// Originally published January 21st 2021

The Metaverse: a persistent, live digital universe that affords individuals a sense of agency, social presence, and shared spatial awareness, along with the ability to participate in an extensive virtual economy with profound societal impact.

This piece aims to set out an overview of why crypto is integral to the emergence of an Open Metaverse. I begin this essay with a brief reflection on where we are on our journey as a digital species, as well as the role the games industry is playing in it. From there, we will touch on the origins of the concept of the Metaverse before exploring its more recent incarnation. Despite aspects of it gradually coming into focus, it remains a nebulous idea. As such, we look at some of the core characteristics that the internet of tomorrow is likely to possess whilst recognizing that the evolution of technologies are usually unpredictable. Having established an idea of where things could go, I will explain why I think the tools afforded by crypto are necessary to get there. We’ll look at some of the driving forces behind our current trajectory, and why crypto technologies may be one of the most imperative yet least recognised components of our evolving digital world. From there we explore areas of application, paths to adoption, new business models being unlocked, and how the investable surface area is expanding. I close out with some key areas of focus for various parties that may be interested in the hope it provides someone with something of use.

If you enjoy this essay, please follow me on Twitter and sign up to my Substack where I’ll be posting more thoughts moving forwards.

1. Introduction
2. Enter The Metaverse
3. Where Does Crypto Come In?
4. What Needs To Happen?
5. A Path To Adoption
6. New Business Models
7. Investable Surface Area
8. Takeaways
9. Conclusion

TL;DR

• Crypto is laying the foundations for a self-sovereign financial system, an open creator economy, and a universal digital representation and ownership layer via NFTs (non-fungible tokens).
• The Metaverse is coming; trends indicate our direction of travel. Our next great milestone as a networked species awaits us: 7B digital souls with the option to exist almost exclusively online and participate in a virtual economy with societal impact.
• More time spent online will lead to more value created and consumed digitally.
• In order to maximize willingness of individuals to allocate serious time and capital to virtual environments, establishing trust in their durability as well as economic robustness is paramount.
• As education of web 2.0’s shortcomings rises, users will prefer credibly neutral platforms that lack altogether the capacity for arbitrary censorship, undue rent extraction (also in the form of privacy cost), or sudden cessation.
• All of these threats are only amplified by increasingly immersive, pervasive, and interconnected digital environments.
• Decentralized networks provide a unique and unmatchable degree of assurance, whilst a universal erosion of trust in institutions is forcing the desire for alternatives.
• NFTs on top of them enable a standardized universal digital representation and ownership layer for any natively digital “thing” such as game assets, digital art, or domain space.
• Early breakout successes will drive FOMO as onlookers scramble to understand the new tool sets available. The network effects of these protocols prove difficult to overcome; their open nature compounds permissionless innovation incredibly quickly as each additional creator builds on the shoulders of all who came before.
• Owning core pieces of these new worlds brings great financial returns to those who believed; many of whom will be from emerging markets who were quick to move on the opportunities available.
• Beyond wealth, the initial players are granted additional advantages. As pioneers of a variety of new business models and technologies, their accumulated IP and know-how provide a significant moat.
• In the same way the rise of mobile forced large buyouts and talent acquisition, so too will the rise of crypto across gaming and the creator economy.
• In hindsight, it will be obvious that crypto’s role in the Metaverse was the most imperative yet least explored by those speculating on its emergence.

