Some of you might see a complex piece of engineering.

You'd both be right.

Meet Genesis, the first Cryptokitty.

She's not alone.

All of a sudden, cryptokitties are everywhere.

“Cryptokitties”

"Cryptokitties"

“The viral blockchain-based game that sparked a global craze for virtual cats.”

“It's a picture of a cat.

And apparently someone bought one for $100,000!”

You've probably heard of cryptocurrencies— but these are cryptocollectibles.

They're like digital beanie babies or baseball cards.

It sounds silly, but Cryptokitties is testing a profound idea: Can a digital good be…

rare?

Every 15 minutes, the company Axiom Zen releases a new cryptokitty that only one person can buy.

And they'll do that until November 2018, when they're capping these “Generation Zero" kitties at 50,000.

But there are already more cryptokitties than that, because unlike baseball cards, you can breed them.

The game is that there are billions of different possible combinations of traits.

And so you can decide which combination of traits is interesting to you

and you can go out and try to find a cat that has that combination and buy it.

Or you can try and find a combination that no one's created before.

And through our breeding mechanics you can come up with new combinations of traits

or, if you're lucky, even new traits entirely.

That's Layne Lafrance and Dieter Shirley.

They both helped found Cryptokitties in November 2017.

And they've convinced a loyal group of users to spend more than $23 million buying and

breeding these digital cats.

In just a few months, a whole community of third party sites and services formed around cryptokitties.

You can do youngest first, cheapest first.

See, like $10 bucks.

And as I mouse over, this is a plug-in I found.

We are trying to find new ways to play with these Kitties outside of the main game.

So we're starting with contests!

Derpface is possibly one of my favorite kitties because he is just so unbelievably ugly.

The traits that made Derpface the ugliest Cryptokitty

—even though, I mean, I think he's adorable—

are baked into his code.

See, this is what Derpface and Genesis both really look like.

The “genes” in their code define their physical appearance on 12 features,

based on a template by a human designer.

They call those features….

Cattributes are the visual elements of the cat.

Like us, these cats can also carry traits

in their code that only show up in their offspring.

But the genetic algorithm that drives cryptokitty reproduction — that's kept secret.

When the cats are breeding together the secret sauce combines those elements to make with

a certain amount of... well we can't really tell you much about that.

But!

They are combined.

And people spend a lot of money on the chance to get their dream cat.

Price depends on the generation number and on what traits are in high demand.

In other words, popular Cryptokitties earn high prices the way collectibles always have:

Scarcity.

And what's so interesting about this is that digital scarcity is brand new.

Before the computers came along if you had a thing, only you could have that thing and no one

else have that thing unless you gave it to the other person in which case you would no longer have it.

But that completely changes when goods become digital and accessible online.

Every time you give somebody data on the internet it's a copy.

I think the sort of reckoning

we had in the 90s and early 2000s was how do we live in a world where everything can

be copied infinitely and you know and what's going to happen to the music industry?

What's going to happen to the news and entertainment industries? And we've seen it all play out.

But Cryptokitties can be scarce because of the technology they're built on.

They're using a blockchain.

Specifically, the Ethereum blockchain, so you have to buy them with “ether”.

But you might also be familiar with the original, Bitcoin.

A blockchain provides a decentralized system for recording transactions, making fraud and piracy a lot harder.

And so the essence of blockchain is that we have -- whether you want to call a book or people

used to refer to it as a ledger.

And they would say, “Hey, you know you know Bob has this, Alice has that.”

And then everybody gets a copy of that book.

And if someone comes along and says, "No Alice doesn't have that."

People can point to their own copy of the book and they can say, "No no no you're wrong.

I see right here in this in my copy that Alice has this."

When a Kitty is born and it's beautiful and I love it, there's something very special about knowing that

it belongs to me and no one else and no one can take it.

But the truth is, it's not all yours.

You own the code for that cat, but not the actual image.

In the case of cryptokitties, they have sections in their terms of service that say that they own

all of the images, all of the graphic elements and that they have the right to use them however they want.

That you actually have no right to use them in any way.

That's not so different from a baseball card.

If you have, say, a Topps baseball card and it has the player's name on it -- say

Barry Bonds, and a picture of Barry Bonds on it -- you own the physical object but you

don't own the copyright.

Owning the physical object doesn't give you the right to print up other cards but it does

give you the right to trade your card to someone else or to sell it to a collector.

But for Cryptokitties...

If they decide they want to, say, change the artwork or if they sell the company to someone

who wants to pull the artwork offline and use it only in their new Cryptokitties movie

series, they could do that.

And you'd be left just with this string of letters and numbers on the blockchain with

no art attached to it at all.

So I think that's a fundamental difference between real-world collectibles where you have the object

and they can't take it away from you

and a digital collectible...

We really really really wanted to put the art in the blockchain,

because our users, I think most of them conceptually know that

what they own is sort of some numbers, in a blockchain.

But what you think you own, what you think of as your, cat

is that picture of the cute little guy with the funny eyes.

And unfortunately, the decentralized systems are just not mature enough to support art in a robust way.

Cryptokitties are cute and complicated and they show that we still have a ways to go

until we can really keep a digital collectible like we can a baseball card.

When I was doing research for this video, I became super interested in what makes Cryptokitties a "game."

If that's the sort of thing you're interested in,

you should really check out The Verge's YouTube channel.

One of my favorites is on the way medicine is using games to improve cognition.

So, go check them out.