Unchained - What Makes a CryptoKitty Worth $140,000? - Ep.75

Episode Date: August 7, 2018

Roham Gharegozlou, CEO of Dapper Labs, the company behind CryptoKitties, and Benny Giang, Dapper Labs’ head of Asia, describe how employees at venture studio AxiomZen came up with the idea for CryptoKitties, what problems it exposed in crypto (beyond scaling!), and how CryptoKitties can teach people the value of decentralization. They also defend the $140,000 price tag on one kitty, explain how they plan to grow from the current 300 users per day that the blockchain is logging, and surmise that if it weren't for user experience issues, CryptoKitties could have been 100 times bigger. Plus, they talk about the Kittyverse. Thank you to our sponsors! DACC: https://www.digitalassetcustody.com Quantstamp: https://quantstamp.com The Sun Exchange: https://thesunexchange.com Episode links: CryptoKitties: https://www.cryptokitties.co AxiomZen/Dapper Labs: https://www.axiomzen.co Roham Gharegozlou: https://www.linkedin.com/in/roham Benny Giang: https://www.linkedin.com/in/bennygiang/ The $140,000 CryptoKitty: https://www.nytimes.com/2018/05/18/style/cryptokitty-auction.html Fundraising news: https://techcrunch.com/2018/03/20/cryptokitties-raises-12m-from-andreessen-horowitz-and-union-square-ventures/ CryptoKitties on HTC's new phone: http://fortune.com/2018/07/11/cryptokitties-app-htc/ Listen to previous episodes of Unchained with these CryptoKitties investors: Chris Dixon: http://unchainedpodcast.co/chris-dixon-on-how-trust-is-the-best-lego-block-ep70 Naval Ravikant: http://unchainedpodcast.co/naval-ravikant-on-how-crypto-is-squeezing-vcs-hindering-regulators-and-bringing-users-choice Bill Tai: http://unchainedpodcast.co/maitai-globals-bill-tai-on-why-blockchain-is-the-6th-wave-of-technology William Mougayar: http://unchainedpodcast.co/icos-why-people-are-investing-in-this-380-million-phenomenon "Developers all the way down" -- Unchained episode with Meltem Demirors and Jill Carlson: http://unchainedpodcast.co/episode-74 Listen to my previous interview with Arianna Simpson on Unconfirmed about CryptoKitties: http://unconfirmed.libsyn.com/arianna-simpson-of-autonomous-partners-on-privacy-cryptokitties-and-crypto-regulation Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin. If you've been enjoying Unchained, pop into iTunes to give us a top reading or review. That helps other listeners find the show. Sun Exchange is a solar power marketplace for the crypto economy. Sun Exchange members all over the world are earning cryptocurrency for helping to deliver solar power generation to businesses and communities in emerging markets. Visit the SunExchange.com to start earning.

solar powered money today. Asset managers, ICO issuers, and other institutional players, it's time to safeguard your cryptocurrency. Partner with Digital Asset Custody Company, or DAC. Purpose built for secure, flexible, institutional quality cold storage solutions. Learn more at Digital Assetcustody.com. Smart contracts are on the rise, and that trend will only continue. Security has become an absolute necessity, and Quant Stamp is being. standard for smart contract security for the blockchain. With a team of security experts dedicated to defeating the bad actors, Quant Stamp is the gold standard for safer, more reliable smart contracts. Find out more at Quant Stamp.com. My guests today are Roham Garagoslu, CEO of Dapper Labs,

the company behind Crypto Kitties, and Benny Yang, Dapper Labs head of Asia. Welcome, Roham and Benny. Thank you, Laura. Thanks for having us. Thanks, Laura. Roham, let's start with you. Your original company, Axiom Zen, which is the company that started CryptoKitties, has been around since before the CryptoCraise. What does Axiom Zen do? Axiom Zen's Venture Studio. So I started the company about six years ago with my brother, and the focus was building

companies based on emerging technology. And really, we realized that when the platform shifts happen, when new technology comes around developers, designers, sort of individual, a small group of folks working at a startup have a very outsized impact on shaping the perception of that technology and on impacting society's basically acceptance of it.

And CryptoKitties is a perfect example with blockchain. So in the past six years, we've built four different companies, two venture funded, too profitable, and most kind of circling around the new platform shifts that have been going on. So AI, machine learning, and not blockchain.

Wow, I really like the insight that you mentioned about how a small group of people will shape these emerging technologies. I hadn't thought of it that way before. Benny, how did the company get into the crypto space? Yeah, so it's been, as Roham said, it's been very interesting journey. I think that we started off with the Money 2020 hackathon, and some of the team members were kind of dabbling in that area of at least digital virtual currency. And not only that, as Roham would probably mention, our CTO Dieter, he kind of mined Bitcoin very early on. And he's been a big fan of this space for a long time. So all of us kind of started getting very, very interested in the cryptocurrency space,

especially around Ethereum and around smart contracts, really. And so that kind of spurred our interest into actually experimenting with smart contracts. and CryptoKitties was one of those experiments. And how did you come up with the idea for CryptoKitties? So being from Axiom Zen, it's a venture studio. So we kind of, we had this place called the jungle. And in the jungle, we actually had a lot of plants in there. And Mack, who is our chief creative officer.