Introduction

It is easy to forget that it has been just 50 years since the ARPANET delivered the first two letters of the word ‘login’ before crashing. The fact that the first message ever to be transmitted over the precursor to the internet was ‘lo’ will always be suspiciously fitting. These events took place on the year of the moon landing, a full 20 years before the emergence of the world wide web. The impact of this technology has turned out to be truly astonishing, yet we are undergoing further acceleration. In just half a century, it has connected 63% of the human race to one another. Right now, digitally transmitted words that represent ideas are forming inside your head that were typed by a completely separate member of your species with whom you have no physical contact. The capacity for complex communication is the primary differentiator between us and other living beings; it is the core foundation of society building organisms. The grand web of information that we have built throughout our brief existence is absolutely fundamental to humanity. Over the years, both the nature of and our relationship to that web of information has evolved dramatically. From the earliest transmissions of knowledge from our ancestors through cave drawings and storytelling, to the emergence of written language eventually leading to the Gutenberg revolution. More recently, photography and telephony unlocked ways to transmit information through time and space that were strange at first.

Now we, especially my generation (‘99 baby), take all of that for granted. Covid-19, of course, served as a useful reminder to many of our sheer dependence on it. Yet still, there is little pause for reflection on the remarkable digital tapestry of modern life woven by the hands of almost 5 billion people. We regularly record and transmit information to one another all around the globe without an inkling of where the recipients might be, oftentimes who they might be, and even when they might exist. The degree to which information is both preserved and accessible is simply unprecedented. Connecting with ideas, and others, is becoming increasingly easy as well as vivid. Historically, a letter may have been your best bet. As communication technologies have evolved, perhaps a phone call with a loved one brings you closer together due to the higher empathetic bandwidth of voice. Better still, we can now video conference and see those with whom we are speaking. Peeking behind the curtain of virtual reality, we are now beginning to see the ability to share social presence and spatial awareness with other people by “physically” sharing the same environment. If that evolves to become a dominant communication technology, what else has to change with it? What might come next?

One of the applications of the internet that appears to have resonated the most with us as a species is the ability to play with one another at scale. Its wide appeal has been a primary driver in the evolution of networking and graphics technologies. There are presently over 2.7 billion video game players globally, that’s 1 in 3 people. Every day, the veins of the web pulse with information as ever-improving experiences absorb attention and capture an increasing portion of the global mindshare. Throughout the history of gaming, despite the ebbs and flows of trends both ephemeral and sticky, the concept of video games and virtual environments has reached an unimaginable audience. We have observed radical changes ricochet throughout the industry as new business models have demanded the delivery of entirely new infrastructure sets. Perhaps most potently, the increased feasibility of digital distribution paired with the advent of mobile in the late noughties drove drastic advancements in what it meant to be a developer. Suddenly the arsenal of a large game publisher grew to include: data science tools, massively scalable synchronous web services, widely accessible low latency databases, live operations including customer support, content management and live-service updates, and high-impact marketing campaigns as increased optionality began to reveal the fickle nature of gamers. The underlying business model shift that drove this activity was a gravitation towards free-to-play (F2P) subsidised by micro-transactions, which now accounts for 78% of digital game revenue (2020).

“Over the course of its 10+ year history in the West, and 15+ year history worldwide, free-to-play game economies and their operations have become increasingly sophisticated and a daunting effort for even the best-resourced projects in the industry. This dramatic increase in sophistication and complexity has led to something of an efficiency plateau, where design has grown stagnant, growth has started to slow, and the industry overall has needed to consolidate. Free-to-play games have come a long way, but incremental improvements to design and economic models are yielding diminishing returns for developers. At the same time, players feel an increasing dissonance with their real world intuitions about transacting for value in these games, and directing their own effort and choices in game economies.” — Brett Seyler, ex-Unity, Founder at Forte Labs

Once more, currents are stirring in the deep. As these “tried and tested” business models become more and more entrenched, innovation has begun to dwindle. Major titles feed us the same reskinned formula year after year. Out on the fringes, new crypto technologies are emerging that afford us tools that can be applied to this industry in interesting ways. I’m confident that decentralized networks and the novel cryptoeconomic systems they can facilitate are going to have a large impact on video games, and in doing so change mainstream perceptions of virtual goods. The new design space can enable both the standardization and true ownership of in-game assets, new monetization mechanisms, new customer acquisition tools, cross-game economies, multi-directional value flows (publisher to player), universal identity layers, and more. Last year, $174.9 billion  was spent on video games, having grown +19.6% year-on-year. For context, that is 2x the revenue of film and music combined. The opportunity is there. With the ever-improving user experience of virtual reality, rapidly growing eSports viewership, and the next generation of consoles being deployed, it is highly unlikely that the formidable trend the industry has set will cool any time soon. It is still early in the transition, but the stats reflect the direction of travel: people will spend an increasing amount of time in these virtual worlds. To continue to perceive this industry as just “video games'' would be myopic at best.

