CryptoKitties is a new blockchain-powered online game where users can buy and sell collectable virtual cats on a marketplace as well as breed new kittens. While a virtual cat collecting game may seem insignificant and somewhat silly, CryptoKitties is actually the first large-scale decentralized application (DApp) on the Ethereum network and thus carries substantial significance for the decentralized economy.

As CryptoKitties was built on blockchain technology, each virtual kitten is entirely unique and has its own particular features. Also, each kitten is fully owned by the person who has bought it and the company behind the game, Axion Zen, has no further control over the game beyond how it was originally coded on Ethereum. This enables gamers to have complete ownership and control over their virtual kittens and how they choose to play the game.

Cats that have the most unique features are perceived as the most valuable. Once two cats with particular unique features breed, their offspring can become even more valuable as its features will be even more unique. The more unique a kitten is, the more it can be sold for on the CryptoKitties marketplace.

CryptoKitties has attracted so much user activity since its launch that at one point the game made up 14 percent of all transactions on the Ethereum network. Furthermore, over $5 million has been spent by users on virtual cats with the most expensive being sold for over $100,000.

One of the driving factors behind why CryptoKitties are considered valuable comes down to the concept of ‘digital scarcity’.

What is digital scarcity?

Today, internet users have access to near limitless content. The cost of storing and transferring data is close to zero so it is no surprise that we have access to a seemingly infinite amount of online media. Furthermore, all types of digital media have become easily shareable and replicable, whether the owner of the intellectual property approves of it or not. This has created ‘digital abundance’.

While digital abundance may sound great for the user, it is far from beneficial for individuals and businesses producing the content — as their work can be copied and shared without permission or remuneration. This is why the idea of digital scarcity is becoming an increasingly important topic in the digital media and entertainment world.

Economic theory teaches us that scarcity is what makes goods valuable. The scarcer a good is perceived to be, the more valuable it generally is. Examples of scarce goods would be gold, diamonds, and land.

If the element of scarcity is taken away, however, goods quickly lose value and this has never been more evident than on the internet. Perhaps the most prominent example of loss of scarcity has been experienced by the music industry. Individuals can now download any album (illegally) as soon as it is released, for free, with little to no legal ramifications. Peer-to-peer sharing platform Napster paved the way for that in 1999. Music piracy costs the music industry billions each year and the film industry is suffering a similar fate as easily accessible illegal movie streaming has become the norm for many internet users today.

Digital scarcity is a fairly new concept and refers to the creation of scarcity in the digital landscape. Typically, the way content publishers have tried to create digital scarcity has been through paywalls. Some newspapers, such as The Wall Street Journal, apply this method to create digital scarcity. A paywall requires users to pay for a monthly subscription to gain access to particular content. This method, however, has its limitations and has not managed to prevent piracy in any meaningful way.

How the blockchain has introduced digital scarcity

CryptoKitties, interestingly, is a great example of applied digital scarcity. The more unique a crypto kitten is, the more scarce it is and thus the more valuable it is perceived to be by other users. Hence, through the introduction of digital scarcity, a new economic good in the form of virtual cats, has been created. This has been made possible through blockchain technology.

Using the blockchain, the issuance of a virtual good can be limited as well as scheduled over a particular time frame. Each good can also be immutably linked to its owner who has full control over the good until it is sold or transferred to another owner. By being able to mathematically verify ownership, it is now easier to proliferate scarcity as it allows the creator of a virtual good to create the level of digital scarcity that he or she believes is right for his good to be sold, at a price level that makes sense.

Undoubtedly, the most successful example of digital scarcity that has been created with blockchain technology is the issuance model of bitcoin. Only 21 million bitcoin can ever be mined and the rate at which new bitcoins are created slows down every four years. This creates is one of the main reasons why investors believe that bitcoin is worth almost $20,000 per coin today as it has a fixed supply while the potential demand for bitcoin as a store of value, an investment, a remittance network, and a currency can be infinite.

Blockchain-power digital scarcity in the future

Bitcoin and CryptoKitties are two great examples of digital scarcity in action. However, thanks to the versatile nature of blockchain technology, a whole new range of different digital security-based business models can be created.

For example, a musician can use a blockchain-based music distribution network and set up a smart contract that only allows his or her album to be purchased and downloaded 5,000 times. Each album would have an embedded code that clearly identifies the rightful owner of the album. Hence, if it were to be copied, it would be very easy to identify who pirated the album. This would greatly deter piracy and introduce digital scarcity into the sale of the artist's music.

Alternatively, a film production company that is launching a new movie can use a blockchain-based streaming service that allows for the movie to only be streamed 10,000 times and each time the movie is streamed the price increases incrementally. While the possibility for piracy cannot be entirely alleviated in this business model either, it can be greatly reduced as the business model is based on the scarce amount of streams available on which the film production company can capitalize on.

Given that digital media is a growing market, the concept of digital scarcity will play an increasingly important role in this new economy. It is, therefore, very conceivable that blockchain technology will become an integral part of the digital media landscape in the future and that we will see a range of new business models that will incorporate digital scarcity — all made possible by the blockchain.