Tokenomics of the Metaverse

How will you define the Metaverse? It could be something like a gaming platform, a training mechanism, a sort of virtual retailing arena, a digital classroom, an advertising channel, or a world of musical concerts and so on. The term has been revolving for about a decade now, yet there isn’t a clear and distinct set of words joined together to define what a metaverse is. Even though the term consists of a lot of imaginations, one can have, in respect to a digital world. One thing for certain is that the metaverse is real, and has potential within itself, to make significant changes. Yet, what we don’t know is how it will be developing in the coming future. The question remains how would someone define something that isn’t completely developed or has a fluid understanding.

APROPOS OF METAVERSE

To answer the same, for now, we’ll be taking into consideration that metaverse is the next iteration of the internet, where it transforms into something that we can immerse into, rather than just viewing it. You can understand that Metaverse would be like a digital world, that’ll have anything and everything one can experience like in a real world. We’ll be able to feel present in it, we’ll be able to interact with people, no matter how far they are situated from us.

Marks of Metaverse

The simplest and most appropriate working definition that can be attributed to metaverse is that metaverse is the next iteration of the internet that seamlessly integrates our digital and physical lives. As of now, ‘proto-metaverse’ is still in development; thanks to the gaming community for these mass investments. Other cases take in business and consumers, for non-gaming purposes.

The Three Features of metaverse comprise:

1. A sense of immersion
2. Real-time Interactivity
3. Use Agency

The vision of metaverse incorporates:

1. Interoperability between platforms and devices
2. Concurrency among thousands of people interacting simultaneously
3. Extending use cases of human activities, beyond gaming

Milestones in the history of metaverse:

1. 1978 – MUD1 – First multiplayer real-time virtual world
2. 1982 – Tron – First film to propose a digital reality
3. 1984 – Neuromancer (novel) – Popularized ‘cyberspace’
4. 1992 – Snow Crash (novel) – Coined ‘metaverse’
5. 1999 – The Matrix (movie) – Imagined humanity inside VR
6. 2003 – Second Life (game/ online platform) – Allowed users to live in VR
7. 2006 – Roblox (game) – multiplayer VR game
8. 2018 – Ready Player One (film) – Imagines a full-fledged virtual world
9. 2021 – Meta – Facebook renamed itself as ‘meta’, aiming at a metaverse ecosystem

History and Fiction

The term ‘metaverse’ was first coined in 1992 in Neal Stephenson’s novel ‘Snow Crash’. The term hasn’t been used much since then. However, in the year 2011, a science fiction novel named “Ready Player One”, by Ernest Cline was written that discussed the metaverse. In 2018, the novel was adapted into a movie with the same title, by Steven Spielberg. However, the term gained much popularity with Facebook changing its name to ‘Meta’, in the year 2021.

Let’s explore a few angles of interrogation of the metaverse, and how people look at it.

1. Does metaverse replace real-life? The actual metaverse doesn’t display any choice between the virtual and real worlds. Rather, the metaverse tries to enrich our real-world experiences by diving into them, instead of replacing the real world. The metaverse is a kind of union between both the physical and the virtual world.
2. Are there multiple metaverses? The notion of ‘multiple metaverses’ is identical to saying that there are many internets. There aren’t multiple metaverses, there is only one single digital world, that is called ‘metaverse’, which is the envisioned end state of the internet that incorporates all digital worlds alongside the physical world, with interoperability among them.
3. Is the metaverse the same as AR/VR? While diving into the metaverse might require AR/VR experiences, even so, the metaverse isn’t AR/VR.
4. Is metaverse all about gaming? Although gaming has been the prime focal point (and most popular use case) of seeding metaverse, gaming isn’t the only domain that is exclusive to the metaverse. Metaverse has several other use cases, for instance, hosting a musical concert, or holding a business meeting without traveling internationally.
5. So metaverse is Web3? The industry defines the evolution of the internet in generations, and currently, we’re somewhere between Web 2.0 and Web 3.0. All the same, metaverse isn’t Web 3.0, but rather Web 3.0 consists of elements that make the development of metaverse possible through decentralization and interoperability.

Web 2.0 versus Web 3.0

Making progress from Web 2 to Web 3 will give rise to the metaverse. Let’s try to compare and understand the features present in the duo. Beginning with platform characteristics, Web 2 is centralized, and centrally owned, the platform format includes PC, VR, and mobile, and the payment infrastructure is the traditional one. In the case of Web 3, the organization structure is governed by the community, it has decentralized data storage, the platform format is similar to Web 2 and the payment infrastructure consists of crypto wallets. In terms of user experience, Web 2 accounts for digital assets ownership that is leased within the platform where it is purchased, also, the portability of the digital assets is locked within the platform itself.