Enter the Metaverse / Visions of the Future

Whilst the exact adoption dynamics with which certain technologies, or combinations of technologies, evolve are often very difficult to predict, the broader trajectory can often be foreseen years in advance. For example, Marshall McLuhan provided rich commentary on the evolution of our communication mediums right at the dawn of the Information Age, long before the invention of the World Wide Web. As a philosopher and professor of media theory, he viewed human history through the lens of four distinct eras: the acoustic age (spoken word), the literary age (written word), the print age (post-Gutenberg), and the electronic age (which we have barely scratched the surface of). His first major book, The Gutenberg Galaxy (1962), popularized the term “global village” — the idea that technology brings people together and allows everyone the same access to information:

"The next medium, whatever it is – it may be the extension of consciousness – will include television as its content, not as its environment," he wrote in 1962. "A computer as a research and communication instrument could enhance retrieval, obsolesce mass library organisation, retrieve the individual's encyclopedic function and flip it into a private line to speedily tailored data of a saleable kind."

Marshall McLuhan’s core thesis, which was encapsulated in the famous phrase “the medium is the message,” was that the technologies through which we absorb information (broadly defined as the media) become “extensions” of our bodies, exerting a profound influence over how we think and act. When an important new medium arrives, it can reshape who we are as both individuals and as a society. Some of his further thoughts would turn out to be eerily prophetic.

“Once we have surrendered our senses and nervous systems to the private manipulation of those who would try to benefit from taking a lease on our eyes and ears and nerves, we don't really have any rights left. Leasing our eyes and ears and nerves to commercial interests is like handing over the common speech to a private corporation, or like giving the earth's atmosphere to a company as a monopoly.”

Those words were written 20 years before the first personal computers came to fruition, almost 30 years before the invention of the web, and 40 years before Facebook came online. Whilst he could not have envisaged the convoluted competitive dynamics of the rise of social networks, nor the world’s submission to the exploitative ad-driven business models of the web giants, he very clearly understood the ingredients. His writing now seems a prescient warning of the raw power of information technology being harnessed by private companies, who in turn could exert great influence over society.

Since around the early 1980s, many technologists have speculated on the emergence of a “successor” to the internet. The concept wore other masks for a period of time, with William Gibson first referencing it in Burning Chrome (1982) as cyberspace—a mass consensual hallucination in computer networks. It would go on to be a core theme in his famous book Neuromancer (1984). Cyberspace has since evolved through common use to simply mean the internet. However, the term in its original context gave way to the word “Metaverse” (a portmanteau of meta; Greek for “beyond”, and “universe”) when it was coined in Neal Stephenson’s Snow Crash (1992). Whilst the true extent and form of the Metaverse are both elusive, increasingly rich ideas are beginning to coincide with increasingly powerful technologies that will likely deliver something monumental in the coming decades. Mainstream awareness of the idea is also growing, with Spielberg’s 2018 adaptation of Ernest Cline’s Ready Player One (2011) playing a major role. Beyond mere speculation, there begins to be experiences that push the boundaries of what we thought possible and force those curious to look further down the road. A potent recent example was Fortnite’s Travis Scott concert in which 12.3M players gathered in real time to witness the release of his new song. The event was a thrilling fusion of popular culture, video games with deep social elements, and cutting-edge concurrency infrastructure. It has become a game that turns players into celebrities and celebrities into players.

