PART A: Fundamentals of Metaverse
What is Metaverse?
While the term metaverse doesn’t have an industry-led definition set yet, we can understand it as the upcoming big tech platform that would encapsulate topical trends, also including the “growth of real-time 3D worlds”. It can be viewed as a version of the internet that can support a cluster of real-time apps and experiences across varied devices.
The metaverse ecosystem generally consists of four components:
- Space: It refers to the open, shared, and virtual environment that individuals can access through the internet. It consists of multi-layered interactions. The setup requires a high bandwidth network and other ingredients for an immersive digital experience.
- Interface: It refers to the hardware and hardware devices that assist a user to access metaverse. It can include VR/AR headsets, game consoles, and other smart sensory tools.
- Monetary Infrastructure: It involves all the money-related aspects and the digital payment processes that help a user to buy, trade or sell digital assets in the metaverse. It can be cryptocurrencies, fiat currencies, or any other digital currency.
- Compute: These are generally the software and systems that act as a framework to support the metaverse. These systems could be centralized, hybrid, or decentralized.
Metaverse and Web3
Web3 is the next generation of the internet or in other words, is the vision of the future of the internet, that would be decentralized, permissionless and the data would have sovereign ownership. Web3 could be utilized to connect users to the metaverse, as the former attempts to join the online and offline worlds. Metaverse could be inside the standards of either Web 2 or Web 3 or a mixture of both; anyhow metaverse is the seamless integration of the immersive internet into our daily lives.
While a metaverse operated by using Web2 would be convenient, and easy to handle, along with giving an immersive experience, it would still run on a decentralized platform. In the case of Web 3, metaverse would support sovereign ownership of data, ‘“portability of data” and “interoperability between platforms”. A transparent working environment can be obtained by deploying Web 3. Web3 vs Web2 vs Web1
Use Cases of Metaverse
After understanding the metaverse, let’s take a look and understand how it can be instrumental for various activities.
Developer and Creator Economies: Content creators can find a niche and construct something very distinct in the metaverse. Along with it, you can build in a “third-party developer base selling experience” and “virtual assets” like NFT marketplaces, games, social media, etc.
Virtual Workspace: Metaverse makes it possible to turn your office into a virtual workspace, wherein you can log in as your avatar, and then do your required business. Few instances of the same include Facebook’s Horizon Workrooms and Microsoft’s Mesh for Microsoft Teams.
Digital Entertainment Events: This case is inclusive of concerts, fashion shows, theme parks, tourism, sports, and much more, wherein one can host virtual concerts, launch parties, movie premieres, as well as offer NFTs. A few examples under this section include:
E-commerce: Users or a group of users can visit virtual shopping malls with their associates. They can even retail digitalized products, speak about the product to company representatives and as well try on the products.
Public Services: Various central authorities, governments, and banks are utilizing metaverse services to establish a virtual communication ecosystem for civic and administrational services.
Smart Manufacturing: Through digital twin technology and simulations, industries can cut down project costs, time, and overuse of resources.
Healthcare: Metaverse could be used to give training to healthcare professionals in a virtual space.
Other areas could include education, training, or virtual representation of the earth for climate change experiments.
Metaverse and Gaming
Gameplay is the most prominent sector that stands still in the metaverse. It is likely to continue its league in the meta-space via its immersive elements consisting of 3D avatars and new virtual worlds. Contemporarily, several RPGs and consoles are trying to unify their gaming experience by featuring in-game events. Let’s see three different economic models for gaming:
- Pay To Play – Such kinds of games require a purchase for the user to play them. They can either be full purchase games or games that can be played based on monthly subscriptions. E.g.: Grand Theft Auto, Rainbow Six, etc.
- Free To Play – In this mode, the game or its some portions are available to the users free of cost, that can they play. Also, in this category, there could be a few games that would ask players to pay to gain extra content or access. E.g.: Dota 2, League of Legends, etc.
- Play To Earn – Players here can earn rewards and money, only by playing the games. This type helps to bring digital identity, assets, and ownership into the player’s control. The assets present in the game are labeled as NFTs. E.g.: Axie Infinity, Decentraland, etc.
