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Earlier in December, an online marketplace for selling and buying digital kittens became so popular and lucrative that it nearly broke the Ethereum blockchain. How did this happen and what can we learn from it?
To tackle this subject, we first need to talk a little bit about Ethereum, an open software platform that allows developers to deploy decentralized applications. Ethereum was first proposed in late 2013 in a white paper as a response to Bitcoin’s lack of a scripting language to develop apps. So, while Bitcoin remains exclusively a cryptocurrency, Ethereum has a value token called Ether (ETH) which facilitates the development of smart contracts. These contracts are computer protocols that can provide self-enforcement and more security (among other things) to regular contracts. They can be used for almost anything else as well: transference of ownership, decision making in a project, voting in an election or crowdfunding. However, Ether is also being traded as a cryptocurrency and its soaring price is making it more sought after day after day.
Now, CryptoKitties is an online game built over the Ethereum platform where you buy images of cats with specific traits and ‘breed’ them to produce new cats that can have rare traits. These images differ in their background color, the posture of the cat, type of tail, expression, colors, spots, among other variables. These digital felines are produced by a genetic algorithm that can pass down traits of parents to their offspring. The community decides which traits are most desirable (usually tied to cuteness) and assigns value accordingly. However, in the same tradition of collector items like stamps or baseball cards, scarcity boosts the desirability of each cat.
What is so special about this game? Well, for starters it generated transactions equivalent to 6.7 million dollars in its first week, and effectively halted all transactions the Ethereum platform. The hype is such that some cats have sold for the equivalent of 80,000 dollars. The extent of the impact of this game has led to people involved in the crypto movement to build CryptoKitties portfolios. As of December 2017, this investment strategy yields more profit than a standard retirement account in the United States; and in a market where retirement seems impossible for young people, these digital assets make a lot of sense. However, cryptokitty trading is highly speculative, even more so than the lesser-known cryptocurrencies. Risks are high and there is no true way to chart the value of these kittens; also, with growing demand the platform becomes increasingly unstable. This game is a true child of our current internet, it could explode into a vibrant community that transacts the equivalent to billions or it could crash and burn in a few months.
There are other important ramifications of the CryptoKitties model. The game was initially conceived to inform a non-expert audience about the Ethereum platform, but has become a proof of concept highlighting the capacity and limitations of the platform under high stress. In doing so it has become a great example of the possibilities of blockchain technology beyond its initial transactional nature. CryptoKitties can thus become a powerful precedent for other Ethereum based applications that are already working on other fields like providing venture capital for African start-ups, decentralized micro-blogging or crowdfunding.
CryptoKitties is also one of the earliest forms of blockchain based international digital asset trading. And while virtual in-game economies have existed for some time and intersect with both digital and physical assets in weird ways (think World of Warcraft’s gold which is now worth more than the Venezuelan Bolivar), this blockchain based economy is a whole other beast. It is still early to project the possible consequences of this model but it is interesting to think how this crypto-collectibles model could be applied to big properties like Disney or Sanrio. However, it also raises some questions: How and why do we assign value to things (or bits?) in the current internet? Is it healthy to anxiously be early adopters and not feel left behind technologically? (e.g. Americans are now taking on mortgages to buy bitcoin). Finally, are these digital images of cute kittens really the same as baseball cards? If CryptoKitties goes bust, will the cats and my cute digital kitten portfolio retain their value?
Image via flickr