The varied allusions of recent decades seem to be coalescing around accepted definitions. For the sake of clarity, let’s define the Metaverse as:

That last part is borrowed from Tim Sweeney, the Founder and CEO of Epic Games (Fortnite/Unreal). He points out that for this thing to fulfill its potential, it needs to take off on an unprecedented scale and deliver a next-generation successor to a lot of communication media that came before it. This is not an incremental improvement to our existing digital experience. The Metaverse represents our next great milestone as a networked species.

“Humans are the networked species” — Naval

To some extent the Metaverse can’t really be knowable today, despite us understanding some of the core properties it is likely to possess. Matthew Ball, an excellent author and source of great inspiration for me, has likely done more than most to crystalize thought around this strange, nebulous idea.  Broadly speaking, we expect the Metaverse to be:

Beyond these anticipated characteristics, there remains some debate about the exact manner in which the Metaverse will emerge. If Facebook were to build it as a closed platform, would it count? If not, how decentralized must it be? Who “operates” it? Could it perhaps be governed and operated by its inhabitants on a global scale?  Is there a standard universal identity layer, or do different ecosystems have different logins? Can it exist on top of current internet architecture, or must we develop a more native support of many-to-many connections? Could the actual compute itself happen on decentralized networks over the long term? How do modern organizational structures translate into it, if at all? What degree of anonymity is permissible and for which functions? Who decides?

The last question is one of particular importance. Decisions were made at the advent of the internet about critical things such as security, privacy, user sovereignty et cetera without any form of democracy. As we now know, many of these choices had profound, often irrevocable, consequences that will reverberate throughout the digital world for decades to come. In the same way, we are on the brink of augmenting our environment at an unprecedented scale as we project ourselves deeper into the digital realm. Crypto presents potential solutions as we shall explore, but it only goes so far. Decentralized technologies certainly can limit the potential for foul play whilst providing incentive structures to coordinate desirable behaviour at massive scale, but design decisions will still have to be made about where and to what extent they are implemented. As a species we stand before a critical crossroad that necessitates the fusion of ancient wisdom built over thousands of years of enquiry into human existence with modern, recent learnings. In doing so, we should attempt to glean a clear understanding of what values and teachings we must code into tomorrow so that only the best of our traits endure in our increasingly digital future. It is imperative that we treat these choices with the care and respect they deserve, or we once again risk letting McLuhan’s ultimate fears come true!

Where Does Crypto Come In?

Firstly, if you are not familiar with non-fungible tokens (NFTs) I strongly recommend you stop and read this post. They will likely play a major role in the web of tomorrow. Essentially, all digital goods currently exist in siloed databases with wildly varied formatting and an inability to interact with anything beyond. Standards already exist for other foundational elements of the web, with protocols such as TCP/IP for sharing data packets or file formats such as GIF/MP3. What NFTs enable for the first time is a decentralized, universal digital representation and ownership layer through which scarcity, uniqueness, and authenticity can be transparently managed. In order for the economic component of the Metaverse to flourish, there first has to emerge shared standards and protocols that are widely recognized for the issuance and movement of virtual goods.

Whilst it is undoubtedly the fusion of all five that will ultimately bring about the Metaverse, I believe crypto is foundational to the flourishing of multiple of these components despite its total lack of recognition from “mainstream” participants. As a result, I think its applications across virtual worlds are exceptionally compelling from an early-stage investment perspective. By contrast, the other integral aspects such as large-scale concurrency infrastructure or next-generation mediums tend to be dominated by large players who are able to harness huge economies of scale and R&D budgets. Arguably, those wheels are already in motion. From an investment perspective, they are almost impenetrable.

