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CryptoPunks, CryptoKitties & The Future of Digital Collectibles

CryptoPunk #1720

Introducing: Cryptollectibles

Here’s why I bought a digital 24×24 pixel art character – and why you should consider buying one too

Meet Bob. I purchased Bob about a month ago for 0.2 ETH (roughly $90 at the time). Bob’s official name is CryptoPunk #1720 and he’s one of 10,000 totally unique, algorithm generated 24×24 pixel “CryptoPunks” created by Larva Labs earlier this year. Most CryptoPunks are punky-looking guys and girls, but there are a few rarer types mixed in: Apes, Zombies and even the odd Alien. Every punk has their own profile page that shows their attributes as well as their ownership/for-sale status (here for example, is Bob’s personal profile).

A brief introduction to Decentralized Applications (Dapps)

The first thing you need to know about CryptoPunks is that it’s one of a growing number of Dapps – Decentralized Applications. While there may not be a single definition to the term Dapps as the concept is still in it’s infancy, dapps are typically open source, decentralized, incetivized applications that run on a blockchain protocol such as the Bitcoin or Ethereum networks.

The ethereum white paper splits dapps into three types: 1) Apps that manage money. 2) Apps where money is involved (but also requires another piece). 3) Apps in the “other” category, which includes voting and governance systems.

For example, a peer-to-peer ridesharing dapp could be developed and published on the Ethereum network to facilitate value exchange between commuters (customers) and drivers (providers); Think Uber without Uber…

The CryptoPunks dapp is essentially a marketplace that runs on the Ethereum network and facilitates ownership exchange of digital artifacts (CryptoPunks) between buyers (customers) and sellers (providers).

Is this a good idea?

This is probably a good place to take a step back and say the following – if you had explained CryptoPunks to me earlier this year and asked me whether I think it’s a good idea, my answer would likely be “probably not”. I may have said that it sounds interesting and similar to Bitcoin and other Cryptocurrencies – where with limited supply, if you can get a growing network people to buy into the idea – it has value. If you can’t – it doesn’t.

The difference, I would probably argue, is that Bitcoin has utility – you can actually buy things with Bitcoin or exchange it for cash. What is CryptoPunks utility? how is it useful? What problem does it solve? Sure, you can add one to your Social media profiles (which I did BTW), but you don’t technically need to own one to do it. It’s just an image – anyone can download it and do it!

I would have been wrong.

From experiment to marketplace

When CryptoPunks first launched, anyone could go and “claim” them for free using an Ethereum extension (such as MetaMask) or browser (such as Mist). Claiming basically means attributing a unique CryptoPunk identity to a personal wallet on the Ethereum Blockchain as proof of ownership.

Within a few days all the CryptoPunks were claimed, and then an interesting thing happened…

A marketplace was born

Once all 10,000 CryptoPunks were “owned” a crypto-collectible (or “cryptollectible”) marketplace was born. Sellers started listing their characters for sale and buyers started bidding on them. Scarcity created demand – which meant that Zombies, Aliens and Apes, due to their rarity sold at a premium. For example, CryptoPunk #2386, a headband & shade wearing Ape – was sold for 4.25 Ether, which today is worth roughly $3,500.

If you think that’s nuts, here are some current stats (note that these numbers will become out of date very quickly), pulled from the CryptoPunks website:

  • Total Value of Punks Sold – 543.03 ETH ($450,450 USD)
  • Average Sale Price – 0.43 ETH ($358 USD)
  • Estimated Market Cap – 2,755.77 ETH ($2,285,937 USD)

So whether or not you or I may think CryptoPunks is a good or bad idea has no significance.

Almost half a million dollars in sales with an estimates $2M+ marketcap suggests that it is.

Narrative + Ownership + Scarcity = Value

Still don’t get it? Think it’s an unsustainable bubble? Here’s my take on it:

  • The above numbers prove that digital artifacts don’t necessarily need functional utility to hold value: Strong narrative + scarcity + ownership create value.
  • Lets face it, humans are weird – we collect anything from art to scraps of tape, because it’s not about the thing, it’s about the story behind the thing. The larger the network of people who want it, the more motivated they are and the more resources they have – the higher they will push it’s value. Simple supply and demand. Capitalism.
  • And granted, in a post-apocalyptic future world where humans have trouble putting food on the table – digital collectibles probably don’t carry much value. But for that matter, neither would any other collectibles…
  • But in a world that is continuously shifting from tangible to digital, where everything becomes increasingly connected and tokenized – digital collectibles absolutely have a place and can carry equal value to a rare postal stamp or Navajo blanket. Because it’s not about the thing, it’s about the story behind the thing. It’s not about what I can do with it, it’s about how it makes me feel to own it. How it makes me feel is the utility.

CryptoPunks, CryptoKitties & The Future of Digital Collectibles

You may have heard of CryptoKitties (you can read more about the CryptoKitty craze here)- a project that took the idea of digital collectibles one step further – adding gamification, creation and multiplication into the equation. In fact, as I write this post the CryptoKitty MarketCap far exceeds that of CryptoPunks at over $20M (!). The problem I foresee for CryptoKitties is that as they multiply like rabbits (despite being kitties) there will always be more of them, and a never-ending supply dilutes the narrative and with it – the value. For any collectible – limited supply is a key driver of value.

Regardless, these two projects are just the tip of the iceberg. The beginning of something new – not only have they attracted some high profile attention from the media and consumers new to blockchain, they proved to developers that actual money can be made by creating dapps.

I believe that these two projects will represent an important tipping point in the future of Dapp and blockchain development. They will draw a new wave of developers and talent into the blockchain ecosystem, which will result in an influx of new blockchain projects and use cases.

Some will create something new and valuable, propelling the industry forward.

Some will simply be useless copycat apps (pun intended) with no new narrative or value.

From first to better

It will become increasingly harder to stand out and replicate the CryptoPunk/CryptoKitty success – and this will be a good thing; shifting the industry from focusing on being first to being better.

Consumer adoption may lag behind for some time, but as the industry evolves and increases utility and value – adoption will follow. It may take time, but will eventually happen.

Why CryptoPunks might actually matter?

My bet is this – in a few decades, as we will look back at the evolution of Blockchain Technology – CryptoPunks, as absurd and simplistic as the idea is – will likely be considered a milestone in the evolution of digital art and blockchain based collectibles.

There will definitely be better/cooler/more useful dapps, but Bob and his 9,999 brothers, sisters, apes and aliens will have been the first ever example of limited supply, digital collectible stored on a blockchain.

The first. Ever.

That’s a strong narrative.

Though at a much smaller scale, this is not unlike what Bitcoin is to blockchain.

That’s why I bought one and you should (maybe) too.

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