The content creators are game developers here. Activities include socialization, game streaming, and much more. The identity herein is an in-platform avatar. For Web 3, the ownership of the digital assets is owned through NFTs, plus, the portability of the digital assets is transferable. The content creators are both the game developers as well as the community. The activities are almost the same as Web 2, added here are the play-to-earn games. The identity here is both self-sovereign and interoperable, as well as anonymous private-key based. Commercially, the payments in both differ in terms of in-platform virtual currency in the former while tokens and cryptocurrencies in the latter. Another point of difference is the content revenue.

Examples of Web2 – Roblox, Second Life

Examples of Web3 – The Sandbox, Decentraland

Elements of Metaverse

There are four core building blocks of metaverse viz., content and experiences, platforms, infrastructure and hardware, and enablers. Ten component layers make up the physical and operational structure over which the metaverse experiences are based. Let’s go through these layers in brief.

1. Enablers
   1. Payments and monetization – tools to enable metaverse economy
   2. Identity – platforms that manage digital identity, avatars
   3. Security, privacy, and governance – privacy, data governance, and content moderation platforms
2. Infrastructure and Hardware
   1. Infrastructure – underlying infrastructure that powers metaverse
   2. Devices, OS, and accessories – devices, and peripherals that are a part of the human interaction layer
3. Platforms
   1. Creators/3D Development Platforms – the core set of tools for building 3D experiences
   2. Access and Discovery – platforms that ease distribution and discovery of content, experience
4. Content and Experiences
   1. Virtual Worlds – Environments where a huge number of users gather and interact
   2. Applications – Restricted to specific metaverse use cases
   3. Content – Enhances metaverse experience

Metaverse is surely to develop into an amalgamation of our physical and digital lives. With every generation of screen technology, we’re getting closer and closer to the content, wherein with each shift, the degree of personalization has amplified.

BUSINESS AND CONSUMER BEHAVIOUR

Our world has adopted technology in both professional and personal manner, especially in the past two years. It is evaluated that many have seamlessly adjusted to carrying out more daily activities, both virtually and in private. Let’s look into the anticipation of the executives and the consumers over metaverse.

Consumer’s Viewpoint

Through research carried out by ‘McKinsey’, it was estimated that almost 60% of the consumers were excited about the transition of daily activities to the metaverse, with the number one driving factor being connectivity. Other drivers of excitement include exploring the digital world, meeting and collaborating, trading NFTs, monetizing real estate, VR experiences, customizing avatars, attending concerts, learning, events, etc. Connectivity covered an extensive array of activities presenting commercial growth opportunities, like entertainment, gaming, and shopping. Another cause of the excitement was travel. The major theme in metaverse-specific travel is inclined toward the possibility of going beyond the limits of the physical world – time travel, space travel, fantastical places et al.

Present Day Activities of Consumers The same research highlighted the metaverse experience of two-thirds of the consumers. It stated:

• 80% of consumers – shared virtual experiences with friends and family
• 63% of consumers – virtual work meetings
• 59% of consumers – virtual education sessions

Another way in which consumers are attached to the hype is through omnichannel commerce, with payment credentials often embedded in the software and the devices they use. The second use case is the integration of commerce with social media entertainment, also known as ‘social commerce’. It is also known that 79 % of the consumers that are active in the metaverse have made purchases to only boost their online experience. The list is inclusive of in-game purchases, virtual cosmetic items, real-world items, NFTs, and virtual estate. The other reasons for the purchase were to gain benefits in the games and to acquire assets.

Executive’s Viewpoint

Senior executives believe in the potential held by metaverse, though it’s still in its immature stage. They expect that metaverse is expected to have an optimistic impact on their industry while others believe it to modify the way in which the current industry operates. Almost two-thirds of the senior executives estimate that more than 5% of their organization’s total revenue in five years would be driven by metaverse technology, while others anticipate it to drive more than 15% of revenue. It is also found that companies with more proactive metaverse adoption were already reporting greater financial success. The top corporate capabilities required to deliver a metaverse strategy embrace – business building, product development/coding, infrastructure, blockchain, product design, legal, risk and compliance, cybersecurity, analytics, content creation, marketing, and much more. The most used metaverse initiatives were marketing, learning, and development for employees and virtual meetings. On the other side, the least enforced were recruiting employees, and allowing customers to pay with cryptocurrencies. According to the executives, the top three metaverse technologies were – cryptocurrency, AI, and AR/VR. Other mentions in the list were Web 3, blockchain, cloud, NFTs, creator economy, edge-computing, and interoperability. It was also mentioned by the executives that revenue uncertainty was a prime hindrance.

