Special thanks to Todd Wiesel and Tuom Holmberg for thoughtful discussion and review
Pokemon Cards. Sneakers. Whiskey.
Crypto bros have long-imagined the novelty of buying collectibles onchain.
Apart from the sheer thrill of rolling crypto wins into their favorite products, the thesis for tokenizing collectibles is incredibly compelling.
Today collectibles are mostly traded on marketplaces like Ebay, TCGplayer, CardMarket and even Facebook marketplace. The process is far from user friendly. Settlement takes weeks and there are substantial challenges with fraud. In particular, most collectibles are authenticated or verified after purchase, engendering risk and opportunity cost for the buyer; it may take days to see if you purchased what you think you did. The common phrase of the car industry summarizes this well; ‘You buy the seller (not the car).’ This caveat emptor standard precipitates a diligence process which reduces liquidity and asset turnover.
Tokenized marketplaces are a step change in user experience and market structure. Most importantly, tokenizing assets enables instant, permissionless trading and settlement worldwide. Imagine buying a rare Michael Jordan card from a seller in Tokyo at 3 a.m. – settled in seconds. Because most blockchain-based marketplaces authenticate and vault the products, purchasers have strong settlement guarantees unlike the traditional purchasing process on Ebay or other platforms.
The immutable blockchain ledger upon which info is stored ensures a card’s history is transparent, from changes in grading/certification to even storage conditions for example what Baxus is pioneering for Spirits. No more worrying if a “mint” card or a bottle of whiskey was misrepresented or mishandled.
Perhaps the most novel component of tokenization is it enables robust financial primitives including collateralized loans, fractional ownership, and even derivatives. For example, a $50,000 Rolex could be tokenized, allowing you to borrow against it at much better rates and lower risk than your local pawn shop.
The time to tokenize collectibles has never been better; the crypto forward GenZ in particular is increasingly allocating net wealth to collectibles with up to 94% being interested in the category, much higher than previous generations. Out with bonds, in with Barry Bonds.
Yet even with world-class teams building tokenized collectible platforms, total market penetration remains low.
Why? Short Answer: It’s still early.
The longer answer: last cycle’s tokenized collectible attempts prioritized regulatory-compliance over liquidity which limited participants and increased complexity and confusion. For example, Rally raised $50M+ to create shared ownership of rare collectibles but had a complex governance process and restrictions like 90-day lockups upon “IPO”, which curtailed trading of fun new assets. It was also built entirely offchain, missing out the benefits of blockchain like composability, global access and financialization.
This cycle teams like Courtyard, Collector Crypt, Baxus and more are using blockchain + DeFi native approaches to create better UX and liquidity.
In this piece we’ll cover what is Tokenized Capital Markets (TCM), propose an asset prioritization framework, and explore additional industry growth opportunities.
Tokenized Collectible Markets (TCM)
Markers of mature markets include deep liquidity, financial derivatives (spot,lend/borrow, derivatives), and well-documented counterparty risk across venues.
The foundational principles of Tokenized Collectible Markets are Trust + Capital Efficiency.
| TRUST | CAPITAL EFFICIENCY |
| Verification | Liquidity |
| Settlement | Pricing |
| Margin |
Verification – am I getting what I think I’m getting? Established through incorporation and verification of external grading rubrics, onchain provenance of issuance, sales and grading
Settlement – Reliability and speed of digital and (if requested) physical settlement
Pricing – Historical and real-time price oracles to show robust price history and unlock additional financial primitives
Liquidity – Deep, global tokenized inventory
Margin – Lend/borrow and ability to effectuate a financial PoV without ownership of the underlying
Blockchains are the only substrate to deliver TCM in a persistent, global way. For example, blockchains enable grading information to be tied directly to the tokenized version of the collectible and available for ingestion across any marketplace. Unlike today’s marketplaces where each listing is ephemeral, a much more robust price history can be inscribed and read onchain. Likewise, tokenized settlement is guaranteed and instant, and users can borrow against their assets from a global liquidity base, a first in the collectibles space.
The totality of the above also enables new or radically superior products not possible without blockchain rails. These include
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Repacks & Gacha Machines – instant repack & resale of digital card packs, substantially increasing revenue-per-card and driving social engagement
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Indices – Creation of collectible indices, enabling new capital to flow into the space. Assets are custodied and auditable onchain. For example, a Pokemon Hologram Index can procure and track the fair market value of the cards inside.
