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 seasoned 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, focusing mainly on the differences in their respective 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 various angles such as technology and operations. Much of the content is based on information gathered 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 constraints, they have been forcibly separated into two markets. Over time, the development directions of the two markets have gradually diverged, leading to the formation of two independent markets.
Strictly speaking, digital collectibles are a subset of NFTs, relying on NFT technology as a single category. So what causes the independence of the markets for digital collectibles and NFTs? Below, I will analyze this point by point.
Policy Guidance Promotes Market Segmentation#
Digital collectibles first appeared in the public eye in China, vaguely remembered as 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 and could function as Alipay payment code skins. 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 exceptional 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 unspoken rules. I will provide a few typical cases to illustrate this.
Domestic Call for Digital Collectibles but Not Allowing NFTs
This unspoken rule is widely circulated among digital collectibles platforms. Currently, there are no clear legal regulations or notifications as conclusive evidence, but in practice, digital collectibles platforms adhere to this unspoken rule during their promotional operations.
When promoting digital collectibles, they generally do not mention that they are NFTs, especially among leading digital collectibles platforms. They had used terms like NFTs 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 collectibles platforms indicates that using the term NFT for promotion incurs high user education costs, and on the other hand, it is easy to be restricted during promotion. Additionally, if an app includes anything related to NFTs, it is also difficult to pass the review.
Thus, it can be concluded that the existing digital collectibles are subtly exploring and demonstrating 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 be traded in the secondary market, but regulatory agencies 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 unspoken rule.
Of course, because of this, domestic digital collectibles platforms have also been divided into two types: those with secondary trading markets and those without or with transfer restrictions. Regardless of the chosen approach, until relevant explicit policies are issued, regulation hangs over them like the sword of Damocles.
In contrast, the NFT market has no such worries. The freedom of NFT trading has prompted domestic policy guidance to separate digital collectibles from NFTs, retaining only the parts that can be regulated.
Domestic Digital Collectibles Emphasize IP Copyright
This also seems to lack explicit regulations, but it is clear from the promotional articles by central media that domestic digital collectibles need to have 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 of the NFT market has led domestic policy measures to sever the connection between digital collectibles and NFTs, ultimately resulting in the current state of mutual 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.
First, the digital collectibles market is very insensitive to technology; in fact, technology cannot even serve as a marketing gimmick. Ultimately, this has manifested in two types of digital collectibles 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 might be confusing for some friends. 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 degree, not even the most basic query services.
In other words, if you purchase a digital collectible on a consortium chain, although the platform 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 digital collectible on the chain.
What users actually receive are only the digital collectible image and an unverifiable hash value.
Digital Collectibles Technical Infrastructure Is Too Simple
In terms of code, major consortium chains are not developer-friendly like Ethereum or Polygon, so many functions need to be implemented by the technical teams of digital collectibles platforms. However, the digital collectibles market is very sensitive to timing, and an unfriendly developer environment on consortium chains stifles the development of digital collectibles in terms of technology.
To put it simply, based on my understanding, many digital collectibles platforms on consortium chains do not use NFT-related technologies, such as ERC721 or 1155 standards. The vast majority treat consortium chains as cloud storage, uploading images to the consortium chain and returning a unique hash value, which completes the issuance of digital collectibles.
Although most consortium chains support X721 and X1155 standards, their actual execution logic is baffling. Taking BSN as an example, in BSN, X721 and X1155 are renamed DDC721 and DDC1155. However, regardless of who issues digital collectibles or how many are issued, they all come from the same contract.
For example, suppose there are 10 digital collectibles companies that want to issue 20 different series of digital collectibles using the DDC721 standard. In that case, all 20 different digital 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 (which 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 related gas fees (referred to as energy in BSN), users also need to pay additional contract service fees. For instance, if you issue 10,000 digital collectibles, you would need to pay an extra service fee of 10,000 yuan.
Data Cannot Flow Between Consortium Chains
In fact, behind digital collectibles, there is a very serious issue with consortium chains. Each consortium chain is different, and data and assets cannot flow between them.