Whilst significant progress needs to be made on various fronts, I believe that within NFTs and crypto lie the most elegant solutions to the problems of digital scarcity and uniqueness, digital property rights, large-scale coordination across virtual environments, and robust privacy-focused systems that cannot be exploited for the enrichment of few at the expense of many. Without the assumption of a robust economic membrane, the entire concept of the Metaverse quickly collapses.  Across a rapidly expanding number of verticals cryptoeconomic incentive systems have given us the tools to bootstrap interest, reward early adopters with meaningful ownership, and through those rewards imbue users with governance power in the projects they love. For the first time, we are seeing the rise of community-owned protocols, networks, and games that are creating impassioned evangelicals whilst obviating the need to trust increasingly dubious and opaque platform operators driven by misaligned incentives. Furthermore, it seems almost self-evident that natively-digital cryptocurrencies will play an integral role in frictionless value transfer throughout natively-digital worlds. Digital assets and crypto seem to be perhaps the most imperative, yet least explored of the above verticals in driving the emergence of a true Metaverse. As such, I spend my time analysing their paths to adoption, what the investable surface area looks like, and the new business models they can unlock.

To understand why NFTs will revolutionize games and other digital economies, it is important to acknowledge both the structural deficiencies and the sheer size of virtual economies today. The virtual goods market is estimated to be around $50B, and is expected to grow to $190B by 2025. A sizable portion of economic activity (aka revenue leakage) around video games happens in nebulous unofficial secondary markets so this number could actually be higher. The extensive grey markets that live in orbit of these virtual economies exist for three primary reasons: there is a lack of legal alternatives, there is an irresistible opportunity to capitalize on obscure revenue streams, and there is a total lack of oversight in those digital jurisdictions.

Ultimately, money is a mechanism through which we transmit value; the most universal driver of value for all living beings is time. Thus, money regardless of form can be thought of as a time-allocation device. This concept can be applied just as readily, and in some instances more appropriately, to cyberspace. This has already been happening for years with gold farming and power levelling operations in MMOs where in many third world countries, it pays better to play these games and sell in-game currency than work a “real” job. For example, in the midst of Venezuela’s economy collapsing, many turned to farming Runescape gold and powerleveling to buy supplies for their families. Not only did this operation allow those behind it to survive, they actually began to earn over 10x the monthly income of an average Venezuelan doctor.

Well, troll123456 r, the foundations of that “country” are being built, although it’s probably not the one you’re thinking of—it’s called the Metaverse. A fast growing digital nation where anyone alive to the opportunities it affords stands to gain regardless of their background. Other large-scale gold selling operations are pocketing their owners up to $50,000 in profit per month. Mod MMG stated in an interview that 40-50% of Runescape’s active player base, on any given month, are buying gold from illegal in-game currency brokers. Gold farming is mostly done by 3rd party botting software, but many real world operations in poorer countries such as Venezuela, Pakistan, and China continue to exist. What’s more, the people operating these services benefited from the abnormalities created by COVID-19. In-game gold (RSGP) prices actually appreciated by 50% in dollar value across March and April of 2020 as demand soared during the lockdown grind. What if this has been a liquid, tradable market that speculators could have punted on without fear of being scammed by a Chinese RSGP trader or being banned?

More creative netizens are able to distort money’s time-allocation properties in their favour by running exploit services or selling hacked goods or accounts. These often involve achieving in-game results that would usually take hundreds of hours, in minutes. For example, an exploit from early 2020 was to use a free open-source hex editor called HxD to edit the code behind the Call of Duty: Modern Warfare executable and unlock weapon skins, calling cards, and other customizations. For those that don’t know, these types of games usually include things called “completionist camos” that take hundreds of hours of play to unlock. Whilst the exploit is actually very simple to do, many aren’t aware of how it works and instead choose to let “professionals” perform the exploit on an account for them. There are hundreds of YouTube videos linking to Discord channels with thousands of users where the owners charge $100+ per camo per account. Again, the exploit takes just a few minutes to complete so the focus becomes scaling and marketing the services. The person behind the operation will usually produce a YouTube video demonstrating the results and linking to a Discord channel, and then use a wide variety of forums as distribution channels. The linked video alone had over 32,000 views in its first 3 weeks. If we assume a conversion rate of just 1.25% (5% made it to the Discord channel at time of writing) at the advertised minimum of $100, then we get $40,000 in less than a month for this service alone. Unsurprisingly, “xLegehnd” who runs the service has his own terms which seem reasonable… “CASH APP, APPLE PAY ONLY!” and “THERE ARE NO REFUNDS PAYMENT IS FINAL IF YOU GET BANNED THAT HAS NOTHING TO DO WITH ME YOU TOOK THE RISK”. I don’t want to labour the point. Find me the game and I’ll find you the market. They are everywhere. These fringe environments are early forms of what we might expect for value exchange between the analogue and digital worlds.