Few popular metaverse game developers are EPIC Games, ROBLOX, Ubisoft, and many more.
A major missing core component of an open metaverse could be the technical interoperability standards. For enabling the portability of assets, various suites of 3D modeling need to interface with one another. Also, the industries would be required to acquire a standardized file format for exchanging data. Technologists predict that virtual world portability is a very long way dream, as of now.
Metaverse in Enterprises
Ever since COVID-19 hit us, people believe that certain tasks like meetings, or collaborations could be done virtually. As such, the work-from-home environment could be influenced by adopting AR/VR technologies. Metaverse enables facilities such as customizing the room’s layout as per the client’s requirement or sketching ideas on a virtual whiteboard, while the collaboration is going on, and many more to mention.
Metaverse as a Service
As we advance into the metaverse, it would require quite many protocols, innovations, and discoveries to work well, along with interoperability. Metaverse-as-a-Service (MaaS), would begin to offer immersive experiences to draw people together, by enabling companies to utilize standardized protocols to construct their metaverse campus. Notable companies exploring the metaverse include Meta, Google, Microsoft, and NVIDIA Corporation.
PART B: Infrastructure of Metaverse
Open & Closed Metaverse Infrastructure
We have read that while we progress in the metaverse, we’re likely to acquire new technologies and infrastructure. Let’s discuss two kinds of infrastructure that are likely to power the metaverse. A Closed Metaverse might have the same experience as that of Web 2, consisting of “multiple logins”, “platform gatekeepers”, “user data monetization” and “embedded advertising”. On the contrary, an Open Metaverse is more likely to resemble a Web 3 technology having a “community-owned and community-governed” and freely interoperable version, ensuring privacy by design.
Building the Open Metaverse
In order to support the open metaverse, new infrastructure is needed to be built. It is assumed that open metaverse apps would be built earlier than the infrastructure is completely ready, that in turn would lead to a chaotic, inefficient and awkward user experience (UX), that would somehow be regressive to the initial Web 2 UX.
Additionally, it is not always the case that the infrastructure is built before the product or app; this applies that the process isn’t sequential in all cases. Rather, infrastructure and apps evolve in a recurrent (iterative) and cyclical manner. The primary applications are most of the time built on a sub-optimal infrastructure, and later on, with the landing of successful apps, further investments are made in the underlying technologies. Correspondingly bringing development efforts into easier-to-build and more-usable applications. The virtuous cycle then continues. Elementary Units of Open Metaverse Operating System
Diverse technologies – blockchain, self-sovereign identity, cryptographic primitives around ‘digital asset’ ownership – come together and converge to form the building blocks of an open metaverse. The function of cryptographic primitive is to enable different levels of security guarantees. The most-commonly used primitives are hash functions, public-key cryptography, and digital signatures. One can interpret open metaverse OS as an unfolding collection of tremendously composable technologies that rests between the hardware, application software, and the user.
Identification in Open Metaverse
In the context of an open metaverse, there is a digital passport (in reference to social apps and games) or a digital closet present, that’ll hold a user’s social media, private accounts, friends, and other digital property. It’ll all be protected by the means of a “private key”, that will help the users selectively expose their identity for the use case they like, with complete self-sovereignty. With the assistance of the “wallet”, players could move in and out of the virtual world seamlessly. The present internet does not come with a no-user authentication system or built-in identity layer. Owing to this, the control of identity is governed by big platforms that act as gatekeepers. In centralized or closed metaverse, monetization follows a similar path, as in that of Web 2 platforms – revolving around advertising in an invasive way. On the other hand, in decentralized identity, the user has the right to choose which segments of his information need to be shared with whom and the purpose of it. It also permits pseudonymous identities, along with multiple personas ( or avatars).
DAOS and Open Metaverse
DAO or Decentralized Autonomous Organizations is a “blockchain-based co-operative” that is altogether held by its members with specified protocols that are executed via code. The fundamental feature of DAO is that the central operating rules are coded into smart contracts and are automatically enforced. A characteristic DAO is launched in four steps viz., smart contract creation, funding, deployment, and governance system. DAO is, however, very primitive and needs to progress so as to tackle the challenges that are smoothly dealt with by centralized institutions.