And Dieter was in there and Fabiano, our smart contract developer. And a few of other developers and designers were in this jungle. And the premise of the jungle was the pump. out experiments on a weekly basis. Some of it could be AR experiments with the new AR kit, and some of it was the early genetic simulations of CryptoKitties. But I think the origins of the idea kind of came from our interest in crypto collectibles. We saw kind of the early stages of the spells of Genesis, the rare pepets, and the crypto punks. And we're really inspired by it because I think it was one of the first projects that were putting art onto the block

And it was talking about, it's creating a dialogue around collectibles and what does it mean to have scarcity and collectibles on the blockchain. And for us, we kind of like, you know, cats kind of are the internet of the, they're the memes of the internet. And they're the logos of many internet companies. And so we kind of ask yourself a silly question, really, why could we could put cats onto the blockchain? And so that's kind of the originations of the idea. So obviously, Cryptokitties has been pretty popular. It's even entered mainstream consciousness, which not a lot of crypto projects can claim. So for listeners who don't know, why don't you guys tell us what CryptoKitties is, how it works,

what people can do with it just in case there are any people out there who are still unaware. Yeah. So CryptoKitties is the world's first and the world's biggest. blockchain game. Essentially, it's breedable, adorable digital cats that are on the blockchain. And the way that people play with this game is they could adopt cats that are available on the web and very soon actually on mobile. And they could sell these cats in the marketplace. Or the really cool thing is these cats have genetics. So just like humans, they have dominant and recessive traits. And you could kind of think about it in a way,

where maybe your grandparents in this funny situation where they have purple hair, I don't know, and when you have your son or your daughter or your grandson that the purple hair kind of emerges. And in a similar way, these cats have genetics in them, dominant and recessive traits. And when you breed them together in the right combinations, new genes emerge. And the really cool thing about this game is that when you get the right genetic combination, you get to unlock newer and really cool cats that we call fancy cats. So kind of that's the premise of CryptoKitties.

And what is a fancy cat? It just means like a kind of higher-priced cat because it has more unique and rare features? Yeah, fancy cat is a unique image. So for example, Fortune Cat or the vampire Dracula cat is a fancy cat. and they look different from these other cats that have maybe purple spots and yellow fur. And essentially, it's a genetic combination or a genetic puzzle that combines to create a fancy cat. And the cool thing about fancy cats is that there is scarcity with them. So some of them have, you know, the maximum amount that it could be issued from the smart contract is 88 of them.

And there couldn't be any more. And so fancy cats are just as that. They're much more fancier, and it's a very prized collectible to have in any kind of crypticcaddy player. So basically, users can essentially breed towards cats of their own design. And one user put it really well. They said, we buy the paint from you guys, and then we make the art. And these are cats that sort of like Benny was saying, stack different genetic traits. and you can basically design and breed towards a kitty of the appearance you want,

with the color you want, the features you want, so on and so forth. And then throughout the genome, there are these hidden limited edition custom art cats where we created the art for them, and they're all limited edition sort of on the blockchain, as Benny was saying. And so that's the folks can breed towards them and discover them. What's really cool, though, is because the breeding game is reasonably complex, we've had a whole series of tools and products be built on top of CryptoKitties. So the first series of tools were things like kitty calc and spreadsheets and sort of breeding predictors and tools to help users decide how best to breed towards the cat they want. And there was a second series of tools that is around accessorizing your cat.

You can buy hats for your kitties. You can buy art from Dada, NYC and give it to your kitties. But now you have a whole series of more kind of casual play games that are being developed. Folks like kitty races, kitty battles, cart collectible card games. You have Tinder for cats. You can pull your cat and give it a personality and sort of treat it as a social avatar. And that's sort of the rich ecosystem that's coming around the kitties as assets. And so you no longer have to, you know, play one game.

You can actually hold on to your cat and play the kinds of games that you want to play, almost like a sort of the cat being a entry ticket into a theme park. And the rides being owned and operated by different entrepreneurs building on top of, you know, this open, permissionless sort of API interface. That's essentially our smart contracts. So I want to understand these other games, but before we go into that, I actually also want to understand. So people are trying to breed the kind of cats that they want, but that probably costs money, right? I, you know, obviously know that a lot of people have been making money from CryptoKitties.

Like Benny in a previous conversation mentioned to me that there's somebody who makes a living from Cryptokitties. I read another one of your team members mentioning that somebody made a million dollars trading CryptoKitties. So how do people make money with CryptoKitties? Essentially, because CryptoKitties is a decentralized game, we've decentralized aspects of running the economy. So there are folks that come in, breed towards the cats they want, but there are others that come in and just buy the cats that they want. And the way that the folks that are making a lot of money, they're kind of predicting what are the highest value traits. So when a new trade emerges, they buy the Gen. Gen. Zero cat. They breed some, they breed towards the sort of higher level traits.

And then they put those back on the marketplace so that the kind of the collector archetype comes in and finds the cats they want and purchases them rather than doing the work of breeding towards them. Oh, wow. It's like flipping a house. I guess so. Yeah. Build and flipping or something. Okay. So then, so then I want to know. more about these other games that you mentioned, like KittyCal and the spreadsheets and the racing and the hats. What are, just maybe give me a fuller description of what some of these, how some of these work.

Sure. So, I mean, I think taking a step back, one thing that we, when building crypto kitties, we're sort of trying to bake in all of the values that we saw in decentralization and trying to think what is native about blockchain. So how does a game look like? on the blockchain. Of course, one of the decisions we made that was maybe controversial was we put all of our game mechanics into smart contracts such that, you know, all of the breeding happens on chain, the cats are born on chain. And that's actually what led to a lot of the congestion on the

Ethereum network. But we wanted to do that because we said, well, this, the transparency and immutability, what it really means to consumers is fairness. And the fact that, you know, they, they know their cats are never going to be taken away from them and the rules are never going to change. What we did kind of, we consciously realized at the time, but didn't realize how big of an impact it would have, how quickly was that all of those same values apply to developers as well. As in platform risk is one of the most insidious killers of startups in the past few decades as, you know, the platforms have gotten more and more powerful.