Most game companies try to enforce restrictive valves by actively fighting these insurgent economies as evidenced by zero-tolerance ban policies on things such as gold farming, account trading, and third-party levelling services. Try as they may, detecting and preventing these activities can be a difficult task and place a strain on resources. Grey markets exist in most video games with their operators drawing from decades of experience in exploiting game mechanics and player psychology. They have built robust networks of contacts to help facilitate these activities and run hugely sophisticated operations, often with dozens if not hundreds of full-time employees. One could argue that these markets are in a way antifragile; their operators patch errors in their strategies and are always one step ahead of the platforms in an eternal game of cat and mouse.  What would happen if developers were able to monetize more of their game assets such as in-game land, items, or skins, and also capture ongoing revenue by facilitating secondary sales of those goods? By drawing these grey markets away from the periphery and figuring out how to integrate that evident demand with emerging business models, immense value can be unlocked for players, creators, and developers.

“When startups consume incumbents, they usually start by serving some small but important market that the big players ignore. It's particularly good if there's an admixture of disdain in the big players' attitude, because that often misleads them.” - Paul Graham

Beyond game assets which for the time being are the most intuitively understood, a huge variety of content will ultimately become tokenized as NFTs and cryptomedia. People within the industry are already tokenizing Tweets and blogs, music, and access to communities. Hypermedia gave birth to a non-linear medium of information traversing graphics, audio, plain text, and hyperlinks. With crypto, we can imbue that medium with digital property rights. One day we will be able to  see rich histories of all the “things” we interact with online; origin stories, individuality, and the grand web of ownership into which that “thing” is woven. Much of digital content as we know it could become tokenized dramatically expanding the granularity of interconnectivity—each item unique with its own creator, history, and owner.

We cannot expect a growing number of users to dedicate serious time and capital to the digital realm if they have no way to manipulate or even really own those investments. Establishing trust in the economic fibre of the Metaverse is of paramount importance, and the employment of distributed ledger technologies provides a unique degree of assurance in this regard. Importantly, digital assets inherit the security of the underlying decentralized network they are issued on. Whilst these technologies are still in their infancy and it is difficult to predict which networks will win over time, the ERC-721 NFT token standard on Ethereum is making a strong case for itself. The estimated market cap of NFTs on top of the network is $540M, with around 200,000 users creating, trading, and playing.  That being said, at times of high usage Ethereum still suffers from crippling fees that totally destroy the user experience for most applications. It is not yet clear that any of the proposed scaling solutions are technically feasible for mainstream adoption of these technologies, and the technical baggage of engineering in-house solutions is likely off-putting to most developers.  Other well-capitalized, purpose-built blockchains such as Flow are coming to market to tackle these exact problems, but the enormous network effects of Ethereum in the form of user lock-in, developer share, and rapid growth of a synergistic “DeFi” are not to be underestimated.  It has built tremendous ecosystem support across wallets, exchanges, fiat gateways, and regulatory familiarity. All of these critical components don’t just appear overnight, and any challenger would have to achieve all of this whilst competing with Ethereum’s growing momentum. Like it or not, the rise of successful layer 2 solutions could well diminish the key value proposition of alternative chains boasting increased scalability. Lastly, it seems that Ethereum appropriately represents the core philosophy of decentralized asset ownership and trustlessness. The network and its participants consistently shun short-term scalability upgrades in favour of network health and decentralization. The whole point of these sometimes clunky technologies is to achieve secure, unseizable, censorship-resistant systems, which leads me to their next area of relevance to the Metaverse.