Unlike the currently thriving public chains, which have long passed the data island stage, there are various solutions for cross-chain communication issues, such as cross-chain bridges, Layer 2, Layer 3, and Layer 0. Consortium chains, however, remain too primitive, making data interoperability unrealistic from a business logic perspective. 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 imperfection of technology, many NFT functionalities cannot be realized in the digital collectibles field. The current digital collectibles market is not as simple as many people think; just sinking NFT functionalities into digital collectibles will not sweep the market.
The technology for digital collectibles is too weak, lacking the infrastructure to implement NFT functionalities on a technical level, forcing programmers to reinvent the wheel to build the necessary infrastructure. However, since digital collectibles emphasize speed, various promotional activities often overlook the technical aspects, which over time has led digital collectibles users to become insensitive to technology.
It is worth mentioning that current digital collectibles 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 means complete open circulation, which is tantamount to self-destruction.
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. Once simplified 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 presents a significant language barrier. Digital collectibles provide speculative opportunities for users who cannot overcome these barriers.
Different Operational Focus Between Digital Collectibles and NFTs
In terms of specific operations on digital collectibles platforms, they 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 actually 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 profitability in this area is not high.
Most NFT project teams hope to turn their projects into blue-chip NFTs, earning secondary market royalties as prices rise. Taking BAYC as an example, its royalty is 2.5%, and with a floor price of around 91 ETH, a single transaction can earn 2.25 ETH. Compared to the early days when BAYC was issued at 0.08 ETH and no one bought it, now royalty income constitutes the bulk of the project’s revenue.
However, digital collectibles are different. Although there are also royalties in the secondary market for digital collectibles, due to strict regulatory measures, it is unlikely for a single piece to sell for hundreds of thousands; more often, a piece sells for hundreds to thousands of yuan. With such low unit prices, royalty income is also low. Therefore, the revenue source for digital collectibles platforms is primarily 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 collectibles discount coupons, priority purchases, etc., which are essentially aimed at promoting sales.
Thus, I personally define digital collectibles as being more akin to e-commerce platforms. Sales are at the core of digital collectibles. Various empowerment strategies for digital collectibles are also aimed at achieving higher sales.
In contrast, NFT operations place greater emphasis on creativity, design, and technology. Examples include NFT PASS, NFT fragmentation schemes, NFT liquidity schemes, NFT lending schemes, etc. NFTs represent a larger, more comprehensive market domain, where technology and marketing intertwine, and speculation and sentiment blend in a free market.
Digital collectibles, on the other hand, exist as a virtual collectible e-commerce market in a specific soil. Therefore, I believe that the future of digital collectibles operations can actually recruit talent from e-commerce operations rather than from NFTs.
Market Summary of Digital Collectibles and NFTs#
I am very glad that I do not have a disdainful 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 here, limited to the Chinese market.
The Digital Collectibles Market Will Be Larger Than the NFT Market (Limited to Mainland China)
As mentioned earlier, the threshold for digital collectibles is alarmingly low. In addition to the technical usage barriers mentioned above, the user education threshold is also very low. Digital collectibles are already a highly localized market, including aspects such as user demographics and product terminology. For example:
- NFT users mostly use Twitter and Discord, while digital collectibles 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 collectibles 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 collectibles users pay via WeChat and Alipay;
- NFTs are called whitelists, while digital collectibles are called priority purchases;
There are so many such localizations that, 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 amounts to a user market of 70 million. (Not considering sales, just considering holdings), and with the younger generation's increasing pursuit of trendy toys, I believe this proportion will continue to rise in the next five years.
The Digital Collectibles Market Has a Natural Moat (Limited to Mainland China)
The digital collectibles market, broadly speaking, belongs to the development direction called for by the state, even if it is currently very speculative and chaotic. It is foreseeable that relevant regulatory agencies will eventually issue regulatory policies and licensing systems.
At this point, the digital collectibles market will have a natural moat, protected by law, and the licensing system serves as a powerful sword. To put it bluntly, when the market is regulated, the digital collectibles 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 nothing more to say; NFTs are everywhere.
Author: Liu Ye Jing Hong
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