And by kind of putting our smart contracts out in the open, we basically removed platform risk from everyone that's building on top of them. So if you build a racing game that uses our genetics as a component in its game design, you know that we can't change those. And so you're building on solid ground. And so there's a lot of whether it's the calculators, the accessory organization games or the actual sort of full gameplay stuff, the reason that they're building on top of this platform,

or rather these assets as a platform, is they know that no matter what happens, in fact, if we go away, that's probably a bigger opportunity for them than if we stick around. So they're tapping into our community, and that basically gives more value to the individual consumers. So the games that are being developed are really early right now, and what we're doing through,

we've essentially created this program called the Kiddy, And what we're doing is we're bringing all these folks, putting them in the Discord channel, and starting to both provide mentorship, connect them to our game designers, our engineers, and help them build their games into full-scale experiences. So you have several collectible card games where people, each of their cats sort of give them different strengths and defense and all these things. And so people collect cats almost like a card deck. You have racing games that are more like, you know, you take your cat, you take your racing.

It's genetics are essentially a factor in how well it does. But then there are also games where the cat is learning new things by going from one smart ground track to another, almost like going to racing school or going to dojo school and kind of packing on skills and then coming back to, to the main smart contract. So there's basically anything you can imagine. One of my favorites is a project that lets users import their cats and then essentially make sort of a Facebook profile but with the cat instead of themselves and give it a personality and start talking to other users' cats.

And it's, you know, it does a small group of people. I don't want to, you know, overstate it. But that's what we care about. You know, we care about the group of folks that are in there not to, you know, speculate or, you know, buy and flip and make a lot of money, but to sort of play the game. And if they need to, you know, the cool thing about blockchain games is you can play it and you can actually, you can make money.

But we want folks that are crazy about the kitties. So we've had, you know, folks get tattoos of cats. We've had folks make wood carvings and custom dolls and sell them on Reddit and in our Discord. We have folks that are making kind of fan art, you know, little kids are drawing things, drawing pictures of their parents, cats, and folks are posting them to Twitter. So that's the kind of community that we've been trying to build over the last few months as everything else in the crypto space is sort of both crashing and burning and maybe sort of trying to look for the next quick fix.

And that's what we're excited about. I don't know if I'd call it crash and burn. I guess I would say cooling off. but I love what you just described. Honestly, so many ideas popped into my head as you were speaking what you were describing about the breeding and the racing. I was reminded of my favorite book, Seabiscuit, which everybody should read if you haven't read. It's by, I think, the world's best writer, Laura Hillenbrand. She's just a master. But obviously in that book, it's about this popular racehorse in the 1930s and how it was so popular that it generated more headlines than literally Franklin, Delano Roosevelt, or Hitler, or like anybody else. And it was in the year in 1938. But, you know, obviously people were really into horse racing. And when you were describing the cat races, I was like, oh, if people really get into the genetics of this the way that they did with the horses and still do today, then you could end up with a little bedding culture around the cats. And just from what you described also, it just felt like,

people were sort of using them as avatars. And I know that worlds like second life have really taken off. So I could see just a ton of different ways that this could become a different thing in many different directions. So I found it really interesting. I do know that before you launched, you had a goal of creating a consumer-friendly blockchain app. So what were your expectations for CryptoKitties before you went live? Like, do you remember, did you expect it to take off? Or were you of thinking like, oh, this is neat, but we're not sure if it'll gain traction. What were your thoughts right before you launched it? I still remember before we launched, one of the things that we created was this spreadsheet and we passed it around where we would kind of estimate, you know,

okay, by month three, by month six, by month nine, how many expected users would we be hoping to reach? And, you know, I would say that we never expected, we never fully expected that the entire world would be so fascinated by cats onto the blockchain. So that was kind of like in the early days of we were speculative and kind of figuring out where, how big can this grow? How big can this experiment grow? Do you remember what you were projecting and what the actual numbers ended up being? Yeah, I don't think we've looked at that spreadsheet since we've started. I think within a week or less, the numbers went way past like the six-month goal. So, I mean, I would have to dig it up, but we were quite conservative.

At least some team members were, and then some were quite aggressive. So you didn't expect it to take off? Not as wild as it did. Okay. And so what were those initial days like? How did you feel the time? And what do you remember happening where you were just like, oh, my God, I can't. can't believe this. When we started out with CryptoKitties, we certainly, our ambitions were

more about demonstrating the possibilities. But by the time Benny and the rest of the team got back from Heathwaterloo, we knew we were sitting on something that was very, very interesting. I mean, our entire office was completely addicted. The Heathwaterloo test went really well. There was really no UI to the game, but everybody was just having fun with, with, with, with, with, uh, with, uh, with, uh, mechanic itself, which, which, which, which tells you, tells you, you're sitting on something, something valuable. Um, but at that time, you know, we expected average cap prices to be, uh, to be, I guess it's sort of a multiple of how much it costs to create the cats in the sense. It's, the values being, being, being baked in. But, you know, gas fees were, uh, scents for, for breeding

cats and transferring them was super cheap, super quick. But very quickly after launch, and still to this day, the game has become much more expensive. And so I would say, you know, we knew we had something that was exciting and interesting. We didn't anticipate the level of speculation that would enter the market, you know, December, January of last year. But it was, it was, it was, It was clear that by October it was clear we had something cool on our hats. And Benny, just I want to hear your response. Like, you know, what were those first few days? And was that the time when your title was Fortune Cat?

The scorebed app here with trusted stats and real-time sports news. Yeah, hey, who should I take in the Boston game? Well, statistically speaking. Nah, no more statistically speaking. I want hot takes. I want knee-jerk reactions. That's not really what I do. because you don't have any knees?

The score bet. Trusted sports content, seamless sports betting. Download today. 19 plus, Ontario only. If you have questions or concerns about your gambling or the gambling of someone close to you, please go to conicsonterio.ca. Local news is in decline across Canada,

and this is bad news for all of us. With less local news, noise, rumors, and misinformation fill the void. And it gets harder to separate truth from fiction. That's why CBC News is putting more journalists in more places across Canada, reporting on the ground from where you live, telling the stories that matter to all of us, because local news is big news. Choose news, not noise. CBC News. Yeah, I mean, so as I'm outlined, there's different timelines, right? There's this timeline where CryptoKitties was in the jungle and the incubation period. There was a lot of genetic

simulation that was being run that allowed us to get to the 256-bit genome. That allows for an upper limit of 4 billion variations in the genetics. And so that was the time period before we went and shipped an alpha version for Ethereum, Eiff Waterloo, which is one of the world's first Ethereum hackathons. And as Roham alluded to, at the hackathon, it caught on fire. I remember that we bought a bunch of Pokemon cards and slapped on Crypto Kitty stickers on the back of it. And we did a lot of guerrilla marketing there. And that was the first time we actually met Battalic in person. And we made a custom t-shirt for him that was a cat with a unicorn.