Using these technologies can help keep coercive political forces at bay. Even the largest web platforms in the world are very much subject to the push and pull of politics, as evidenced by YouTube removing content that might aggravate the CCP, or the tensions at Facebook over Zuckerberg’s refusal to remove Trump’s posts allegedly glorifying violence during the 2020 protests. As long as there are centralized choke points, it is impossible to immunize against. The ability to arbitrarily censor users can easily be abused for anti-competitive, political, or other reasons that can be harmful to society. The Cambridge Analytica fiasco should be evidence enough of the role large media platforms now play in directly influencing democracy itself. There are countless examples of banning and shadow-banning of voices deemed to be “against the grain”, most recently demonstrated by the United States President himself being removed from every major social network. It is important to differentiate between moderation and censorship however, as what we see in the States and what we see in China are two different things. A lack of moderation can be just as harmful to the fabric of society as people overextend and reach the false conclusion that there are no consequences to their words and actions. As such, we need to think carefully about what the right balance might be, as well as what that might look like across decentralized networks. In addition to the above, major technology companies are now effectively being weaponized by states to fight political adversaries. The scary part is that they regularly succumb to this pressure and in doing so ban certain users or expose private data. As more value shifts online, the consequences of censorship rise. All of these threats are only amplified by increasingly immersive, pervasive, and interconnected digital environments.

We should think very carefully about how we might design robust systems that minimize the capacity for things to go awry, whilst promoting and rewarding desirable user behaviours and interactions within them. The radical differentiator between cryptoeconomic systems and other technologies, is that they represent both a social and economic breakthrough as much as a technological one. It is a technological breakthrough in that it remedies what has been referred to as the internet’s original sin—the omission of a digitally native P2P value transfer protocol (technological). Crucially, this advancement both enables and is enabled by cryptoeconomics—the combination of cryptography and game theoretic incentives (economic) that lies at the heart of this revolution. The fusion of digitally native value transfer protocols with cryptoeconomic incentive systems unlocks new dimensions of large-scale P2P coordination (social). Where previously access to resources and services had to be mediated by trusted third parties, along with their inherent privacy, censorship, and transaction costs, these can now be replaced by cryptoeconomic systems. The result is that cooperation needn’t rely on increasingly mistrusted intermediaries, but only on the age-old human mercenary instinct. We now possess the tools to create fundamentally better systems that allow a wider range of people to participate in the economics of the value they help to create. As the internet and our interactions with it evolve, it will present many opportunities to meaningfully implement them. That said, crypto has already provided a stark warning that wherever there is value, there are scams. Businesses already spend significant resources on protecting their customers from such activities, and it’s not clear that we have good solutions to this problem for web 3.0  and beyond yet.

“The fundamental axiom of economics is the human mercenary instinct. Without that assumption, the entire field would collapse.” — Cixin Liu

The emergence of blockchain-based NFTs has enabled true ownership of virtual assets, indefinitely, and outside the control of the creator. This as yet underappreciated breakthrough radically changes the nature and scope of the virtual item space, which was already amounting to tens of billions of dollars a year. Take Fortnite for example which in 2018 at the height of its popularity earned $2.4 billion, the vast majority of which was driven by one-way transactions for in-game cosmetics with exactly zero in-game utility beyond aesthetic appeal (and the resulting glory associated with looking cool in front of the squad). Setting aside the fact it would fundamentally impact their current business model, let us ask: what if you were able to not only liquidate your blockchain-secured Fortnite skins on an open market should you grow tired of them, but actually deploy rare ones as collateral to secure loans and produce cash flows (perhaps to buy the latest battle pass)? Fortnite could look to implement fees on that economic activity.  It is a wonder that players continue to spend time and money on in-game items that exist on heterogenous, centralized services that are owned by a single company, provide no ongoing cash flows, and offer no real ownership/control prospects for the investor. As and when viable alternatives emerge, they will surely be adopted.

