The Backdoor to the Metaverse?
Photo by Hardik Pandya on Unsplash
Much has been made of “the metaverse” in mainstream financial media and all over Twitter. The concept of the metaverse, which barely a year ago was edgy (almost “fringe”), fun and enticing, has now been written into the narrative of almost every company that even half-qualifies as a genuine potential participant. Recently, Roblox had its flagship direct listing and at the time of writing had a freshly minted market capitalisation of around $37 billion. So hot was the theme that they skipped an IPO, concerned about leaving money on the table for the sellers. There was even a private round just before the direct listing to make sure the market was anchored to a new, far higher, valuation. And for good measure, the stock still traded over 50% higher than the “guide price” on the first day. Everyone also by now knows about Fortnite and Minecraft, the two other key candidates for early metaverse infrastructure. Make no mistake, we are huge proponents of all these companies, but what about the ecosystem that is brewing on the other side of the fence?
Nowhere is the word “metaverse” thrown around more these days than in the world of crypto. Newsletters, podcasts, investment memos, Discord and Telegram groups – it is everywhere, and everyone wants a piece. With good reason.
The key criteria for any potential metaverse are interoperability and permissionlessness. Imperative to any grand plan of merging the virtual and physical worlds is freedom of movement and an ability to interact (and transact) without friction. Nobody wants to have a couple of giant corporates gatekeeping all the action (apart from the corporates themselves). It needs to be seamless. A future metaverse must be free of clunky movement. It would mean preferably one wallet to spend at will, wherever one goes.
Enter the world of cryptocurrencies. Unbeknownst to almost everyone south of the crypto wall, there is a plethora of innovation and activity happening where traditional folk fear to tread. We’d previously written about how the permissionless characteristics of crypto fundamentally changes the playing field in the financial space through Decentralised Finance.
It’s now on the cusp of applying that change to everything else, especially the non-financial.
The metaverse is real
While still basic (although improving rapidly) by the magnificent aesthetic standards of their illustrious “real world” peers, blockchain-based worlds such as Decentraland and The Sandbox are experimenting with the infrastructure that could genuinely bring the metaverse to life. Decentraland is mind-boggling: a proper virtual world where one can buy virtual real estate, develop that real estate into whatever one desires and monetise. For example, there is a casino inside run by Decentral.games where you can sit down and gamble away. There is a virtual gallery as we have written about before, complete with 20 Beeple “Everyday” artworks. And this is only the beginning. The land parcels have been changing hands for obscene amounts of real money, but this could be the early equivalent of buying up prime real estate in the world’s greatest cities, only this is truly global with a far larger addressable market for the dominant platforms.
Inside the casino, Decentral.games is now looking for employees: real people to be dealers at the tables and interact with the customers! Ready Player One showed us what a world could look like where people actually work inside some kind of metaverse, and it is now already becoming a reality. It is the ultimate leveller: with no geographic barriers, human capital competes for opportunity. And for many people in poorer countries, whose physical location is a function of unfortunate circumstances beyond their control, this is a boon of the highest order – a true chance for social mobility and income.
The primary example of this emerging phenomenon today is the most popular blockchain based game called Axie Infinity. Axie has stormed up the table of applications which use Ethereum processing capacity as its usage numbers have gone through the roof since the pandemic began. Axie is a fairly straightforward game in which players manage a team of Axies or cute little creatures and compete in battle against other Axie teams. Axies are not free of charge and to start a player must purchase his team. As time goes on and success amasses, the Axies accrue value and mature as they improve and become battle-hardened. Of course, to start with one can purchase a high-value Axie with better fighting qualities and not start from square one - you get the idea. As a reward for progressing through the game, players earn tokens called SLP, which are exchangeable for cold, hard, real world cash at any time. And this is where it gets interesting.
Ground zero for Axie Infinity is the Philippines, where in the middle of the pandemic, new players flocked to the game. And from playing the game, they have earned a living. Not only a minimal income but something far in excess of what they could have dreamed of before from hours of manual labour. It remains to be seen how sustainable this actually is, as the value is determined by the market price of the SLP token. But with activity so frenetic and the adoption curve exponential at this point with new geographies coming on board (Indonesia, Venezuela etc), right now the sky is the limit (Axie Infinity is owned by Sky Mavis).
