ERC 721 tokens. The decentralized exchange protocol 0x also recently announced their support of NFT’s.
The game needs:
1. To be easy to understand
2. To be attractive enough to create news headlines
Think of a headline like ‘13-year old girl from Bangladesh sells her digital Mona Lisa for US $100,000!’ I suspect these kinds of stories may well become the next ‘bitcoin millionaire’ stories that attracted serious attention globally. If this is the case, then you will agree that they will attract a huge user base. There are two things you should do to capitalize on your excitement: First buy your own collectible today. I, for instance, bought a Paul Klee painting for around $100 USD (don’t judge me here):
If you are feeling especially creative, you can create your own Crypto collectible game and help us make the blockchain go mainstream.
I am also looking for ways to create a valuation framework for NFTs. Let me know your thoughts!