We knew that he kind of liked this style. He has this collection of T-shirts. And so that was kind of one of our first exposures to some of the projects that are very well-known now, such as Bena Mask and Parody and a lot of projects now that are grown in a very big way. And so at that hackathon, yes, there was a lot of people who started playing with it. People actually kind of stopped. It was a hackathon, right? So people actually stopped hacking to play CryptoKitties and they just came to our table

to kind of like ask questions about, hey, like, how does this work? How do you breathe? And that actually brought up a very interesting perspective. We had a lot of people who are in this hackathon to learn, and they haven't actually interacted with the blockchain at all. They haven't signed a transaction. They haven't adjusted the way for gas. They don't even know what gas is.

And throughout the whole hackathon, we were sitting there basically educating quite a lot of people. But here, this is how you sign the transaction. Here's how we work. of course, all of this was on TestNet. And so when we came back from that, we already had a few thousand people who spread to the community, who had signed up for the actual launch.

And we knew at that point that we had a really strong following, and a lot of people were interested in what we were going to do next. And so when you did launch, like, what was that like? And do you remember what some of your kind of crazy, oh my God, I can't believe this is happening moments were? So when we launched, I remember that we had this timeline of launching before Thanksgiving, American Thanksgiving, because we thought that people are still at work and that they would see the email and would be willing to kind of play crypto keys or test it out.

And what had happened is that at that same time, we were doing smart contract audit. And Nick Johnson and a few others from the Ethereum Foundation found a very serious bug of which we decided to delay the entire launch for a few days to fix this bug. And I think that was probably one of the best decisions we've made as a team, as a company, as a whole. And we actually then launched it on American Thanksgiving. That's when we sent out the email to the community that we gathered from Eiff Waterloo. and that kind of worked in our favor in a very odd way because everybody went home to their families and I didn't think that they would go home and talk about Bitcoin and Ether and Ethereum and the third topic I think at the dinner time was CryptoKitties because they received the email

and they started to teach their moms and dads, their uncles and aunts while they're all home in having Turkey. So that kind of became the central topic around the initial launch. And then it just started picking up steam slowly but slowly. And not only that, we had June from Quartz and now he's back at Coin Desk, who kind of we've been talking for a while. And I remember that when I was contacting you, Laura, I was telling you about we're putting cash on the blockchain.

It's super exciting. And you were just like, I don't know about this. I think a lot of people had a very similar reaction. I had something else. I had a huge project I was working on. I couldn't. Yeah, I couldn't even look into it. I had like no time.

Well, that's fair. That's fair. That's fair. And so essentially, yeah, we were able to get into the courts and into tech crunch. And a lot of people then started getting very interested in, you know, what is CryptoKitties. I also think that it's like an overall sentiment. in the community, there were kind of three overarching headlines that were consuming the crypto space.

And these headlines also kind of flooded into the tech space as well. It was the price of Bitcoin. It was the hacks and scams that were happening. And then the ICOs, right? There's just so many ICOs that were happening. I think a lot of people kind of felt that they wanted to see a tangible product. They wanted to see a team ship something that they could interact with. and not do an ICO, which, you know, of course, we didn't do an ICO.

We just shipped the product as we do with any of the startups that we build in here. And we focused a lot on user experience. So we have probably one of the best teams to build the best user experiences, both in the enterprise world, but in the B2B world and even on the consumer side. So we have the best team centered around it to build CryptoKitties and make it super polished and easy to play with. And that flow included kind of like the flow that is really well known now in the industry, which is Coinbase to CryptoQDs to Metamask,

and then that's how you play a H2ML5 blockchain game. And now all of the blockchain games are using that flow. It kind of established a standard. But as Roham is alluded to, that flow is not good enough. It's still kind of like a 10-step process, and it really leaks a ton of use. users at every single state. So it's not very ideal. It was ideal eight months ago when we launched, but it's not ideal anymore if we want to grow as an industry and to bring on board more consumers to the blockchain. Yeah, I agree. We're going to turn back to this question about

user experience, but before we do this little ad break, I actually want to ask you guys a couple of really quick questions. So at this point, how many users have signed up for Cryptokitties or how many people own a cat? I believe there are 68,000 people that own a cat, Ben, you may have more updated numbers than that. Okay, and are they, who are they demographically? Like, by age and gender and geography. Like, where are they located?

Are they mostly Americans, or? It's mostly North America, and we don't collect tons of, we don't collect much demographic information on our users, somewhat for obvious reasons. but the the what anecdotally the my the a lot of the players are actually crypto curious folks that were introduced so so some of my favorite stories are folks like uh as folks that say hey listen i've been crazy about crypto but my boyfriend never got it and now he has a series of cats or

my girlfriend never got it and and now she's into it and she understands why it's important um so a lot of our current users are folks that identify more as gamers than as crypto people um i think that it's still most mostly males, but a much higher percentage of female players than in crypto more generally. But mostly in North America. And I think that's a missed opportunity for us in the sense that there's when we go to Asia and when we talk to folks that know about us, they go crazy. But there are not enough people that know about us.