Introducing: Play-to-earn
The model has been coined the play-to-earn model and it is attracting interest from everyone. It is leading to new ideas and other businesses are forming around it. Yield Guild (YGG) is an entity formed late last year which invests across the blockchain "metaverse” space and looks to “farm” gaming assets as well as land parcels etc. In Axie Infinity, YGG buys up Axies and then recruits players to play the game using these Axies. YGG lowers the barrier to entry for the player by taking care of the upfront cost of the Axie and in return the earnings are split between the player and YGG. YGG is set to be one of the key drivers of bringing young people to these virtual worlds to play-to-earn as the ecosystem matures.
The development of the blockchain “metaverse” is becoming increasingly sophisticated, and new games are being developed as we speak. A recent hot launch is Illuvium, an open-world RPG game, where one can again pitch one’s team of characters against the others in battle and progress. And as time goes on, we will surely see the development of genuine AAA titles using blockchain technology.
Now imagine what the seemingly endless worlds of Skyrim could become if it were truly open-world – is it really that much of a stretch of imagination?
The driver of this rising activity is twofold. First, these worlds are all decentralised, meaning that ownership rests in the hands of the community. The is no centralised corporate entity which is in control of user data and rule keeping nor accountable to shareholders. The community itself makes the rules, upholds them and shares in the risk and reward of the system as time progresses. Secondly the in-game assets a player accumulates can accrue value as NFTs, which are readily liquid and tradeable!
Today, the “real world” giants have all the users and the sophistication that they need to create wonderful virtual experiences. But what will it look like in the years to come?
A matter of priorities and incentives
The question on our minds has always been whether the blockchain-based worlds evolve independently north of the crypto wall or whether the titans in the real world will move towards adopting blockchain technology.
We are of the view that the underlying blockchain infrastructure is a critical component of any emerging genuine metaverse. And it is here where the battleground lies. Any tokenised structure, if constructed properly, has the potential to realign the nature of the relationship between the producer and the consumer from adversarial to one of common purpose. It allows a community to genuinely drive the key outcomes of its own ecosystem. As it did for Helium, which we wrote about last week, it can also do for any business model in any industry.
We recently saw a prime example of how this adversarial relationship played out in one of the companies we have followed and respected for a long time. CD Projekt is a video game developer which until recently was adored by its customers: the players. After producing a runaway hit in The Witcher 3, CD Projekt became famous for attending to the needs of its players. In all the company messaging, players came first. And while things were going well, this indeed was the case. But when they launched Cyberpunk 2077 late last year, in probably the most anticipated gaming launch of all time, it was a disaster of epic proportions. The game was quite simply, even after 8 years of development, nowhere near ready. On console, it was practically unplayable, leading to the unprecedented step of Sony being forced to intervene and remove it from the Playstation store.
There are many opinions about what went wrong but the simple fact is that CD Projekt is a listed company accountable to its shareholders. In the period up to the release, the share price had continuously breached all-time high after all-time highs, ratcheting up the pressure to deliver the game on the already much-delayed timeline. And here is where we speculate the quandary arose. Of course, the management team wanted to please its gaming community with a world class, AAA-rated game AND they wanted to please their shareholders by having record-breaking sales (which were expected by all analysts) from a successful release. However, when it became clear that they wouldn’t have the luxury of pleasing both interest groups, it’s possible the company was forced to choose. And it could be argued they chose to please the shareholders by getting the game out in the wild and clocking up all the initial sales.
It turns out that they didn’t end up pleasing anyone as the release was a disaster and the blowback bigger than anyone could ever have imagined. But what if, using tokenomics, they had a structure whereby the shareholders, the management team and the gamers all benefited equally and were aligned to achieving the optimal outcome. What if that profit which was meant for shareholders could be shared amongst all the stakeholders of a tokenised entity, all working together to make decisions for the benefit of the entire community of gamers, management, and investors? It’s possible that this situation could have been entirely avoided as everyone would have been more than happy to delay and delay until such time as the game was actually ready. One even remembers the early days of Cyberpunk development when the company, faced with clamours for a release date would simply reply, “Release date: When it’s ready”.
Metaverse: When is it ready?
This is all food for thought and certainly applicable to the case for a metaverse. A fully functional metaverse with interconnected worlds, vendors and consumers of everything could be a far more enriching experience should everyone be correctly aligned to deliver this tantalising vision of what’s to come.
For now, the giants are in pole position, but as we have seen, things change fast. The “real world” and the blockchain world are by no means mutually exclusive and we are beyond excited at what the future will look like. It will probably end up nothing like we imagine at all – a delightful hodgepodge of uneven parts, which nonetheless will be a lot of fun. Our job is to see where the best opportunities lie. For now, the areas north of the wall remain cordoned off, but its where a lot of the action is happening.