Branded as the next generation of the internet, the metaverse aims to digitalise further the physical world, taking more of what we do offline, online. Although many are still unsure what this will actually entail, companies have already begun to put up real money to finance this new digital reality.
In October 2021, Facebook rebranded itself as Meta Platforms Inc., reflecting a vote of confidence for the unproven metaverse. The social media giant has also pledged to invest more than $10 billion annually towards it, in related hardware and app development.
Earlier this year, Microsoft purchased game developer Activision Blizzard, the creator behind the Call of Duty franchise, for $75 billion. The transaction was soon followed by Sony’s equity stake in Epic Games, valuing the Fortnite creator at $32 billion. As the makers behind Xbox and PlayStation respectively, each is looking to enrich its entertainment content across metaverse platforms.
Enthusiasts argue that the metaverse is simply an extension of what billions of internet users do every day online, from playing games and communicating with friends and colleagues, to conducting necessary business. But what the metaverse will ultimately look like is a bit more complicated, Tiwee Pang, co-founder of RHT DigiCapital, a Singapore-based early-stage investor in digital assets, explained to FinanceAsia.
“Every company holds a different vision of what the metaverse will be, but the overlapping aspiration is to create a digital alternative from the physical world in as many aspects as possible. This is why companies are salivating at the endless opportunities of what the metaverse could bring for them,” shared Pang.
Analysts believe that the metaverse could pervade all major sectors, accumulating revenues of at least $1 trillion annually, according to research published in January by JP Morgan. Such convergences between the physical and digital worlds are already evident, most notably in entertainment venues such as virtual gaming or live streaming social media events. However, some traditional brick-and-mortar stores have launched “twinning” strategies, selling both physical and digital versions of items to buyers.
In a post-pandemic era where working from remote locations becomes increasingly common, there is growing acceptance of the transition from in-person activities towards online appointments, deepening the potential for metaverse disruption. With Zoom meetings now as official as traditional office engagements, additional overlap between real and virtual world appears within reach.
However, the metaverse is not only about moving more of what we do online, but also digitising more of what we value as well, including material possessions in the form of virtual assets. Virtual assets are intangible items that often mirror objects in the physical world, but only exist online. While anyone can view a person’s virtual asset, there is only one owner.
JP Morgan’s research revealed that in 2019, $54 billion was spent on virtual goods, more than what was spent at the cinema, and almost double what was spent on music, with the trend continuing on an upward trajectory. In-game purchases that enhance the user experience for “free to play” games, make up the bulk of gaming revenues, accounting for 75% of nearly $200 billion in annual turnover, and up from 20% in 2010, according to research last year by Ark Investments.
In the metaverse, digital assets exist as non-fungible tokens (NFTs), which like cryptocurrencies, are recorded on digital ledgers showing both ownership history and transactions. In 2021, NFT sales breached $25 billion compared to just $95 million the year before, according to data published in January by market tracker, DappRadar.
But the explosive growth of NFT sales belies their true intrinsic value, according to Yat Siu, co-founder of Animoca Brands, speaking at a Jefferies virtual event at the end of April. He believes that digital assets in the metaverse will disrupt traditional internet business models at a faster pace than analysts currently expect.
Siu argues that the current internet operates on a “rental” model, where users forfeit their personal data for network access on tech platforms. He equates this to finding oil in one’s backyard, where selling the unwanted commodity at a fraction of its value to a company capable of monetising it, is better than receiving nothing at all.
“Data is the same, it matters little to you, but given to an engine like Facebook or Google, that collective data is an absolute power right into their construction,” Siu noted. In the metaverse however, users can own their digital information and the digital assets they create.
“Once data is recognised with property rights, decentralisation has the potential to unlock economic value,” he posited, since users would no longer need to give their data away for free. This would be closer to selling newly discovered oil in line with its market value, because now the seller can select any potential buyer willing to pay more.