And that's one reason, Benny is in Shanghai. and one reason we partnered up with HTC and we're going to, you know, the next few months are all about sort of, you know, we've spent the last few months preparing for scale, making it easier for folks to understand the game, get into crypto, and the next few months are going to be about expanding the doors, expanding the markets and trying to get to the crypto curious folks because it's still incredibly hard to onboard into this world by yourself.

so almost always you need someone to help. But, you know, our interest is the folks that have been left out by the conversation over the last few years. That's all about investment, all about risk-taking, about sort of, you know, hodeling and a very kind of financial first approach to what really is a conversation about, you know, freedom and sovereignty over your own data and kind of being, having a really. relationship of respect with the businesses that you work with and being treated fairly and transparently. So we're trying to change the conversation. We're trying to change the vocabulary. And with that, it's a change in demographics. But at the same time, you know, just the core are our crypto enthusiasts. And that's the, those are the folks we need to be working with to expand the movement and bring others into the fold.

I love how you took a philosophical turn there because that's the turn that we will also take after the ad break. I'd like to take a quick break to tell you about our fabulous sponsors. Imagine this. You dedicate countless hours of hard work to creating a smart contract only to be hacked in mere minutes. If you think that can't happen, think again. We hear that $10 billion has been raised through smart contracts, but over $300 million of that has already been compromised. Hackers are hungry for more. So security is not just critical to your success, it's an absolute necessity.

And that is where Quant Stamp, the standard for smart contract security, comes in. With a team of security audit experts, dedicating to defeating the bad guys, the Quant Stamp of Approval, is your solution for safer smart contracts. Find out how we can be the gold standard for security at QuantStamp.com. Sun Exchange is a solar power marketplace for the crypto economy. Sun Exchange members all over the world are earning cryptocurrency while solar-powering businesses and communities in emerging markets. Through this SunExchange.com, for as little as $10, and in just a few clicks, you can purchase solar cells and lease them to projects in the world's sunniest regions, earning you an income stream of monetized sunshine, paid in Bitcoin. Sun Exchange members can earn between 10 and 15% IRA, backed by the power of the sun.

Founded in 2015, Sun Exchange is operating solar projects across Southern Africa, entirely powered by our members' solar cells. Our partners include SolarCoin, the United Nations Development Program, and the Energy Web Foundation. Visit www.Thesunexchange.com to check terms in eligibility to join the crypto-solar revolution. Start earning solar-powered money today. If you're an institution managing crypto assets, you need a secure custody solution. Digital Asset Custody Company, or DAC, is the leading purpose-built institutional quality cryptocurrency custodian. DAC leads the industry in security and service.

Experts in the tech, cybersecurity, and investment worlds, DAC's founders built the system that today's major players in asset management rely on. DAC is in production on over 90 tokens. Secure, efficient, egress transactions. That's DAC. Custody with DAC. Visit Digital Asset Custody for more info. I'm speaking with Roham, Garagoslu, and Benny Yang of Cryptokitties. Before we started recording, I was checking out a transaction volume in CryptoKitties. And at least recently, there was a 24-hour period where it had

only about 300 users. The transactions totaled less than $9,000 in 24 hours. I also looked at looked at the site Crypto Kitty sales and saw that all the most expensive cats had been sold in the first couple of weeks with like nearly all of those sales occurring literally in the first two weeks after the game launched. So do you ever picture Kitty's trading for such high prices again? How do you plan to kind of like grow traction again and, you know, keep this going? Yeah, I think that's a great question. And so, so for one thing, the 300 something users are Those are unique users that have been hitting the smart contracts. So that's not, obviously, folks that visit the website, do things that are off-chain, interact with other kiddieverse experiences, you know, drink coffee out of their CryptoKitties, mug, so on and so forth.

So that's that's one piece of it. The other piece of it is, I would say, the entire sort of decentralized app and game market has followed the same downtrend and activity in the, in the, crypto world. So, you know, that 300 users is still by far the most active community in terms of transaction volume in terms of even even dollar spent. So there's, but really the most important fact is we have, we're actually happy that the players that are playing the game are not focused on speculation. In fact, you know, we, what I said earlier is, you know, that the, despite the, sort of public perception or in which we haven't really addressed, there's a group of folks that are,

that love the cats that are building products on top of the kitties. And that's our current focus is saying, well, let's double down on these teams and not only help them build more utility for these same tokens that will attract different kinds of communities, but also try to understand this core user base of folks that are coming back day after day, spending tons of money and also being very active in Discord, creating new channels, going above and beyond, and even policing the community itself.

That kind of demonstrates what the point of a blockchain game is. It's not sort of Ponzi schemes. It's not gambling. That's just the cryptocurrency trading market. You can already get that by buying your favorite latest altcoin. What blockchain games are about is about community. And so we've been focused on, let's simplify things, let's not focus on growth and look after this core community and understand what makes a blockchain game different and special. And then we build on top of that.

So that's where we feel like we've got it at this point. I think we have a lot of learnings, a lot of understandings about what are the values of decentralization. How can we explain the why to a new user? and those are the kinds of things we're building into a new onboarding flow, as Benny is saying. And first, applying it to CryptoKitties and sort of this universe of apps we call the Kittiverse. But then we want to work with all the best folks out there that are creating great content. And we don't see other game companies as competitors. We see them as partners.

