Blockchain gaming: Crypto Kitties

Since the launch of CryptoKitties – a digital cat-breeding game built on ethereum – roughly a year ago, games have provided a digitally native playground for early adopters to experiment with the unique benefits of open protocols. Currently, most of the top dapps by transaction volume are games.

While there’s a lot of early excitement in the blockchain gaming space, there’s some rightful skepticism. Tony Sheng’s post on why Fortnite probably won’t embrace the blockchain any time soon sparked a great discussion about how the tech fundamentally changes in-game economies.

Blockchain represents a fundamental business model shift: from value extraction in closed ecosystemsto value capture in open ecosystems. The problem is that, while incumbents have figured out how to extract value in closed ecosystems (restrictive monetary policies, locks on transfers, fees, etc.), new entrants have yet to figure out how to capture value in open ecosystems.

Enter CryptoKitties: a digital cat breeding game and the first mainstream-oriented blockchain gaming experience. CryptoKitties was incredibly exciting to the tech community (myself included).

The fact that you “really owned your kitties” and could make ETH flipping them sparked a viral loop and culminated in the infamous kitty bubble of 2017. At the peak, cats sold for hundreds of thousands of dollars apiece.T

It’s worth taking a closer look at CryptoKitties.

Because little gaming infrastructure existed on ethereum, CryptoKitties built everything themselves. They had their own website, their own artwork, their own on-chain breeding mechanic, and their own marketplace.

At launch, CryptoKitties was a fully vertically integrated game that used smart contracts as its database. The CryptoKitties business model was actually highly traditional: they sold generation 0 kitties and took a 3.75% cut every time a kitty was sold or sired.

As many critics later pointed out, CryptoKitties could have built the same game on centralized infrastructure. They could have provided the exact same user experience on their website (they could even still take ether if they wanted to preserve the painful UX), and simply stored the kitties in a SQL database.

A non-crypto-knowledgable user wouldn’t know the difference.

The CryptoKitties experience is what I’ll call “vertically integrated digital scarcity,” and it’s likely a reason that none of the CryptoKitties clones got any traction. To mainstream users, they were just hard-to-use games.

I’d argue that the real signal with CryptoKitties lay beyond the initial user experience: it was the ever-so-slight unbundling of the game.

The logic layer for CryptoKitties now existed on a smart contract whose address and source code was viewable to the public, and could be called by anyone with an ethereum address. Now, any ethereum developer could build an ever-so-primitive “layer two experience” on top of the game.

Want to write a bot that snipes under-valued kitties? There’s an open API for that. Want to write a kitty explorer site to let users browse recent sales? Just watch the events on the smart contract.

These experiences didn’t have to be complex. In fact, the first layer two experience was simply the existence of Etherscan, the smart contract explorer nearly all ethereum users have grown to depend on. Techie power users could go to Etherscan and read directly from the CryptoKitty smart contract to inspect their kitties.

Marketplaces were another layer-two experience. I co-founded OpenSea with the idea that a generic layer two experience around trading games might contribute.

But it’s worth noting that OpenSea also failed to capture or contribute significant value to the CryptoKitties ecosystem. At the time, it simply didn’t provide enough additional liquidity to be interesting.

The problem with layer two is it’s just super immature, and you need to squint to see it at work. It’s unclear how much value CryptoKitties has captured from layer two experiences and it’s unclear how layer two experiences can capture value.

Nevertheless, dismissing layer two and focusing simply on “true digital scarcity” or “true ownership” is missing the forest for the trees. Layer two is what drives digital scarcity and true ownership.

In the same way that the vibrant ecosystem of exchanges and consumer experiences around bitcoin, ether, and ERC20 drove liquidity for the assets, the ecosystem created by layer two experiences will be what drives consumer excitement and confidence in digitally scarce assets.

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Categories: Crypto Currency

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