Popularity for games like Axie Infinity underscores Siu’s optimism, as the gaming model transitions towards a “pay to play” format, where gamers can earn NFTs and exchange them for fiat currencies. Siu estimates that the impact from shifting the internet towards one that is “ownership”-driven, can potentially create tens of trillions in economic value. To offer some comparison, the top five economies globally have a combined worth of approximately $40 trillion in total.
While the technological advantages and market opportunities have been identified, the major challenge to facilitate a functioning metaverse comes down to appropriate policy support.
Pang believes that industry leaders and elected officials should immediately draft laws to ensure that the code driving the metaverse reflects the rules currently managing the physical world and the internet. Failure to do so could result in policymakers quickly falling behind rapidly innovating technology, he told FA. Executives from Facebook’s Meta and Microsoft echo this sentiment, advocating for common technology standards, yet few proposals have come forward.
Meanwhile, Sebastien Borget, co-founder and COO of The Sandbox, a metaverse created by Siu’s ASX-listed Animoca Brands, suggests that the best solution would be one that already has been implemented by decentralised autonomous organisation (DAO) structures.
Empowered by blockchain technology, DAOs are community-led and built on transparent, encoded contracts that can be audited by each member. Speaking to FA, Borget explained that a DAO would allow broader, community-led participation in governance, since it is already used to manage many virtual worlds. A blog published by software development company, Consensys, points to the elegance of the DAO framework in its alignment of incentives. It is in the interest of each community member to be forthright in governing developments that serve the best interest of the group, and the protocol itself.
Yet, difficulty stems from widely diverging attitudes on cryptocurrencies, which are set to function as the medium of exchange for the metaverse. Both The Sandbox, as well as Decentraland, Somnium Space and Cryptovoxels – all of which are considered to be among the leading metaverse platforms – are built on the Ethereum blockchain.
While some policymakers view cryptocurrencies as complementing traditional fiat money, others consider them a conduit for illegal activity, which could be further exacerbated within the decentralised digital purlieus of the metaverse. Few countries have shown as brazen support for crypto as El Salvador, which last year recognised Bitcoin as legal tender and can be used to pay taxes.
Adding to the challenges are the opposing views taken between the US and China. While both Washington and Beijing share overlapping concerns about a decentralised currency, they are taking precautionary measures independent from each other.
In early March, the White House signed an executive order calling for a federal strategy to better oversee digital assets. Neil Mascarenhas, an ESG fund manager and digital asset specialist, considered this to be a positive move towards the accommodation of digital assets into an evolving regulatory landscape, he told FA at the time.
Washington’s approach contrasts Beijing’s zero-tolerance stance which was adopted in September last year, deeming all digital currency-related activity to be illegal, and rendering local use of Bitcoin as void.
“The decentralised aspect of blockchain technology, which is so appealing to libertarians opposed to fiat currencies as state monopolies, is the complete antithesis of China’s collectivist system,” said Christopher Wood, equities strategist at Jefferies in a research note.
Siu is more sanguine, convinced that China will eventually embrace blockchain, but through a framework that fits the Chinese narrative as a mechanism controlled by the government. However, this would of course be the opposite of what decentralised currencies hope to achieve.
The ultimate question surrounding the metaverse is whether it can offer a better alternative to the one that is already available. Gaming and entertainment remain the prominent drivers of its development, however, there is uncertainty around whether it can truly enhance – or even replace – work and school.
As pandemic restrictions ease, the preference to return to physical premises means less time spent in the digital universe. Keeping students out of school for a prolonged period has been proven as detrimental to social development, while also having wider political and social repercussions.
Whether or not the rise of the metaverse truly represents a watershed moment, at the very least it marks a technological evolution. Although the gap between the popularity of smart-watches and 3D televisions suggests that some are keen to wait before committing to the next iteration of technology, the metaverse is pushing ahead through the early stages of a growth cycle.
Given our interconnectivity and comfort to move more of what we do online, the metaverse is positioned to evolve quickly and in line with innovation. Companies, policymakers, and internet users need to be ready, because it is only a matter of time before metaverse 2.0 arrives, in whatever shape or form that might take.
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