Building the Metaverse Infrastructure
Metaverse experts anticipate that a fully-immersive content streaming environment would entail a streamlined and continuous stream of interconnected data. Apart from this, it would also involve computational efficiency improvement of 1000x, as of today. The reason that the current infrastructure is unsuitable for creating an experience-rich metaverse is due to lags, packet drops, and network unreliability. In order to obtain a metaverse as envisioned, we require to invest in a conflux of technologies, whose magnitude would be much higher than those presented by the technologies today. Let’s understand them in detail:
Compute GPUs and CPUs make up the brain if network and bandwidth form the nervous system of the metaverse. In a gameplay setting, the game is rendered by the GPU, whereas the game’s logic is handled by the CPU. Additionally, high-performance chips are needed for a more immersive internet experience.
Storage In order to meet the needs of the metaverse, computer graphics, vision, and physics simulation must concentrate on a rational architecture, wherein the core of this architecture would constitute cloud data centers. The chips required would have larger die sizes and would eventually be more powerful. Another angle that could be taken might be to focus on “ultra-low latency for virtual-world applications”.
Network Infrastructure The next gen of the internet for powering immersive applications needs to improve in two areas viz., bandwidth and latency. Bandwidth needs to be much higher than that of today and the latency, the lesser the better.
Consumer Hardware The factor will indicate the user’s experience with metaverse, as it is related to the end-user experience. It comes in the form of VR Headsets (a head-mounted device with motion sensors and integrated sound and display; can come both as tethered or standalone), AR Headsets, Haptic, and Sensory Experience Devices, Fusion of Smartphones and AR/VR devices, etc.
Technological Limitations to Recognize Metaverse
Vast investments in hardware, data center, processing power, and networking, all with higher degrees of magnitude as compared to today, would be required to obtain a riveting metaverse. Another challenge faced is the network’s latency constraint and immersive video-streaming gaps. The CapEx requirement for metaverse is somehow interrelated with the CapEx requirement of VR, AR, robotics, and autonomous driving. The atoms of metaverse can be classified into three layers:
- An intelligence layer (software)
- A compute layer (processing)
- An operational layer (delivers compute to users)
For the purpose of getting a seamless experience, the computing layer must go through significant developments across prime areas of transistors, packaging, and memory. Metaverse is likely to have AI, applications that demand 5G/6G network speeds, and transformation from cloud-computing to edge-computing. Blockchains need to operate smoothly and instantaneously as well.
PART C: Digital Assets and NFTs in Metaverse
Blockchain primitives have replaced the basics of digital asset ownership by introducing, standardization, interoperability, tradability, composability, and immutability.
Non-fungible digital assets whose ownership is recorded on a blockchain are known as NFTs. They can also maintain aspects of digital ownership rights, by the permanent reference to the original owner. The characteristics of NFTs turn out to be their – uniqueness, scarcity, authenticity, ownership, immutability, transparency, and interoperability (or tradability). A point to be noted is that NFTs do not store the digital asset on the blockchain by themselves but instead it contains a URL that points to the metadata that is stored on some file storage like IPFS.
Composability in NFTs is enabled through its permanence and openness, as creators and developers can build on each other’s solutions creating a compounding creation process, without the fear of the underlying component getting disappearing or being deprecated. Each time an NFT is traded, either first minting or secondary market, the new owner and the trading amount is recorded over the blockchain, which anyone can view and verify. Yet, there is a lot of vagueness present about the property rights that come when acquiring an NFT.
Another consideration is the deployment of Web 2 URLs and servers for NFT trading, due to the easy replacement of underlying digital assets or metadata. To counter this issue, the InterPlanetary File System (IPFS), a kind of decentralized file storage, is used that operates well with immutable data needed to store digital assets.
Use Cases of NFTs
There are two ways to approach NFTs. The first is utility and the subsequent is those that are primarily used as collectibles. In some cases, both approaches can be combined and presented. The former ones are used to open up access to exclusive events. Collectibles are generally criticized as speculative. Other well-known use cases include fashion, luxury, sports, gaming, virtual world, digital art, social token, name service, and domains.