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Perpetuals – new form factors for users to speculate with leverage on price appreciation or depreciation of Pokemon Cards (eg will a 1st Edition Base Set Charizard appreciate or depreciate in price)
Tokenizing Makes Number-Go-Up
The prior technological trends of digitization + decimalization enabled radically more efficient markets with tighter spreads and faster execution. Tokenization furthers market structure by improving settlement across a global, permissionless network.
Tokenizing collectibles can increase the value of collectiblesthrough a liquidity premium, greater demand and increasing asset velocity. Let’s unpack.
Liquidity Premium
The Liquidity Premium is a foundational financial concept: assets with more liquidity are valued higher than less liquid ones. High liquidity attracts more capital, larger investors and reduces the risk of being unable to sell, enabling a robust market.
Tokenized collectibles can be more liquid and inherit a premium due to the reasons outlined in the prior section – counterparty risk and global access. More market participants can trade with greater guarantees.
But there’s two additional liquidity benefits to liquidity through tokenization; the first is Standardization and Improved Pricing. Standardization grows markets by enabling uniform instead of bespoke access and usage. On a blockchain standard, through a single API (or in blockchain case RPC) any collectible asset can be traded. This enables more retail whales and institutional actors to enter and cover a wider range of assets than possible through traditional, fractured venues.
The second is Pricing. Since all transactions are recorded on a universal ledger, every transaction and even bid/offer and listing change can be tracked onchain across platforms. Those who participate in NFTs understand this today; users can track the price history of a NFT since inception. The primary enablers beyond the shared blockchain and standardization is that listings are tied to the item, not simply the ephemeral listing info that is erased upon sale. Improved information enables better pricing which enables better liquidity.
Global Demand
Increased demand leads to increased prices. China and the East more broadly is massively long crypto but they are unable to fully participate in the collectibles market. The top 1% can gain residency in more open areas like HongKong or Taiwan to access, but even then settlement challenges render it challenging for them to participate in the rapidly growing collectibles asset class. Enabling digital collectibles would create a substantial pricing premium relative to the same collectibles sold on current channels.
Asset Turnover
Tokenization also enables dramatically higher asset velocity through new mechanics like Gacha Machines, which are digital repacks and enable repeated, rapid reselling of cards compared to selling the card 1x on the open market. These mechanics will be discussed in more detail in the next section, but on Collector Crypt selling a card through a gacha machine can produce up to 25+% revenue-per-card than selling via the open market.
Prioritization Framework
The collectibles market is vast, ranging from cars to watches to cards and more. Although not all benefit from Tokenization, some lend themselves more-so than others.
The most important consideration for Tokenization is Fungible Market Size – the amount * value of interchangeable assets. There are many secondary considerations such as vaulting cost, asset turnover, market size, fraud likelihood, etc. All these are important, but they are second to the depth of fungible assets.
Why is Fungible Market Size Matter the most important? The ability to create financial primitives. Let’s start at the worst-case to prove the point, a 1-of-1 item. Tokenizing a 1-of-1 item (e.g. a rare Ferrari) lends minimal additional benefits beyond just holding the item. There’s no ability to create a price oracle since the only price is derived from one asset being sold, and fractionalizing the item still leads to a small market size that is subject to market manipulation. In contrast, tokenizing an asset where there’s hundreds or thousands of equivalents enables a more robust pricing oracle for financial derivatives. Another key point is the complexity of the asset – no two cars are similar, they may have different paint defects, maintenance history, mileage, etc. However, bottles of a spirit are fairly universal, pending relatively similar storage conditions. Similarly, there are thousands of 1999 PSA Grade 9 Charizards.
With this framework, here’s an example ranking of collectible segments. Perhaps no surprise, Trading Cards rank at the top. There is a massive fanbase with thousands or tens of thousands of like cards. This enables robust trading and difficulty/impossibility of market manipulation, as well as new products like indices.
| Low | <———- Fungible Market Size ———-> | High | |||
| Rare Art | Cars | Luxury Goods | Watches | Spirits | Cards |
Achieving Growth and Scale
Liquidity remains the biggest hurdle to adoption; it’s challenging to gain meaningful liquidity to overcome decades of trading on platforms like Ebay.
So how does TCM 100x and become the dominant platform to research/buy/sell collectibles?