These barriers included –

• Undefined return of investment
• No Business Model for metaverse technology
• Absence of managerial capability to embed metaverse technology into the business
• Unavailability of computing infrastructure
• Need for external funding for technology investments
• Inability to integrate data across systems to implement metaverse technology

They also highlighted worrying less about the technology involved. Additionally, several risk factors were put forward that needed to be addressed in order to adapt to a successful metaverse future. These risks were data privacy, cybersecurity, ethics and regulatory compliance, technological drawbacks, brand image, and payment security.

PREDICTING THE POTENTIAL

What is to now analyze is the metaverse’s significant impact in the future. The progression of the metaverse is imaginable to be different. Users are excited about what the metaverse is to offer.

5 Trillion USD Impression

It is expected that the economic value of the metaverse will rise exponentially. There are a variety of factors influencing the same – it appeals spans gender, geographies, and generations. Consumers are showing a willingness to spend on digital assets, they are ready to adopt new technology, and huge investments by companies towards a metaverse infrastructure, brands experimenting and positive consumer feedback. As a result, everything sums up to a substantial potential economic value for the metaverse that is estimated to be $5 trillion by 2030.

Potential Sector Connections

Metaverse is already paving its way into the near future and several kinds of industries are ready to implement these initiatives. Although maximum efforts are centered around marketing, learning and development for employees, virtual meetings, events and concerts, and product design or digital twinning. Of all the potential drivers of the economic impact of the metaverse, the largest is e-commerce.

The metaverse can construct footprints across the value chain for different sectors:

1. Apparel, Fashion, and Luxury Users are spending their time using digital screens and are intended to spend the majority of their daytime in the metaverse. In terms of fashion, ‘Decentraland’s Metaverse Fashion Week’ received more immense attention than any digital fashion week ever. It also attracted several brands like Dolce & Gabbana, Estée Lauder, and Etro. As a consequence of the fashion industry’s capability to be both physical and virtual, it is reckoned at the forefront of the metaverse shift. The fashion industry’s early experiments concerning the virtual world have been largely through virtual clothing. Another slant of the enthusiasm of NFTs.
2. Consumer Packaged Goods (CPG) CPG companies are vulnerable to being functional in the virtual world since their products are traditionally related to practicality and usability in the physical world. For CPG brands there are opportunities across two of the metaverse’s layers: content experience and platform. A significant question is about the resources that CPG companies should direct to the metaverse. For brands and retailers in the medium to long run, the metaverse will be concerned about adding new sales channels to the omnichannel mix.
3. Financial Services In reference to Web 2.0, the finance sector is using the technology for employee training, creation of virtual financial towns, telecommuting centers, interaction spaces, and providing virtual investment advisory services. What could come next might include: multicurrency cash management, real-estate mortgage origination, warehousing, metaverse-specific investment funds, gamified credit education, unique loyalty experiences, and other financialization of everything. The growth is dependent on the extent of the adoption of the metaverse.
4. Retail Broad-ranging metaverse-powered approaches and applications can be deployed in-store. Brands can contact AR/VR for new-fangled experiences like – 3D, navigability, branded spaces for consumers to experience, buying of physical and virtual goods, and trying out products unavailable in the store on time. The advancement of online, virtual worlds enables retailers to enlarge their marks. The next step for retailers could be to reimagine and personalize the store environment for individuals and groups of customers.
5. Technology There are three zones that are emerging as control points to withstand a larger share of the value created; they are, infrastructure, developer tools, platform, and virtual worlds and content. A concept known as ‘four technology enablers’ is needed for the metaverse to reach its full potential.

Considerations for Policymakers

Regulation of technology will also exist in the metaverse and could be more intensified. There is a vast list of critical topics in relation to the acceptance of metaverse like, intellectual property rights, monetization and distribution model among stakeholders, equity and inclusion, securing user safety and awareness, ensuring data privacy and many more. Policymakers need to plan ahead and define legal, policy and governance of the metaverse.

References:

Value creation in the metaverse - The real business of the virtual world | McKinsey & Company | June 2022