Famous digital collectibles spaces are, CryptoPunks and Bored Ape Yacht Club (BAYC). In gaming, selected ones are, CryptoKitties and Axie Infinity. Brands making an early move, in metaverse are Adidas (Into The Metaverse NFT Collection), Ralph Lauren, Nike, and many others. Popular virtual worlds are The Sandbox, Decentraland, etc. Also, the three layers that enable these virtual platforms are the consensus layer, the content layer, and the real-time layer. For sports, we’ve NBA Top Shots.
Real-world NFTs act as a bridge that connects metaverse with NFTs and NFTs with real-world assets. They are a way to tokenize physical property to be uniquely identified digitally, traded, governed, and owned by using the same primitives driving the crypto economy. It can be used in decentralized Commerce. Cryptographic primitives, blockchain-enabled traceability, and security hold the potential to decentralize commerce. They may enable customers to bypass large platforms and go direct to smaller brands. One company that is building the same is Boson Protocol. Other cases could be a community, events, and investments.
Working of NFTs
Programs implement smart contracts by working on an EVM (Ethereum Virtual Machine). They are also written in high-level programming languages like Solidity. There is a function embedded in the smart contract that defines the URI (Universal Resource Identifier), which points to the location where the “metadata” of the NFT is stored. The “metadata” then gives the link where the base image is stored. It also defines the chief features of the NFT, such as its name, description, and location where its image is stored.
Darkside of NFT Market
NFT Market is like an ocean – the surface is very clear, but when you go down, it gets gloomy. Let’s look into the drawbacks of the NFT market.
- Counterfeiting Once the NFT gets recorded on the blockchain, it gets relatively easier for it to be verified. However, the present-day NFT ecosystem has made it effortless to mint someone else’s work on the blockchain as an NFT. The same can let to counterfeiting and void validity from the beginning.
- Rug Pulling In crypto jargon, “rug pulling” refers to the act when the project creators hype a lot about their project but later on back off or disappear from the ecosystem. As such, NFTs price starts to fall, causing tremendous losses to investors who already have a stake in the project.
- Wash Trading A transaction wherein the seller is on both sides of the trade is known as ‘wash trading. Due to this, the buyer would rely on history price as an indicator of the NFT, while the seller links multiple wallets to the platform.
Web3 and Phishing
Although Web3 promises secure and decentralized transactions it invites the further challenge of self-custody leading to probably higher individual losses. The users and NFT owners must thereby remain watchful not just with keys but also with signatures and withdraw unwarranted authorizations. Web3 for beginners
PART D: Money and DeFi in Metaverse
Money in Metaverse
The most primitive or earliest antecedent to money in the metaverse is the gaming ecosystem. Since then, players now pay for digital skins, virtual land parcels, and loot boxes. We can anticipate the future metaverse to include in-game tokens, traditional money, and digital native primitives tied to NFTs and other tokens.
Characteristics of Money in Metaverse
Let’s see the features that money in the metaverse possesses.
- Decentralized to Centralized The contemporary centralized metaverse-identical platforms apply “withdrawal limits”, “marketplace fees and rent” and “centralized in-game monetary policy”. No branding or community benefits are derived from centralized in-game tokens. They are also not as transparent and borderless as cryptocurrencies, and as compared to stablecoins, they aren’t interoperable. For a metaverse that is likely to work on a central body, a range of currency exchanges needs to be present like – fiat-based alternatives, CBDCs, stablecoins, cryptocurrencies, etc. For a metaverse that is likely to work without a centralized body, formats of money that are truly decentralized, trust-less, and verifiable, are required.
- Micro-payments with Instant Settlement The major requirement of money in the metaverse is a frictionless payment with instant settlement. The wide-ranging application of money in the metaverse is likely to be reserved for small-valued transactions, and some for micropayments. In the case of digital native or internet-friendly value transfer, the best-suited payments could be CDBCs or stablecoins, that provide tokenized alternatives.
Types of Money in Metaverse
Money in the real world is very different from what we refer to as ‘money’ in the metaverse – those which are a form of cryptocurrency or other innovative ‘currency’. While implementing decentralized boundaries, interoperability and seamless exchange between chains are crucial to ensure a laminar and smooth UX.
