From Colored Coins to CryptoKitties: A Brief Analysis of the Development of NFTs

This article was first published on the Distributed Capital WeChat account

In simple terms, NFTs are unique digital assets. To help everyone understand what NFTs are, I will delve into the history of NFTs.

(This article is authored by Andrew Steinwold, translated by Distributed Authorization.)

2012-2013: Colored Coins

Some might say that colored coins are the earliest NFTs. Colored coins are made up of small denominations of Bitcoin, which can be as small as one satoshi (the smallest unit of Bitcoin). Colored coins can represent various assets and have multiple uses, including:

• Asset certificates;
• Coupons;
• Issuing digital currencies;
• Subscriptions;
• Access tokens;
• Digital collectibles;

Colored coins demonstrated a significant leap in Bitcoin's functionality, but they also had shortcomings: they can only represent a certain value if everyone agrees on their worth. Bitcoin's scripting language was not designed to implement such functionality on the network, making colored coins weak. For example, if three people agree that 100 colored coins represent 100 shares of a company, if even one participant decides not to recognize the colored coins as representing company shares, the entire system collapses.

In early 2012, a blog post by Yoni Assia first mentioned colored coins, titled "bitcoin 2.X (also known as colored bitcoins) - initial specifications." He discussed colored coins in the article but did not mention that they could represent various assets or use cases. Instead, he claimed that colored coins belonged to the "genesis transaction" of Bitcoin, as their uniqueness could be identified from regular Bitcoin transactions. It seems that the potential of these new assets was not realized until December 4, 2012, when Meni Rosenfeld published a paper titled "Overview of Colored Coins." A few months later, in 2013, another paper titled "Colored Coins - Bitcoin" was published. This paper was more in-depth than the first and you might be more familiar with its authors: Yoni Assia, Vitalik Buterin, Lior Hakim, and Meni Rosenfeld.

The flaws of colored coins were evident; if the system works best in a controlled environment, it means that in some cases, a single database would suffice. Nevertheless, colored coins opened the door for further experimentation with NFTs and laid the groundwork. The immense potential of placing real-world assets on a distributed ledger was clear, but achieving this required a more flexible blockchain network.

The birth of colored coins made many realize the tremendous potential of issuing assets on the blockchain. However, people also understood that Bitcoin did not need to enable these additional features in its current iteration. In 2014, Robert Dermody, Adam Krellenstein, and Evan Wagner created Counterparty: a peer-to-peer financial platform and a distributed open-source internet protocol built on the Bitcoin blockchain. Counterparty allowed assets to be issued on a decentralized exchange and generated a corresponding digital currency, XCP. Counterparty had many projects, including card games and meme trading games.

April 2015 - Spells of Genesis

The creators of the game Spells of Genesis not only became pioneers in issuing game assets on the blockchain through Counterparty but were also one of the first project teams to launch an ICO that year. In fact, ICOs were referred to as crowdfunding early on. Spells of Genesis funded its project development by launching a token called BitCrystals, which was used as currency in the game.

August 2016 - More Card Games on Counterparty

In August 2016, Counterparty collaborated with the popular trading card game "Force of Will." Thus, Force of Will launched its own cards on the Counterparty platform. Force of Will is the fourth best-selling card game in North America, following Pokémon and Magic: The Gathering. This event was significant because Force of Will was a large mainstream game company with no prior experience in blockchain or cryptocurrency. Their entry into the NFT ecosystem marked their recognition of the value of such assets on the blockchain.

October 2016 - Rare Pepe on Counterparty

It was only a matter of time before meme games entered the blockchain. In October 2016, people began issuing "Rare Pepe" as assets on the Counterparty platform. Rare Pepe is a meme-themed cartoon frog.

These memes have a strong fan base. There is even a meme exchange called the Rare Pepe Meme Directory.

Simply being on the Bitcoin blockchain was not enough for Rare Pepe; it also needed "experts" to verify the rarity of these Pepe frogs. While somewhat absurd, this example shows that there is a demand for unique digital products. Today, Counterparty has established many projects on its platform, many of which involve similar NFT assets. You can browse various projects on their website.

March 2017 - Rare Pepe on Ethereum

With the rise of Ethereum in early 2017, many meme projects began trading as well. In March 2017, the Peperium project announced itself as a "decentralized meme marketplace and trading card game that allows anyone to create memes that permanently exist on IPFS and Ethereum." Similar to Counterparty, Peperium also had a related token, coded as RARE, used for meme creation and trading fees.

June 2017 - Cryptopunk

With the rise of Rare Pepes trading on Ethereum, two creative tech experts decided to start their own NFT project. John Watkinson and Matt Hall realized they could create unique characters on the Ethereum blockchain: the number of these characters would be limited to 10,000, and each one would be unique. They named the project Cryptopunks after the cypherpunks that emerged in the 1990s, the precursors to Bitcoin.

