DEX Series #6 - How blockchain is changing the collectibles game

DEX Series #6 - How blockchain is changing the collectibles game

Collecting is usually thought of as a bit of a childish hobby, while in fact, it is a lifelong passionate pursuit for many. It usually starts in childhood, where we collect everything from toy cars to player cards. Adults are no strangers to collecting, with a known dedication for everything from stamps, coins to works of art. The rarer a collectible, the more coveted it is among the community, driving up the price and the amount of attention they grab. The digital world is no different in this logic, nourishing a growing market of digital collectibles whose combined market value is already worth around 200 billion USD.

Digital scarcity equals value

Digital collectibles are digital assets, defined by their unique properties. That means that each of them is one of a kind and therefore not replaceable with another one. This defining trait makes them scarce and adds to their popularity.

Such digital assets are known as non-fungible tokens (NFTs), a unique and immutable data record on the blockchain that cannot be replaced by any other in its value nor its properties. The ERC-721 standard for creation of NFTs serves as a set of rules that make an asset (either digital or tangible) become tokenized as a non-fungible token. As such, it carries its unique data, maintains its original value, provides a track of its provenance and ownership, and remains safe from hacks and alterations.

One type of the data inscribed into an NFT is information about its scarcity - either that it belongs to a limited edition, its serial number, ID, etc. This is especially important when an asset acquires its value predominantly based on the fact that it is one of the rare pieces of its series. Even when a digital asset gets traded, transferred or managed, its data remains intact, meaning it is safe from frauds, alterations, and mismanagement, no matter how many hands has it passed through.

In the world of collecting, scarcity means attention, which translates into value. CryptoKitties, a blockchain-based game that’s all about collecting (and taking care of) digital cats, has seen over 2 million transactions since it launched last November. One of them, apparently a very rare breed indeed, sold for a whopping $120,000. CryptoKitties and other digital collectibles find new owners on marketplaces such as the very popular OpenSea or RareBits. Trading is an important element of owning crypto goods, and with an increasing number of digital asset exchanges, both centralized or decentralized, the growth of crypto collecting community has gained a strong momentum.

A variety of sources, from Kitties to celebrities

There are many different types of digital collectibles out there, ranging from virtual pets, digital works of art, even celebrities, as well as unique and special items from various video games. The latter have proven themselves as very popular even before the rise of blockchain which has provided them with infrastructure for further growth and new applications. In-game items like special weapons, rare player skins or other virtual assets, have gained a massive market value with games like Fortnite. Such assets are creating a whole new revenue stream to the gaming industry, adding up significantly to licensing and e-sports. Even one of the most popular type of collectibles - the famous baseball cards - has made its transition to the blockchain world, officially licensed by MLB.

This shift from real life activities to their digital applications introduces an additional feature of great importance in non-fungible tokens – their traceability, proof of ownership, and provenance, as well as their IP protection. Since its origins, a digital collectible tokenized as an NFT can be verified on the blockchain through its distributed and immutable ledger. Not only can such assets present a more trustworthy source and reliable investment for buyers, but also can their creators gain an additional layer of IP guarantee when building their portfolio.

Blockchain changing the collectible game

Although collectibles as a thing are not new, moving them to blockchain is adding new dimensions to the collectibles market and improving it. On blockchain, the actual value of a collectible can be expressed through non-fungible tokens (NFTs), a special kind of crypto assets. They are unique and non-divisible, and thus ideal for ensuring the metadata of the collectible remains undisturbed. Tokenized as NFTs, such collectibles acquire a tamper-proof and immutable record of ownership and can be traded among individuals on decentralized exchanges.

Blockchain also introduces a game-changing feature when it comes to ownership of a collectible item (or a piece of real estate or other assets). It’s called fractional ownership. In reality, indivisible objects (like paintings) cannot be broken down and handed to multiple owners. However, with tokenization of assets where ownership is digitally represented, there is no such limitation. An asset can be broken down into several parts and purchased by multiple owners.

Without the rise of blockchain or another distributed ledger technology (DLT), digital assets could not turn into digital collectibles with a complete warranty for their inherent data. Not only did blockchain contribute to their creation, but it also enables their transfers, trade, and verification. As their data stays inscribed on the blockchain, they remain solid, trackable, and reliable carriers of value.

The blend of digital and physical

Although digital collectibles might sound like a geeky craze that will pass faster than Friday night, the number of transactions and values involved (see above) point to the other direction. Further potential might be forthcoming with easier applications that will drive adoption (which in turn drives news headlines).

As the tangible and digital world overlap almost on every field, examples of blockchain being used for managing physical collectibles have sprung, as well. One of them could be having every trade of a virtual painting in the form of an NFT include a certain percentage of its value as a donation to the museum that is holding the actual painting.

Much like digital collectibles on the blockchain, a non-fungible token can also carry data of real-world objects. Especially important becomes the strength of NFTs when tokenizing assets with much of their value lying in their scarcity or uniqueness, authorship or provenance, originality or trackability. So as the tech and its awareness evolve, we are expecting to see whole sets of real-life collectibles tokenized and traded on the blockchain, preferably in a decentralized way on decentralized exchanges, much like digital collectibles today are.

For more on the topic of a decentralized way of trading assets, please check our other episodes of the DEX Series:

DEX Series #1: Tags and IDs
DEX Series #2: Trading and exchange
DEX Series #3: Governance and control distribution of exchanges
DEX Series #4: Centralized vs. decentralized exchange
DEX Series #5: Academia