Author's Note\
Due to certain reasons, I have recently been researching the fields of digital collectibles and NFTs, engaging in many discussions with several industry leaders and experienced players, as well as platform representatives, and have gained a lot of insights.
Therefore, I plan to write an article discussing digital collectibles and NFTs, mainly focusing on the differences in their markets. I hope this can help some friends who are paying attention to these two fields.
The article will include an analysis of both markets from a macro perspective, as well as examining various aspects such as technology and operations. Much of the content is based on information obtained from others and has not undergone careful data analysis. Therefore, all content in this article is for reference only.
Additionally, I have recently been keen on conducting slightly more macro industry analyses. If any readers have quality materials or information, please feel free to share them with me.
Main Text#
Digital collectibles and NFTs are essentially from the same family, but due to policy reasons, they have been forcibly segregated into two markets. Over time, the development directions of the two markets have gradually diverged to the point where they have formed two independent markets.
Strictly speaking, digital collectibles are a subset of NFTs, relying on NFT technology as a single category. So what are the reasons that have led to the independence of the markets for digital collectibles and NFTs? Below, I will analyze them one by one.
Policy Guidance Promotes Market Segmentation#
Digital collectibles first appeared in the public eye in China, vaguely remembered to be the payment code skin launched by Alipay at the beginning of last year. Collaborating with the Dunhuang IP, digital collectibles were issued on the Ant Chain, which could function as a payment code skin for Alipay. However, there was no concept of secondary circulation at that time, so it did not become a phenomenon.
Fast forward to 2022, when central media frequently published articles promoting the concept of digital collectibles and encouraged their issuance and development, leading to an extraordinary boom in the domestic market for digital collectibles. (Meanwhile, overseas, people were engaging with NFTs.)
Due to the early and chaotic nature of the digital collectibles market, many rules were not formally established and mostly circulated as unwritten rules. I will provide a few typical cases to illustrate this.
Domestic Call for Digital Collectibles but Not Allowing NFTs
This unwritten rule is widely circulated among digital collectible platforms. Currently, there are no clear legal regulations or notifications as conclusive evidence, but in practice, digital collectible platforms adhere to this unwritten rule during their promotional operations.
When promoting digital collectibles, they generally do not mention that they are NFTs, especially among leading digital collectible platforms. They had used terms like NFT for promotion in the early stages, but at a certain point, they uniformly removed all promotional content related to NFTs and only promoted digital collectibles.
In many smaller platforms, there is also a deliberate avoidance of any association with NFTs. Feedback from discussions with some digital collectible platforms indicated that using the term NFT for promotion incurs high user education costs, and it is also easy to be restricted in promotional reach. Additionally, if an app includes anything related to NFTs, it is difficult to pass the review.
Thus, it can be concluded that the existing digital collectibles are subtly achieving the localization and compliance of NFTs.
Domestic Digital Collectibles Do Not Allow Secondary Trading
There is no explicit regulation stating that digital collectibles are not allowed to have secondary trading, but regulatory bodies have taken a strong stance against earlier secondary market activities. Recently, the WeChat platform has also banned parties involved in secondary trading or related information, leading to the formation of this unwritten rule.
Of course, because of this, domestic digital collectible platforms have been divided into two types: those with secondary trading markets and those without secondary markets or with transfer restrictions. Regardless of the chosen method, until relevant explicit policies are issued, regulation hangs over them like the sword of Damocles.
In contrast, the NFT market has no such concerns. The freedom of NFT trading has led to the policy direction in China cutting off the connection between digital collectibles and NFTs, retaining only the parts that can be regulated.
Domestic Digital Collectibles Emphasize IP Copyright
This also seems to lack explicit regulations, but it can be clearly seen in the promotional articles from central media that domestic digital collectibles need to possess IP copyrights, meaning they must have legally compliant authorization.
This creates a significant divide with NFTs. While there is a tendency for IP authorization in NFT issuance, it is not a mandatory condition in the NFT market. NFTs can be issued and traded freely without IP copyrights. The excessive freedom in the NFT market has prompted domestic policy measures to sever the connection between digital collectibles and NFTs, ultimately resulting in the current state of independence between the two markets.
Technical Direction Promotes Market Isolation#
This point is something I have rarely seen mentioned in online articles and materials. After discussing with some friends involved in product and technology, I found that the technical direction in the digital collectibles field is almost stagnant.
Firstly, the digital collectibles market is very insensitive to technology, and technology cannot even serve as a marketing gimmick. This has resulted in two types of digital collectible platforms.
One type uses consortium chains, including Ant Chain, Zhixin Chain, Zhizhen Chain, BSN, etc. The other type does not use any chains at all and relies purely on centralized methods to issue digital collectibles.