Surprisingly, Watkinson and Hall allowed anyone with an Ethereum wallet to claim a Cryptopunk for free. This led to all 10,000 Cryptopunks being quickly claimed, and a secondary market began to flourish as people continuously bought and sold them. Interestingly, Cryptopunks did not follow the ERC721 standard, which had not yet been invented at that time. Due to their limitations, they were also not entirely ERC20. Therefore, Cryptopunks can be described as a hybrid of ERC721 and ERC20.

What is ERC?

To enable tokens to interact properly, the Ethereum blockchain has different technical standards for different types of tokens on its network. The most common standard is ERC20, which specifies how tokens should interact as expected. This standard framework is very helpful when tokens created by developers need to interact with other tokens or applications on Ethereum. Although ERC20 tokens can fulfill many functions on Ethereum, they are not the best tool for creating unique tokens. For this purpose, ERC721 was born. While similar to ERC20 in many ways, ERC721 aims to be the technical standard for NFT tokens on the Ethereum blockchain. The main difference between the two standards is that ERC721 can track the ownership and movement of individual tokens in a block, allowing the chain to recognize NFT tokens. The first project to use the new NFT technical standard was the famous CryptoKitties.

October 2017 - CryptoKitties

With the emergence of CryptoKitties, NFTs became mainstream. CryptoKitties is a blockchain-based virtual game that allows players to adopt, breed, and trade virtual cats. These crypto cats exist on the blockchain! From Coindesk to CNN, this incredible project seemed to appear on every news outlet. The reasons could be that the game clogged Ethereum or that people made huge profits through trading.

CryptoKitties was launched in October 2017 by a company based in Vancouver called Axiom Zen. The team released the alpha version during the ETH Waterloo Hackathon. The ETH Waterloo Hackathon is the largest Ethereum ecosystem hackathon in the world, and the Axiom Zen team worked on the project for several months, with over 400 developers attending to introduce the game. Ultimately, the CryptoKitties team won first place in the hackathon, and the game quickly became popular.

The rise of CryptoKitties coincided with the crypto bull market of 2017, making it a perfect match. At that time, people were frantically buying, breeding, and trading virtual cats. This made many people see the potential of NFT tokens. Subsequently, Axiom Zen launched a company called Dapper Labs, which raised $15 million from top investors like a16z and Google Ventures. After witnessing the fervor of the CryptoKitties community and the significant investments from top investors in Dapper Labs, people began to realize the true power of NFTs.

2018-2019 - The NFT Explosion

In 2018 and 2019, the NFT ecosystem experienced massive growth. Now, over 100 projects in the industry are advancing simultaneously, with even more projects in preparation. The NFT market flourished, driven by platforms like OpenSea and SuperRare. Compared to other crypto markets, their trading volumes were small, but their growth rates were rapid, and significant progress was made. With continuous improvements in Web3 wallets like Metamask, entering the NFT ecosystem became easier. Dapper Labs also recently launched a Dapper wallet that does not require gas fees. Additionally, there are now websites like nonfungible.com and nftcryptonews.com that study NFT market metrics, gaming guides, and provide information for the industry. The Block illustrates the current ecosystem well.

CryptoKitties pioneered NFTs, but they could not have done so without prior projects laying the groundwork by building unique digital assets. This interesting image provided by nonfungible.com showcases the importance of CryptoKitties to the current NFT ecosystem.

This chart shows that people who own CryptoKitties tend to play other NFT games, while those who play other NFT games typically do not play other games. CryptoKitties is the perfect gateway into the world of NFTs.

Due to the different functions of breeding different cats, CryptoKitties also experienced significant growth, creating a whole new breed of crypto cats or ERC721 tokens. NFTs now have countless functions, including character names (similar to domain names), virtual land, virtual clothing, event tickets, asteroid mining resources, and more. Perhaps the most exciting advancement in the industry is that numerous NFT games and projects can collaborate with each other, achieving interoperability. For example, a sword owned by a player in one game could be brought into another game as a rare piece of clothing. With interoperability, the possibilities for NFT games are truly endless.

Where Will NFTs Go in the Future?

The history of NFTs is much longer than most people realize. The first attempts at NFTs occurred during the colored coin era of 2012-2013, but I believe that as of 2019, we are still in the very early stages of NFTs. Despite the tremendous growth we have experienced over the past two years, the industry is still very young, and growth will not stop. In fact, I believe that as more people and companies recognize the impact of NFTs and participate in building the ecosystem, the growth of NFTs will accelerate. Developers creating new use cases and interoperable projects will become game changers. I believe that in five years, the NFT industry will be completely different from what it is today!