And we want to give them the learnings that we've had. Because once we do that, then we want to turn on the taps for growth and bring in new communities. You know, with HTC, the U12 phone is one of the best phones on the market. It has, I think, an installed base of almost $2 million even today. And the app is going to, the CryptoKitties app, a new Android version of the product is going to be preinstalled on all those devices. And more importantly, by giving more utility to the tokens, by deepening and having more utility to the tokens, by deepening and having sort of a solid core of players rather than traders and speculators, that's how I think the flywheel is going to start getting going again. And once the new wave of users come in and the old

wave of users come back, it's really not about buying, selling flipping. It's about going on a journey, designing your own cats, building things you love, and then being able to paint them throughout the rest of your life. So, you know, using crypto goods, you can order a mug, you can have an iPhone case with your kitty in it. You can take it in various games, both from indie developers. We're working with some of the world's largest and most respected gaming companies as well to build full-scale experiences that use these assets. So that's, I guess, the short version of some of what the team is cooking. I totally get that when you have a dedicated core fan base, there's a famous entrepreneur who I'm just blinking on who it is who says that all you really need to get a business

going is 1,000 dedicated fans. But, you know, that's not really the kind of thing that you can build a venture-backed business on where you're probably, I'm sure you're investors, Andrewson Horowitz, Union Square Ventures, Digital Currency Group, and these big name people in the space like Fred Ersom, the co-founder of Coinbase, who's a former gamer, Nivalravakon, the co-founder of, or founder and CEO of, or former CEO of AngelLift, Bill Tai, William Mugiar, all three of those, by the way, were people who were previously on the show, you know, I don't imagine that they're, that when they backed you guys with $12.85 million, that it was because they were like, oh, they've got 300 people that are still into this. So, do you know, do you feel like,

you can grow something sustainable because I just wonder the past history with a lot of these games is that they take off and then they die down. That's like the story of all of them, right? Well, definitely games are hit-driven business. What we are creating with CryptoKitties is a brand. And I think the key sort of, I guess, distinction with a blockchain game is that unlike a normal game, the assets and the mechanics are out there, and they're getting better every day. So the game eight months ago was you buy a cat, you buy another cat, and then you breed them together, you create a new cat. The game today is a hundred different things you can do with, well, I guess today it's more

like five or ten different things you can do. But with the teams that are working on new experiences with the team that we've built over the past while, those same assets can be used and reused. And so the affinity that people build for their characters can persist throughout the experience. But I did want to make the point. I mean, our investors are very grateful. They're fantastic folks. And I think all of them are, we chose to work because they understand that we are actually very early in this platform shift.

And our purpose as a company is to think long term and to build a, like you said, a sustainable business. not necessarily a sort of chasing, you know, quarterly, quarterly numbers and whatnot. So, you know, to be clear, the 300 folks aren't the only people using crypto kitties. We have thousands of daily users that come to the website, thousands of daily users that are active in our Discord, and the 300 purchases of cats on our smart contract, are users spending an average of between $15 and $25 a day on their kitties. And that's unheard of in sort of the mobile game space and certainly, you know, the pre-internet game.

So there's something very special here. And specifically when we were fundraising, you know, at that time, given our numbers, well, actually, we weren't fundraising. People were just coming to us. And there were a lot of folks that were willing to give us capital at frankly unreasonable terms. The reason we chose to work with Fred and Chris and the folks you mentioned are, is precisely what I said. I want folks that know what they're getting into and understand that, you know, this is a, we're extremely early in even the public's perception of this. I think the vast majority of companies out there are misdirected. I think most founders don't even understand sort of their own space, much less how everything's going to click together.

And so there's going to be a dramatic falling out. I think there will be another downturn before the vision we have for a decentralized future is really in the mainstream. And so I would hope that none of those folks are sort of refreshing DAP radar and seeing that, hey, even though we're the biggest. You better not. If you think that we're still the biggest game. And there's, there's just, it's, it's a, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's a, it's, it's a, it's a, it's a, it's a and, and, and, and if you think about the evolution of how games are made, you know, 20 years ago, you, you, you, you, you would, uh, finish a game, put it on a CD and ship it out to a

retail store. With a mobile game, you're essentially running, you know, this advent of live ops, right, where you ship a game. And then a lot of the player experiences actually in the events you run, the campaigns you develop, the new content you add on the weekly or daily or monthly basis. And with blockchain games, it's, I think, a supercharged version of that where you, you sort of create a theme park and then you invite others to contribute to it. The, the community itself can submit art for kitty hats and they can design their own hats and then make money when people buy it. In future games, you'll have the community able to design levels. You'll have the community able to run leagues for collectible card games. And those are the

little things we want to test in a microcosm and understand and then scale up. Because building a scaled game is incredibly challenging. It takes time. And so we're in the learning mode at the moment. And don't forget, the Ethereum network still can't handle much more than what folks are throwing at it. Yeah. Actually, I want to discuss that in a second. But one more question before we move on from this topic. You guys recently, or well, actually it was a few months ago,

Ethereum auctioned off an exclusive kitty for $140,000. Do you think that that kitty was worth that amount? Oh, absolutely. A celestial cyber dimension is a... Okay, but so I want to ask you about that in the same, you know, context in which you were kind of deriding the speculators and saying that, you know, that's not necessarily activity that you welcome on your game. So, so to be clear, that $140,000 went to charity and, and it's designed to support artists and sort of, it's designed to support artists and create kind of business models for digital artists specifically. So it was worth it because the buyer was supporting a cause that he cared about and getting a thing that he valued in return. So all of his social profiles, I won't disclose his name because obviously I don't have permission,

but all of his social profiles have the cat as the avatar. He's proud of it. And he's a well-known entrepreneur and investor in the space. But like even in this kind of situation where everybody's, still can see, like, you know, you can look at a copy on the web of what this looks like, you know, like maybe people don't own it, but they can still see it anytime they want. It's not like a painting that you hold in your house, right? So how does it have that value? What gives it that value? Why do you think it's, how do you think it's worth $140,000?