Therefore, based on my investigations, I have drawn the following conclusions to demonstrate that the digital collectibles market is a technology-insensitive market.
Consortium Chains Do Not Provide Services to C-end Users
This may be confusing for some. Isn't it normal for consortium chains to only serve B-end users and not provide services to C-end users? However, upon deeper understanding, it becomes clear that consortium chains do not provide services to C-end users to an excessive extent, not even the most basic query services.
In other words, if you purchase a digital collectible on a consortium chain, although the collectible will return a hash value to you, you cannot verify it. Consortium chains do not provide tools similar to Ethereum explorers for C-end users, so users cannot check whether they truly have the corresponding consortium chain wallet, whether the transaction is genuinely on-chain, or query the corresponding information of the collectible on the chain.
What users actually receive are only the collectible image and a non-verifiable hash value.
Digital Collectible Technical Infrastructure Is Too Primitive
In terms of code, major consortium chains are not developer-friendly like Ethereum or Polygon, so many functions need to be implemented by the technology of the digital collectible platforms themselves. However, the digital collectibles market is highly dependent on timing, and an unfriendly developer environment in consortium chains stifles the development of digital collectibles in terms of technology.
To put it simply, based on my understanding, many digital collectible platforms on consortium chains do not use NFT-related technologies, such as the ERC721 or 1155 standards. The vast majority simply use consortium chains for cloud storage, uploading images to the consortium chain and returning a unique hash value, thus completing the issuance of digital collectibles.
Although consortium chains mostly support the X721 and X1155 standards, their actual execution logic is perplexing. Taking BSN as an example, in BSN, X721 and X1155 are renamed DDC721 and DDC1155. However, regardless of who issues the digital collectibles or how many are issued, they all come from the same contract.
For example, suppose there are 10 digital collectible companies wanting to issue 20 different collectible series using the DDC721 standard. In that case, all 20 different collectibles from these 10 companies will be issued from the same DDC721 contract. The entire BSN only has one shared DDC721 smart contract.
In a normal 721 contract, when minting, you pay gas + mint fees (of course, it can be set to free), but here in DDC, you need to pay energy value + service fees, and only registered merchants can call this contract.
Thus, logically speaking, BSN's DDC721 does not allow users to deploy contracts themselves; it only allows users to pay to call the official DDC721 contract. Because of this, in addition to the relevant gas fees (referred to as energy in BSN), users also need to pay an additional service fee for the contract. For instance, if you issue 10,000 digital collectibles, you would pay an extra service fee of 10,000 yuan.
Data Cannot Flow Between Consortium Chains
In fact, there is a very serious issue behind digital collectibles: the various consortium chains are completely different from each other, and neither data nor assets can flow between them.
Unlike the currently thriving public chains, which have long passed the data island stage, there are various solutions to address cross-chain communication issues, such as cross-chain bridges, Layer 2, Layer 3, and Layer 0. Consortium chains, however, remain too primitive, and from a business logic perspective, data interoperability is unrealistic. For example, expecting Alibaba's Ant Chain to be compatible with Tencent's Zhixin Chain is akin to hoping to use WeChat Pay on Taobao.
In summary, due to the imperfections in technology, many NFT functionalities cannot be realized in the digital collectibles field. The current digital collectibles market does not operate under the assumption that simply applying NFT functionalities to digital collectibles will dominate the market.
The technology for digital collectibles is too weak, lacking the infrastructure to implement NFT-related technical functionalities, forcing programmers to reinvent the wheel to build the necessary infrastructure. However, since digital collectibles emphasize speed, various promotional activities tend to selectively ignore the technical aspects, leading to a gradual transformation of digital collectible users into technology-insensitive users.
It is worth mentioning that current digital collectible platforms are either consortium chains or centralized, with very few public chain digital collectibles. The fundamental reason is that once public chain digital collectibles are created, it equates to complete open circulation, which is tantamount to seeking one's own demise.
Different Operational Strategies Lead to Different User Profiles#
The differences in operations are vividly reflected. The NFT market benefits from a high degree of freedom, leading to a plethora of operational strategies, and there are many ways to profit in the NFT field, not limited to a single sales source.
From a macro perspective, NFT project teams, especially blue-chip NFT project teams, generally operate only one NFT project at a time. In contrast, digital collectibles can be issued multiple times a day under ideal resource integration conditions.
User Differentiation Between Digital Collectibles and NFTs
The users of digital collectibles are generally driven by similar factors as NFT users, namely speculative interests. However, there are significant differences in the details.