In-Game Tokens They are the currency that is needed to trade or can be earned, while the game runs. A few examples of the same include Robux in Roblox, MANA for Decentraland, and SAND for The Sandbox.
Layer-1s, Layer-2s, and Layer-3s These are the layers into which the public blockchain is classified.
- Layer 1: denotes the main blockchain, e.g., Solana
- Layer 2: Overlay network (or chain) that optimizes Layer 1, e.g., Polygon
- Layer 0: Interoperability protocols allowing different blockchains to work together, e.g., Polkadot and Cosmos
As metaverse implementations are embodied on various blockchain technologies, one can expect that the native tokens of the Layer-1 chains to be acceptable in the form of money in the metaverse.
- Stablecoins When stable coins, along with their stability and high volatility of cryptocurrencies, when linked to fiat currencies, are awaited to be adopted as money in the metaverse.
- Central Bank Digital Currencies (CBDCs) As governments are set to explore the metaverse, for various aspects, like public services, it can be assumed that CBDCs are likely to come into the picture, as money in the metaverse, equivalent to private crypto or stablecoins.
DeFi and Metaverse
Decentralized Finance (DeFi) is a blockchain-based financial ecosphere, that eliminates the need for centralized financial intermediaries to offer financial services. It enables the users to transfer, trade, borrow, and lend cryptocurrency formulated on blockchain-based infrastructure. A decentralized app (dApp) is an application raised on decentralized technology, having transparent auditable code, and smart contracts, and is permissionless and globally accessible from initiation.
Composability in DeFi
Due to this feature, different protocols can capitalize on interoperability and build on each other’s capabilities.
DeFi’s Role in Metaverse A couple of roles that DeFi might take in the metaverse comprise the following:
- Growth of Self-Sovereign Financial Accessibility: self-custody of cryptocurrency
- Risk Management and Short Selling: improved market-making, price discovery, synthetics, active hedging, etc., through dApps
- Tokenization of Everything: tokenization of traditional and new forms of assets for real-time and frictionless transactions
- Automated Market Making: more yield-bearing assets and reduce the incentive to hold cash
- DeFi Matrix: real-time DeFi tradability with AMMs Other areas might span micropayments, streaming packets of money in the metaverse, and centralized services on DeFi et al.
Joint Working of NFTs and DeFi
Since NFTs are composable and DeFi is decentralized, they together unlock new use cases.
NFTs as Collateral NFTs can be used as collateral for DeFi lending. In case the borrower fails to repay the loan, the ownership of the NFT is given to the lender.
Fractionalization of NFTs (F-NFTs) The process involves splitting or dividing NFTs into smaller fungible tokens. They sanction part ownership, partial liquidation, greater price discovery, and much more.
Nested and Wrapped NFTs It refers to the nesting or wrapping of several fungible tokens within an NFT. It permits the users to generate programmable yield, and it also increases the liquidity of NFTs.
NFT as Derivatives This would help to create an assortment of liquid digital assets whose value might depend on the value of off-chain assets and be linked to data oracles to determine the state.
Financing Real World Asset (RWA) Market It would help out borrowing, lending, and other services, due to its availability on a public blockchain.
Dark Side of DeFi
Despite the fact that DeFi transforms financial services, there are still some drawbacks linked with it. Since the centralized party is eliminated, the security and protection are solely dependent on DeFi. Moreover, if any transaction is made, you can’t cancel it – there is no cancellation, and also there are no chargebacks. Many DeFi projects also have short lives, meaning that high risk is associated. Some of the high-yielding products also stand untested as time passes, due to the normalization of yields that promises high yields at first.
PART E: Regulatory Developments and Socio-political Considerations
Metaverse, as a place in itself, will consist of some regulatory issues, along with implications for society, politics, and government. One certain thing is that the metaverse is going to transform our lives, both physically and digitally. Metaverse is presumed to invite scrutiny from global regulators, policymakers, academic institutions, and governments.
The principal parts of concern regarding metaverse include content moderation, privacy, ownership, competition, and antitrust. These activities ensure that no harmful or illegal content comes into the metaverse. There is no misbehavior accounted for. Privacy is maintained by both the users and the collected data. Understanding the rights associated with the components present in the metaverse. The stakeholders operating in the metaverse need to consider the pre-existing as well as the emerging legal and regulatory frameworks since they are important in forming their business strategy.
