Part 2: Digital Scarcity (Am I original? Am I the only one?)
Written by Andrew Holz
Part One of this series, A Taxonomy of NFTs (Collectibles and Assets and Digital Twins, Oh My!, outlined the definition and broad categories of non-fungible tokens. Part Two will dig into the category of NFTs which have gotten the most attention to date, purely digital, consumer collectibles.
Within this category, some provide utility to the owners (generally through games) and some do not. By understanding both the similarities and the differences we can gain insights to help evolve the platforms supporting NFTs and move towards wider consumer adoption.
Part 2: Collectible Consumer NFTs
All NFTs are created by originators with the intent of creating value (obviously) for themselves and their audience. Value for consumer collectibles can be very fickle however and unique digital collectibles share that feature. Digital consumer collectible NFTs may even be more sensitive. Consumers understand that producing the collectible from bits is essentially free, so the rules of issuance and scarcity must be held to an extremely high standard if the collectible is to appreciate in value.
Starting with a particularly interesting example, a recent collectible digital NFT is the single 2018 World Series Trophy token that Major League Baseball created and auctioned off. Different blockchains and standards can be used to issue NFTs (Ethereum’s 721 being the most common). Fundamentally they need to enable unique tokens, attach attributes, prevent invalid cloning, enable transfer between owners and have an immutable history. This does not mean however, that another VERY similar one-of-a-kind token can’t be created. This new version just will not be identical to the one created at that time, by that creator. Lets unpack the implications of what uniqueness really means.
Collectibility is built on authority and reputation.
One of the most important characteristics all digital collectibles share is that the issuer needs to have authority and a good reputation if the NFT is to be valuable. This need for a central authority to issue a collectible NFT is in many ways anathema to the decentralization ethos of the wider blockchain-o-sphere, but nonetheless true. If the issuer has no authority to create the official version of the collectible or to enable the utility of it in a game, it has no value. I can go and create an NFT (ERC-721 or otherwise) right now for the public event of the Yankees 2009 World Series, but it's obviously worthless even if I double pinky swear to only ever make one. (I might also get sued even though it was a public event... but that is a rabbit hole for another day.)
Beyond the authority, the reputation of the issuing organization matters because if no one believed the MLB was only making one World Series 2018 NFT it greatly reduces its desirability (beyond it being for the Red Sox which is bad enough). If you buy into the MLB Cryptobaseball ecosystem you are trusting MLB to responsibly issue additional non-duplicative assets and provide them with enough support (in a game or via media coverage) that my baseball NFT retains significance and ideally increases in value.
Implied with every NFT is that the issuer (since it is built on their authority and reputation) will not devalue the collectible through their actions. Issuers will need to publish and honor the rules of issuance if they hope to develop the market for the collectible they are issuing. Blockchain based NFT platforms that are good for collectibles will help support the communication and enforcement of those rules (i.e. “Token 83 of 100 in the series”). The platform also needs to make it easy to check the one-of-a-kind collectible token really was issued by the appropriate authority within the rules of that ecosystem. Tupelo (Quorum Controls DLT project) enables this through validity checks built into the token itself though it can also be done via smart contract through a blockchain like Ethereum as well.
Issuers may even want to take a further step and embed a digital copy of an old school legal contract about issuance within the token itself. In the end, however, the issuer can likely devalue existing collectibles without breaking the enforced rules. A basic rules language for token issuance is very helpful, but does not truly prevent debasement.
All collectibles are built on active communities and NFTs are no exception.
A key factor in creating valuable, collectible, NFTs is the support for developing the community around the items. The best NFT platforms have a role to play not just enabling these communities but in helping build them.
In analyzing the potential value of collectible digital NFTs it is helpful to consider some of the more successful physical collectibles. Baseball cards have big conventions where vendors lay out huge collections for sale. Collectors interact with each other and those vendors and buzz can be transmitted and collective belief in the value reinforced. Books and guides are published pricing cards that are not even necessarily for sale. Disney pin collectors display their rare pins proudly and the real insiders can recognize each other when they meet. (“I am more Disney than you!”) Magic the Gathering lets players not only use their cards at their local gaming shop (to which many players bring their trade binders) but sponsors large scale conventions and tournaments to which vendors play a key role both buying and selling the highly collectible cards.
Access and ownership of rare items confer status but only IF they can be displayed in the context of the community that values them. Multi-player games inherently have a community -- the other players in that game. Having a particularly rare sword, or a vanity item that marks a significant achievement raises the status of that player with every other player that sees them in the game. That is a good start but it is not enough.
Non-games collectibles have an even bigger challenge without the utility games provide. The answer that has been provided thus far has been the marketplace (e.g. OpenSea). This does allow for available NFTs to be shown and a sense of the value reinforced, but will need to evolve more social aspects to energize the markets they support. The listed items should provide maximum context, say something about the seller (if they opt into it) and even link through to the full collection of that seller. There needs to be a deeper engagement in the marketplace. Differences between Etsy which enables a social experience and Ebay which has a much more limited one is a good starting point to understand more social marketplaces.
Community development around NFTs needs more than marketplaces.