Well, actually, we designed a custom hardware wallet to hold this exclusive kitty. if you see in the photos, the celestial cyrogy dimension cat was actually loaded into this hardware wallet, and this kind of glass cube was displayed at the Christie's auction house previously

before it actually was at the Ethereum Summit for the auction. So in this case, it was a very experimental thing that we did kind of trying to see that these cats are digital. They do live on a website, and as you

said, they could copy it, the photo and do whatever they want to do with it. But in this instance, as you said, they can't physically hold it. Well, they can physically hold it, at least in this instance. No, I want to add on top of that, though, I mean, Laurie, I mean, you cover technology, so it's obviously a, you're familiar with the saying that the future is already here. It's just not even if you only distributed yet. And I think that for many people, what happens in the digital sphere is more real than what happens in the physical world. And you have a painting that's supposedly 400 years old, but you don't actually know the full story behind it, whereas we are at least technologists and certainly folks that

work in the cryptocurrency world can look at something on the blockchain and say, yep, that is a thing that happened. And so the fact that just forget about the art, forget about the physical device, that token itself on the blockchain and the stories around it, if you hold, hold that token, it's more verified that you own the real thing than if you have a painting of whoever and whatever at your home. And so it's kind of, I mean, I think value is accorded by different people differently, right? And the perception of value is changing generationally. And certainly there's certain folks that live a little bit further in the future than the most of

us. But every generation thinks in the more digital world, every generation is looking increasingly at a screen rather than in sort of the quote-unquote real world. And if you imagine kind of AR and VR technology improving at the pace it is, then what is real? What is real? And as long as you sort of trust in the property rights of a certain blockchain, it's a better judge of reality in the digital world than, anything we've had previously.

And I think that that's, that's, that's, that's, that's, that's, that's really the, the, the, the point here, I guess, you know, you can say, well, what's the point of Bitcoin? Um, it's just numbers and, and, and can anyone fork it? And there's Bitcoin gold and there's Bitcoin, uh, cash and, and, and, and, and, for, for now, that version of truth is what's recorded on, you know, the Bitcoin, the Ethereum, and maybe just those two sort of primary blockchains. Then what happens on those things, what tokens are traded, what things are purchased, what sort of stories are told are just as

very, just as real as, or maybe even more so as something you see with your own eyes, which, you know, as every, every kid knows can play tricks on you. rather easily. Yeah, I find that interesting. I definitely agree that obviously we've seen these news stories about fakes in the art world. So clearly that I think that can affect the value of an artwork to not be certain of its provenance. But I do, by the same token, feel like handing down a physical object from generation to generation or through the decades, there's something much more difficult and therefore more valuable in that. But anyway, I take your point. I find it really interesting. So I've got to go back to what you were saying before about the user experience in

crypto. I know that you guys had that goal of creating a good experience, a good user experience with a crypto project. And then in a conversation I had with Benny prior to the show, he was mentioning that as you were working on this, you feel, or you guys noticed that Cryptocities kind of was was exposing some of the problems that the crypto space has overall, you know, in trying to reach a mass audience. So what would you say those problems are and how do you think they can be fixed? Yeah. So, I mean, if we take a step back and zoom out from the entire user experience from somebody who may stumble on this podcast and become interested in, well, what is CryptoKitties? Let's check out the website all the way to getting their first CryptoKitty. That's a very huge

jump because there's so many, you know, points, touch points where they firstly need to understand, you know, this is my money that I'm putting in here that converts to some digital money called Bitcoin or Ether. And then somehow this gets sent to a chromic sense in that it's not readily used by many people. And that's going to be holding now my money. And then I get to play a game. And not only that, through this process, I think if you were to map the emotions of the person kind of going through this, it's ultimately skewing towards fear and frustration and not knowing exactly what's happening.

And, you know, soon, very soon after, when people get excited about, by looking at the cats and hearing about it, they kind of come through this huge roadblock, right, where they find themselves extremely frustrated. and this is what we've seen and not just from what we're saying, but from the data. We see that a lot of people just give up halfway or even to the point where, oh, I need to Coinbase. Okay, I give up. Even though Coinbase is relatively easy to use

compared to some of the exchange accounts that needs to have a selfie and a passport, the KYC process, AML. So we see that it's a significant blocker. And the other thing that we've also seen is around distribution. So right now, well, up until quite recently, most of these games that are web-based, we couldn't use any user acquisition strategies that we're quite used to,

which means, like, basically, digital ads. Now that being said, we can't, you know, Facebook has just opened the doors again, but they're really clamping down in terms of verifying these accounts. accounts and ensuring that they're legit and these projects aren't just ICO scams using Facebook ads. But, you know, distribution and discovery for some actually more amazing games or even for CryptoKitties was very, very difficult. So in combination of those two elements, it's just extremely hard for more moms and dads or uncles to kind of want to experience the blockchain

to get into it. Yeah. Something that's so interesting to me about what you said is that when you go to the CryptoKitties website, it looks so slick. You know, the kitties are really cute. Like, the whole thing just seems like a really well-designed web experience. But then the user ends up bumping up against all this backend stuff that normally users don't have to think about. So I find that really interesting and fascinating. It's like you, you know, approach this thing and it seems very 2018. And then when you're trying to use it, It feels like pre-AOL. One, the bigger problem is there's no, there's no expression of the value.

So when Metamask is, you know, terrifying you by telling you to write down your seed words or, or your children will be kidnapped, it doesn't actually tell you sort of what's the point, right? It doesn't tell you why you're going, jumping through these hoops and what's the value of sort of being able to be self-sovereign over your money. It sort of assumes that by the time you come, you already understand those things. And so for us, it's really kind of that's representative friction, because unless someone is already in the crypto world, their crypto is something that they read headlines of and they shake their heads and they're kind of, you know, what's going on over there.

And there's not a clear sort of expression of beyond, again, like many was saying fear of, hey, your government will take the thing from you. Your bank will change the rules on you. There's no sort of expression of why do I, you know, for most consumers, they've lost more money than their bank is stolen from them, right? So it's how do we actually get users to feel the value and understand that there's a point towards to jumping through all these hoops? Yeah, I actually just want to go back to when Benny was describing,

how through the flow a lot of people probably would just not end up following through. Do you have any stats on the attrition due to this friction? I think it's close to 99%. Oh, really? So this could literally be like a hundred times bigger, you think? Correct. And the problem is like even when you get in, it's bad, right? Like when you submit a transaction, you don't know how long it's going to take.