There are few key initiatives that could help.
Fundamentally, the most important component to reach the tipping point is to source deep inventory. For a particular collectible category, if a Tokenized Marketplace can become the ‘default’ platform to discover and trade a collectibles it’s game over for physical marketplaces.
Gatcha – the perfect Crypto-native Flywheel
Gacha machines are speculative machines where users buy ‘re-packs’ of existing cards that have a probabilistic value. For example, a user might purchase a pack for $60 that has a minimum guaranteed value of $50, with a 20% chance that they have a ‘big win’ (eg > $100). Repacks are not a new concept, but TCM makes them radically better.
Users purchase the packs hoping for rare card(s), and in the event they don’t win, the company offers users the ability to ‘Instant Sell’ the pack back to them which they buy for a discount, for example at 85% of the fair market value. Cards are then repacked and relisted. But instead of needing to be repacked physically, they are digitally repacked instantly and can be listed again in the machine.
A clear behavior has emerged where users buy vibe buy 5-10+ packs during a sitting hoping to get a rare card and a win big. And when they do, they often share about it on X, further fueling users to try their luck at the Gacha machine.
From a value creation perspective, Tokenized Marketplaces can dramatically increase the revenue-per-card compared to its fair market value. Collector Crypt, operator of one of the leading Gacha Machines, estimates an up to 25+% increase in a cards value simply by being able to reloop it multiple times. Most importantly, the undesired ‘filler’ cards are the ones where additional revenue can be generated; the unvaluable cards now generate cashflow.
The strategy overall has led them to over $85M in revenue and they *literally* cannot keep the machine open due to a limited inventory. Collectors have made it abundantly clear that a gacha machine is the perfect blend of game-of-chance with asset accumulation. Crypto makes this superior because users can validate the odds of the system AND because it’s much higher turnover due to being all digital (i.e. the packs don’t need to be mailed to the user). Physical repacking methods cannot compete and suffer from their own challenges.
Universal TCM Standard
Standards exist in every industry and are a marker of mature markets. Why? Because they simplify user adoption and enable clear market structure. Standards enable companies to compete on different axes and enable a larger ecosystem, driving innovation and increasing the addressable market.
For example, cell-phones used to have unique chargers and it was a nightmare trying to find the right charger for the right phone – you couldn’t use your friend’s charger in most cases – yet everyone knew the charger was not the differentiator for buying one phone vs the other. Instead, through both industry consensus and regulatory pressure, the industry aligned to USB-C, radically simplifying cell-phone ownership and the end experience for users.
Similarly, leading players in the industry should align on a blockchain metadata standard. Why? The ordering of onchain blockchain metadata doesn’t win customers, but having a universal approach does make it easier for the TCM Ecosystem to grow.
A robust standard should include meta like origination year, grading scores, prior transactions, and even prior offers.
Treasury Vehicle
If liquidity is the challenge, a large, liquid vehicle is a solution.
A vehicle in the form of a liquid fund or a Digital Asset Treasury vehicle (DATs) would have the dual mandate to acquire + tokenize collectibles as well as grow the underlying ecosystem.
To non-crypto native readers this might sound ridiculous. But in crypto we’ve seen DATs raise $20bn+ within the past year to do this exact mandate, and real-world collectibles are a more trusted, widespread investment than the latest AltCoin that is going to zero.
It’s extremely reasonable to believe a Collectibles DAT could raise $200 – $500M to acquire and tokenize collections. The gameplan would be:
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Acquire + tokenize collectibles
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Implement a collectibles blockchain standard, which becomes the default due to size
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Partner with or acquire a Tokenized Collectibles platform to generate revenue through the products like Gatchas, Indices, Perps and more
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Use revenue to acquire more cards
The DAT could also create content to drive desirability of owned collections.
The pushback would be that many DATs as of this writing are trading below NAV. This is for a few reasons:
- Undemonstrated benefits to DAT ownership vs direct exposure to the liquid asset (eg Bitcoin, Solana)
- Many deployed their capital too quickly in a bullish market
- They haven’t figured out a revenue model.
A Collectibles DAT could easily overcome all of these. In particular, it would be giving the public markets net-new exposure to an asset class versus serving merely as a wrapper with an expensive management team and the future promise of revenue.
Conclusion
It’s a matter of when versus if collectibles trading moves onchain. If you are building in this space and want to chat please reach out to us.