Compared to NFTs, the purchasing threshold for digital collectibles is very low. After simplifying the process to mobile registration and real-name verification, users can start purchasing digital collectibles. However, NFTs are entirely different; they involve using MetaMask, the initial inflow and outflow of cryptocurrency, and platforms like OpenSea or LooksRare. To become an NFT OG, one must also participate in project Discords as a volunteer and engage in various whitelist activities.
More importantly, becoming an NFT native involves overcoming significant language barriers. Digital collectibles provide an opportunity for users who cannot cross these barriers to engage in speculation.
Different Operational Focus Between Digital Collectibles and NFTs
In terms of specific operational aspects, digital collectibles differ greatly from NFTs. The operation of digital collectibles is primarily focused on promotional sales, selling more digital collectibles to increase platform sales is the operational priority. In NFT operations, the emphasis is on broader usage and greater dissemination.
The fundamental reason for the differentiation between the two markets is the difference in revenue sources.
In NFTs, the profit from sales is a very small proportion. Currently, many new projects are priced at 0.1 ETH or 0.05 ETH, and even free mints are common. With such low prices and many being given away as part of promotional activities, the profit in this area is not high.
Most NFT project teams hope to turn their projects into blue-chip NFTs, earning secondary market royalties when prices rise. Taking BAYC as an example, its royalty is 2.5%, and the floor price for a monkey is about 91 ETH, meaning that each transaction can earn 2.25 ETH. Compared to the early days when BAYC was issued at 0.08 ETH and no one bought, now royalty income is the main source of profit for the entire project.
However, digital collectibles are different. Although there are also royalties in the secondary market for digital collectibles, due to regulatory crackdowns, it is unlikely for a single piece to sell for hundreds of thousands. More often, individual pieces sell for hundreds to thousands of yuan, resulting in low unit prices and low royalty income. Consequently, the revenue source for digital collectible platforms is more from issuing digital collectibles.
In terms of presentation, it can be observed that regardless of the type of activity, digital collectibles essentially revolve around inducing purchase activities. This includes digital collectible discount coupons, priority purchases, etc., which are fundamentally aimed at promoting sales.
Therefore, I personally define digital collectibles as being more akin to e-commerce platforms. Sales are the core of digital collectibles. Various empowerment strategies are also aimed at achieving higher sales.
In contrast, NFT operations place greater emphasis on creativity, design, and technology. For example, NFT PASS, NFT fragmentation schemes, NFT liquidity schemes, NFT lending schemes, etc. NFTs represent a larger, more comprehensive market domain, intertwining technology and marketing, speculation and sentiment in a free market.
Digital collectibles, on the other hand, exist as a virtual collectible e-commerce market in a specific environment. Therefore, I believe that digital collectible operations can recruit talent from e-commerce operations in the future, rather than from NFTs.
Market Summary of Digital Collectibles and NFTs#
I am very glad that I do not hold a dismissive attitude towards digital collectibles, which has allowed me to conduct in-depth research into the digital collectibles market. Therefore, I will provide my personal subjective conclusions, limited to the Chinese market.
The Digital Collectibles Market Will Be Larger Than the NFT Market (Limited to Mainland China)
As described above, the threshold for digital collectibles is alarmingly low. In addition to the technical usage threshold mentioned earlier, the user education threshold is also very low. Digital collectibles are already a highly localized market, including user demographics and product terminology. For example:
- NFT users mostly use Twitter and Discord, while digital collectible users use WeChat and QQ;
- NFT users need to install and back up MetaMask and use purely English websites like OpenSea and LooksRare, while digital collectible users download platform apps or even H5 mini-programs;
- NFT users need to use DEX and CEX for KYC to deposit and withdraw funds, while digital collectible users pay via WeChat and Alipay;
- NFTs have whitelists, while digital collectibles have priority purchases;
There are countless such localizations. Therefore, within the confines of China, I believe the market for digital collectibles will be very large, far exceeding that of NFTs. Even if only 5% of 1.4 billion people hold digital collectibles, that still represents a user market of 70 million. (Not considering sales, only considering holdings), and with the younger generation's growing interest in trendy collectibles, I believe this proportion will continue to rise over the next five years.
The Digital Collectibles Market Has a Natural Moat (Limited to Mainland China)
The digital collectibles market, broadly speaking, aligns with the national development direction, even if it is currently very speculative and chaotic. It is foreseeable that relevant regulatory bodies will eventually introduce regulatory policies and licensing systems.
At this point, the digital collectibles market will have a natural moat, being protected by law, and the licensing system serves as a powerful tool. To put it bluntly, when the market is regulated, the digital collectible platforms with "red power" will become the most advantageous moat in a "red soil" environment, something that technology and operations cannot compare to.
As for the global NFT market, there is not much to say; NFTs are everywhere.
Author: Liu Ye Jing Hong
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