That's odd. And we have to message that in the UI and sort of. make it almost like a fun thing, like, hey, you don't know when your egg will hatch. On top of that, when a network is slow, there's no indication that the network is slow other than, hey, your price is somehow higher. And so we've put in a traffic light sort of symbol that says, oh, the network is congested. And so we're having to message all these things to the user. And when I said, you know, we're preparing for scale, I didn't even mean from sort of a technology

a standpoint, although we're trying to have as much off-chain interaction as possible now. But I meant from just trying to tell the story of, hey, what's going on behind the scenes here? And why is it important? So you've been doing all this on the Ethereum blockchain, but obviously you're having all these issues with the scaling and everything. Are you guys looking at other blockchains? So we are. I mean, we have. But the problem is that there's no real, there's no good alternative, frankly.

You know, people talk about EOS, but for us, the thing that matters in blockchain is decentralization. That's the whole point. And so in a sense, a blockchain is the digital jurisdiction. And so we have to be comfortable as businesses in that jurisdiction with the laws, the community, the approach to changing those laws, the governance, so on and so forth. And Ethereum has proven that it gets a lot of those things right. what we're trying to do with CryptoKitties in terms of preparing for scale is, is A, with the core application, trying to move as much user interaction off-chain as possible. So, you know, we have a collections feature.

We have, you know, likes, and we're starting to build in more kind of a much deeper sort of UI, traditional game experience that uses the blockchain tokens without actually moving them around. And then with the Kitiverse, we want to explore the different scaling solutions. So in Kiti Battles is a good candidate for some like state channels or potentially plasma. Same thing with things like Kiti races, Kiti Kiti Hats. Much of it can be done off-chain and then committed once back to the chain. So a lot of the time and app won't load on the blockchain. So I think there's while the core breeding has to happen on the Ethereum blockchain.

And that in itself, you mentioned something, which is the difficulty of passing something on makes it more valuable. And I think that that's a curious thing, but it is true. And so because the Ethereum blockchain is, because the cats need to be born on chain, there's no way to actually use any of the scaling solutions in development to simplify that. That actually has, in an odd way, will limit their number and give them value as well. And as you're trying to kind of grow all this and do it on Ethereum, which of course has scaling issues, and you're saying that you're trying to kind of do more off-chain transactions, does that risk centralizing the game more since you've been talking about how kind of the purpose of the game was to build something that was decentralized? The purpose of the game is to teach the values of decentralization.

And so for me, for us, I should say, we talk about this a fair amount. The fact that you as the user, you have your token, we can't ever take it away from you, and that the core rules of the game are completely transparent for everyone to see and that they're immutable. And we're sort of working through the process of once we can put the art on IPFS, that means that if the game goes away, or if we go away, rather, if all of the centralized infrastructure disappears, anyone can put up a competing UI or even right now, someone can put up a competing UI and essentially our community can very easily fork to alternative sort of providers of the same service. And so all of the off-chain things we're building are sort of the cherry on top, if you will. And so anybody can anybody can build that on top of the core token.

And what that means for the user is choice, right, and freedom. As in if we ever end up being a bad actor, misusing their information, building in features they don't like, complicating the interface, whatever it may be, there's always going to be alternatives available to them. And that's the point of decentralization. It's not that the actual code, all of the code needs to be running on the public blockchain. It's that the user has the ability and the freedom. to just simply take their business elsewhere.

And what that does is it narrows the sort of the spread between price and marginal cost and gives the value back to their user. So it's super interesting. And I actually also just want to circle back to when we were talking about the funding that you guys received. You also mentioned that you're exploring these different things like kitty races and stuff in order to test some of the more experimental technologies. Is that kind of like another? layer of kind of or another a second part of your mission with now Dapper Labs that you've spun

off to I guess to do things with CryptoKitties and why you got this funding from Andreessen and the other investors? Well, the mission is to bring a billion people to the blockchain and to really teach the values of decentralization in a way that people can feel and not not sort of be lectured that. And if we the hoops we have to jump through in order to get there are or just that their means to an end. It's just serving the consumer rather than saying, hey, we're a platform company or we're a kind of scaling blockchain's company. I think there's so many smart people working on the various parts of the stack

that we're trying to be as collaborative as possible. There's the L4 team in Toronto working on state channels. And, you know, the Ethereum Foundation obviously lead into charge with sharding and whatnot. So we're trying to be collaborative as possible. and part of our frustration is that most of the developers in the space don't think consumer first, and they sort of want the technology to be almost aesthetically perfect rather than functionally useful. And so it is a kind of back and forth of, hey, we need this. And it's a lot of, well, why?

And no, we want it to be this way. And we're just like, that's not the point. So it's a little bit of a interesting back and forth. Yeah, if you haven't listened to a more recent episode that I did with Melton Demares and Jill Carlson, they were saying kind of the same thing. And Jill had a really great comment. She was like, well, if it's developers all the way down, then, you know, it's not going to take off. So you guys should check that out. Both you as well as listeners who may not have listened to it.

Well, this has been an incredibly fascinating discussion. And where can people learn more about you and your work? So Cryptokitties.co is where that CEO is where the folks can try the game. And AxiomZan.co is where they can get to know our team and maybe some of the background behind the company. Perfect. Well, thanks for coming on the show. Thanks for having us, Laura. Thanks, Laura. Appreciate it.

Thanks so much for joining us today. To learn more about Roham and Benny and Cryptokitties, check out the show notes inside your podcast episode. episodes of Unchained come out every Tuesday. If you haven't already, rate review and subscribe on Apple Podcasts. If you liked this episode, share it with your friends on Facebook, Twitter, or LinkedIn. And if you're not yet subscribed to my other podcast, Unconfirmed, I highly recommend you check it out and subscribe now. Unchained is produced by me, Laura Shin, with help from Elaine Zelby, Fractal Recording, Jenny Josephson, Rahul Singeretti, and Daniel Nuss. Thanks for listening.