The role of the regulators in the metaverse is to determine the type of government structure that needs to be put in what place, the activities that are permissible in what jurisdictions, and also, they have the power to classify which activities are to be done. The policymakers have the chance to work alongside the industry participants to build a regulatory framework, as opposed to the possible risk of front-running technology and innovation by putting in preventative regulations.
Reactions of Regulators, Policymakers, and Global Standard Settlers
For now, no nation or global standard-setting body has any rule or regulation relating to the ‘metaverse’. Additionally, there is no governing body drafted especially for metaverse and its regulations. Let’s look into the starting mentioning of the metaverse. In 2021, the UK government published a draft bill, that mentions the metaverse as:
- Addressing illegal and harmful content online
- Imposes duties of care concerning illegal content and the content that has a detrimental effect on children or adults
- Protection of user’s right to freedom of expression and privacy
Open or Closed Metaverse
There would be different regulatory considerations for both kinds of the metaverse. In the case of closed metaverse built by platforms, there is a vast number of regulations to follow. The regulatory intensity might increase if the comments made by authorities are already constructed on competition, antitrust, and online safety. Any organization looking to build a closed metaverse needs to consider emerging regulatory developments along with existing rules and regulations. With reference to an open metaverse, the regulatory environment is far less mature.
Illustration of Regulation in Metaverse
Activities that can be conducted in the metaverse connected with regulatory and legal confines are:
- Exchanges and Wallets It is significant to pay close attention to what is coming out of the FATF (Financial Action Task Force), as it circles the tone on the movement of value and AML rules that need to be built around the space. Because FATF guidance will entail local implementation; we forestall a fragmented regulatory framework.
- Accessing Metaverse from DeFi The Bank of International Settlements (BIS) has advised the policymakers to look at the DeFi space and draw probable access points for potential regulations. The FATF’s 2021 guidance brings creators, owners, operators, and any person who maintains control or sufficient influence in the DeFi protocols under their VASP (Virtual Asset Service Provider) definition.
It is expected that there will be a further regulatory response given that DeFi and decentralized applications are the financial backbone of Web3, allowing transactions to take place on a peer-to-peer basis without the need for an intermediary.
The regulatory conduct of crypto assets will be contingent on their economic function and other key features to categorize the instruments and govern the rules applied.
Ownership and Metaverse
NFT is a record of ownership of the unique digital version of the asset one is purchasing and is based on blockchain primitives, and hence is border-less. It will be vital for any NFT issuer to reflect what the token is used for, as this may bring the token into the scope of the guidance. They will also have to look at how each jurisdiction is implementing the guidance into local law for better understanding. NFTs also bring up legal subjects about intellectual property and who owns what and what rights have been purchased or sold. NFT stakeholders will have to look at the IP rights and contracts that govern the transaction. From the viewpoint of an NFT buyer, it will be important to pay close attention to what terms are set out in the primary smart contract that forms part of the NFT. NFT minters will have to look after any potential trademark infringements.
Environmental and Social Considerations
The present day’s social and mental risks from using Web2 platforms could get augmented in the metaverse depending on who owns the metaverse, how users decide to interact with the metaverse, and what regulatory framework is put to practice. Because the metaverse is still a work in progress, it allows society to implement the learnings from failings in the real world. Privacy matters about the metaverse have been at the lead of social media platforms since these platforms depend on an enormous amount of personal data. Any setup building something in the metaverse needs to follow the data protection laws. In countries with data localization laws, interoperability between different metaverse platforms and applications will be challenging. It is possible that metaverse could propagate bad conduct, if violators remain unidentified, due to lacking mechanisms for tracking and tracing.
Metaverse can sanction political leaders, a new medium to reach their voters in a more immersive way and get their messages across to younger voters in a way more appealing to them. It could be a transition for politics and the sorts of campaigns we will experience going onward, possibly affecting elective demographics.
Citi GPS: Global Perspectives & Solutions, METAVERSE, AND MONEY – Decrypting the Future, March 2022