A recent craze spreading through the cryptocurrency community is CryptoKitties. These digital kittens are bought, bred, traded, and sold through the community. As of January 10th, more than $18M has been spent on these CryptoKitties, with one exclusive kitten — ‘Genesis’ — selling for over $114K. While the popularity may be confusing to outsiders, CryptoKitties are a wonderful example of how the blockchain works.
In this blog post, we’ll dive into how CryptoKitties works, how other assets can benefit from being represented in the blockchain, and what it means for the financial services industry.
What are CryptoKitties?
CryptoKitties are collectable digital kittens that are stored on the blockchain. Just like real kittens, CryptoKitties are non-fungible, meaning that they’re unique and in this case individually identifiable, and they are rivalrous, so they can only be possessed or owned by a single user. They also happen to be cute which is helpful for their virality, but alas is irrelevant to the blockchain.
Blockchains can run ‘smart contracts’, which govern how users can interact with and use their digital kittens. When used on a public smart contract is available to review by anyone — meaning that it can be audited and validated by the market participants. In the case of CryptoKitties, there is a smart contract that governs how the kittens ‘work’ — in this case the smart contract has defined functionality for buying and selling the kittens, for trading kittens, and for breeding kittens. Essentially, the kittens are digital assets that are governed by auditable rules.
Digital assets beyond kittens
Much like real kittens, there are numerous goods that are non-fungible and rivalrous: for example land, cars, and art. These goods can have a counterpart that can describe their ownership such as a land deed, car registration, or certificate of authenticity and provenance for a piece of art.
Let us examine land for a moment — land can be bought, sold, traded (under a proper legal framework), combined, split, and developed. It has inherent properties such as location and dimensions, and has other properties assigned to it such as ownership, zoning, and more.
A blockchain could have a smart contract outlining these properties of land and how they operate (you would only want someone to adjoin to pieces of land that are contiguous) based on jurisdiction. Once this is complete, the blockchain facilitates a decentralized and efficient market for land ownership. Additionally, it has a publically viewable chain of ownership that can be used by anyone in the market to purchase, to settle ownership disputes, and more.
Smart contracts in financial services
Beyond physical goods, smart contracts can likewise be used to govern fungible financial instruments. As an example, futures contract can easily be defined within a smart contract — with the contract defining the terms and settlement. Standardization with the blockchain will help financial institutions reduce costs for executing agreements. With an auditable smart contract, the barrier to entry is also lowered, thus increasing liquidity in the market.
Finally, the blockchain can be a powerful tool for financial institutions’ regulatory compliance efforts. With transparent and immutable ledgers, anti-money laundering (AML) efforts are easier to perform, audit trails with transaction data, and communications data can all be stored immutably — in an obfuscated way of course.
While CryptoKitties may be only a fad (for reference, Beanie Baby-maker Ty reported sales in excess of $1.3B in 1998), they demonstrate an important concept about the potential of smart contracts and blockchains — they can govern a decentralized yet secure storage and exchange of goods and data. These characteristics will have broad implications for many industries, but in particular financial services, where efficiency and compliance apply pressure to the market.
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