This can be achieved by providing the verified display of the NFT online wherever the collectors might congregate. A logical example of this is online forums. If I can display my most impressive collectibles as part of my signature every time I post I am signaling my “rank” to others in my community. This encourages the desirability and value of the items. Ideally, this forum display is also a link to a full online “display case” verifying not only the NFTs shown in my signature but the rest of my collection as well (perhaps with a way to offer trades). If these display cases can be customized to the user/collector they can deepen the browse-ability and engagement even further. Customizing the organization and display of a collection can also promote engagement in much the same way physically inventorying and organizing collectibles is an important activity for many hobbyist. Providing appropriate discord avatars linking to more full profiles with relevant NFTs would be similar to forum signatures. From a technology point of view this can be thought of as extended very public wallet. It is all about combining public display and integrated verification.
Enabling NFT integration into streaming platforms such as Twitch is another online community flashpoint that could provide key fuel to displaying and engaging with collectible NFTs.
Browsing and interacting AROUND the collectible NFTs needs to be enabled wherever community members congregate. It is like an advertisement for the collectible but presented BY the community members to each other. The DLT platforms supporting them need to help make this happen.
Last, community sites showing some form of leader boards ranking the NFTs collections along a variety of dimensions (most rare, most complete, best theme, etc.) should be supported with functionality similar to the forum signatures above. Perhaps this can be blended with articles of interest on relevant content sites for enthusiasts. The platform on which the NFTs have been issued need to make these integrations easy, free and even provide the actual infrastructure where appropriate. By keeping the displays and interactions close to the platform itself, it helps prevent fakes and makes it easier for sustainable ecosystems around collectible NFTs to emerge.
NFTs need to leverage the “Digital” of Digital Collectibles.
Digital collectibles do have several advantages over physical ones. One of the more obvious ones is their durability. Although they can be destroyed, in general, age does not cause them to degrade. My Crypto Kitty doesn’t turn yellow and curl up over time though some care does need to be given to securely storing them. Ideally, this secure storage does not compromise the ability to display the NFT. Cold storage could work against some NFT marketplace community features described above and verified display needs to be carefully balanced with security.
More significant than durability is the fact that NFTs contain within them a full, immutable history of their ownership. So not only do I have 1 of only 1000 of a particular collectible, but I can prove it once was in the collection of a noteworthy member of the community, or perhaps that I was the ONLY one to ever own it. The display channels for the NFTs need to incorporate this information though different NFT markets may need to accentuate different features of the history of the item. Games could go as far as to record notable achievements (killing the Lich King) while the sword was in use. The actual “skin” Bizzle wore for their Fortnight Championship match can be part of the immutable history as well as part of the display for whichever of his fans purchase this one of a kind collectible NFT. These histories essentially make each instance of the item even more “non-fungible” and truly one of a kind.
Game NFTs are collectibles that provide utility.
Most of the above features apply whether the collectible NFT is part of a game or not. Games bring utility to the collectible party but we need to examine how that will work as the market evolves. So far, game NFTs have been largely usable in only one game. That reinforces that the functionality, value, and usability of an item is still highly centralized in a single game developers hands. There may be a decentralized market (Blockade selling Baus on OpenSea), but the value of the items is largely under central control. If the power level in a game moves past my Legendary Sword and it does not adapt, its utility in the game is certainly lowered. More direct would be if the developer “nerfs” an overpowered item after auctioning off a number of them. Part of the promise of NFT game items though is that the gamer really OWNS their items.
Gaming NFT platforms and builders need to take steps to minimize arbitrary changes to the items and to enable meaningful movement of items between games. To realize this one important step is to load key data INTO the actual NFTs representing those items. The NFT should have two types of data, one generic information stored via an agreed to standard. (Note this standard needs to go WAY beyond the high level exchange rules of ERC-721.) The generic data would include things like a description, origin story and 3d model that can be used to display the item (in the game or in a collection or on a market). The other type of data in the NFT would be namespaced with the specifics for a particular game but still part of the NFT.
(Tupelo would be excellent for this.) Additional details about the display and the history of that specific instance of the object could be stored in the game specific part of the NFT data as well if it went beyond the generic history structure available.
To enable meaningful movement of items between games standards for both of the types of data described above (with a focus on the generic portion) needs to be reached between developers. By partitioning a shared and a game specific place within the NFT each game could evolve independently but meaningful sharing between them is maximized.
By structuring NFTs with both a shared and game specific space they can truly exist outside of any one game in a meaningful fashion. This increases the value of the items and lets development companies (especially smaller indie ones) collaborate in a decentralized fashion all contributing to increasing the total value of the market. If marketplaces went a step further and rewarded the games involved in transactions for cross game NFTs the incentives could be aligned even further.
Creators of collectible NFTs, whether they have utility or not, have to be particularly sensitive about how they issue them, communicate about them, honor the rules and support the communities that embrace them. There is a greater sensitivity and scrutiny because digital goods CAN be duplicated for essentially zero cost and users are aware of this fact. The scarcity of digital collectibles must be cultivated in a meaningful fashion and the tools supporting them must be community oriented and celebrate the uniqueness each has to offer across the ecosystem.
In part three of this series we will move on to another major category of NFTs, those representing real world objects.