What do digital kitties have to do with charities?

Rhodri Davies, Head of Policy for Charities Aid Foundation, explores what the emergence of unique digital assets will mean for the charity sector.

Guest Writer | 11th Jul 18
Cryptokitties are collectible cat characters based on blockchain technology, Image credit: CryptoKitties

This article was written by Rhodri Davies, who leads Giving Thought, CAF’s in-house think tank focussing on current and future issues affecting philanthropy and civil society. Rhodri has spent nearly a decade specialising in public policy around philanthropy and the work of charities, and has researched, written and presented on a wide range of topics. He has a first-class degree in Mathematics and Philosophy from the University of Oxford.


What would you say if someone offered to donate a digital cat to your charity?

Most people would probably laugh politely and back away, which is understandable. But in doing so they could be missing the early signs of a phenomenon with big implications for fundraising: the arrival of unique digital assets.

To explain what I am on about, let me introduce you to CryptoKitties. These are collectible cat characters based on blockchain technology, which emerged in late 2017; and a healthy market has already sprung in in buying and selling them. The most expensive Cryptokitty to date sold for well over $100,000.

However, this isn’t just about internet cats. Apart from anything else, recent reports suggest that the initial flurry of enthusiasm for cryptokitties may have died down, so we probably shouldn’t get too hung up on feline collectibles. But if you get past these to the underlying technological advance they rely on, much wider possibilites become clear.

To get to that point, let’s briefly back up. Blockchain technology, for those who don’t know, is the distributed ledger technology most famous for providing the infrastructure for Bitcoin. It is essentially a way of recording ownership and transactions within a system without the need for traditional middlemen and centralised governance.

Crypto currencies such as Bitcoin remain the best known use case, but many believe they are only the tip of the iceberg, and that the potential applications of blockchain technology go far wider.

 

The crypto-token explosion

One of the areas in which there has been a lot of development is in the creation of ‘crypto-tokens’. These are, as the name suggests, digital tokens created on a blockchain that can be imbued with a wide range of characteristics and used to represent pretty much anything you want.

You may have heard of crypto-tokens in the context of Initial Coin Offerings (ICOs). This is a new funding model in which people raise money for the creation of new platforms and products by selling tokens that give buyers some kind of stake in any future success, and it has spawned a huge marketplace.

But this still doesn’t quite get us to where we need to be. Most of these existing tokens are fungible: that is, they all can be interchanged without any discernible difference. The big change came last year with the creation of a new token protocol on the Ethereum blockchain (known as ERC721, but feel free to forget that immediately). This allowed the creation of non-fungible crypto tokens for the first time.

What this means is that it is now possible to create unique digital objects imbued with all sorts of characteristics. And this solves a long-standing problem: up to now it has been impossible to create digital objects that retain scarcity value, because people can always find a way to copy and redistribute them, despite attempts to implement solutions like Digital Rights Management (DRM).

But now, for the first time, it is possible to create digital objects that cannot be copied; and thus can hold scarcity value. Inevitably, as with any major advance in technology, the first thing people did was create something cat-related, but it should be obvious at this point that the principle could be applied much more widely. That is why a number of big technology investors, such as the VC firm Andreessen Horowitz, put money into cryptokitties.

 

Discovering digital value

People are now exploring how this technology can be applied elsewhere. For instance, in contexts where individual, high-value items play a huge role, such as the art world or the luxury goods industry.

One notable area of exploration is the burgeoning ‘e-sports’ industry of competitive computer gaming, where there is already a huge market in “skins” (items such as clothes, weaponry etc that can be used and traded by players). Some are exploring whether crypto-tokens can be used to make these skins unique, and thus radically enhance their existing value.

So what does this all mean for charities? For one thing, there is likely to be an explosion of new types of digital assets in coming years. And if people want to give these away to support good causes, the scope of fundraising could increase enormously.

Of course, if charities want to identify where new opportunities might be, they need to stay abreast of relevant technological developments. And when opportunities for donations of new types of digital assets do arise; they need to engage with regulators and tax authorities to ensure that risks are minimised and that any necessary changes to legislation or regulation can be made.

The funding environment for charities is always competitive, so opportunities to develop new income streams for the future need to be explored. You and I may not necessarily understand why collectible digital cats (or whatever other kinds of digital objects the future brings) have value, but if people want to direct some of that value towards good causes, then doesn’t it seem foolish not to at least try to help them do so?