NFTs are certainly not limited to the games space, they have already made an impact on the digital art scene by unlocking a direct monetization mechanism for creators. Not only can they now issue tokenized representations of their work on-chain with full provenance and authenticity, they are able to directly sell their work on global art marketplaces and even capture secondary sale fees (royalties) in perpetuity. In fact, NFTs can be a useful tool for issuance, tracking, and monetization of almost any creative endeavour. To better understand their near-limitless applications, I strongly recommend Jake Brukhman’s piece on why all digital content is going on-chain. He touches upon why NFTs can be understood as encapsulating the intellectual property rights of the assets they describe, and why we are heading towards an age of “liquid IP” that will unlock billions of dollars of value as well as new ways to manipulate IP that were previously impossible or prohibitively expensive. These standards for natively digital representation of “things”, alongside the native economic rails to support them, are likely to be woven into the fabric of the Metaverse as the natural and the virtual world continue to bleed into one.

What Needs To Happen?

It’s important to recognise the sheer scale of the opportunity that NFTs represent. Those already familiar with bitcoin are likely to have encountered the concept of its soundness as money: the idea that bitcoin embodies an optimal combination of desirable monetary characteristics that are enforced through its mathematical,  decentralized nature providing inflation immunity through its predetermined issuance schedule and unforgeable cost of production. Importantly, the Metaverse will likely lean heavily on bitcoin for its economic foundations: the world’s first internet-native reserve currency. There exists something called Gresham’s Law: the idea that any circulating currency consisting of both “good” and “bad” money (e.g. a copper vs silver coin of the same value) quickly becomes dominated by the “bad” money. This manifests as people preferring to spend the “less sound” money before spending the sound money, which effectively drives sound money out of circulation.

Interestingly, this idea can readily be extended to virtual goods when considered through the lens of collectibles. It’s important to note that collectible goods were the precursors to money. Money is a social technology that allows civilizations to scale. Throughout the emergence of the first human tribes, reciprocal favours were carried out amongst tribe members. As the group grew in size, so did the number of favours that needed to be tracked. Tribes that did not have cooperation systems eventually died off, but those that found a generalized system of tracking favours were able to scale efficiently and ultimately flourish. Prior to that however, humans had evolved to seek collectibles with specific desirable attributes that would help to solve these problems of cooperation. Despite money becoming our dominant favour tracking technology, collecting has persisted through the ages and is observed across all cultures, historical periods, and age groups. To this day, trillions of dollars of value is stored in physical collectibles around the world.

In Szabo’s Shelling Out, he explains how Menger found that what he described as an “intermediate commodity” would increase in desirability and become a collectible if they had the following traits:

1. More secure from accidental loss and theft. For most of history this meant carrying it on the person and easy to hide.
2. Harder to forge its value. Goods that are unforgeably costly become desirable. This is not dissimilar from Zahavian signalling that we observe in nature.
3. Their value was more accurately approximated by simple observations or measurements. These observations would have had more reliable integrity yet have been less expensive.

As Tony Sheng notes, pre-crypto digital goods can thus be seen as deeply unsound when compared with physical goods that can be held, authenticated, and sold. They continue to exist in siloed databases and walled gardens that actually offer no ownership prospects for users— usually merely licensed from the issuing company.

“The “owner” of a pre-crypto digital good faces massive liquidity and trust risks. Pre-crypto digital goods are issued by central authorities that manage custody of the digital goods (risk to 1), can inflate the supply at will (risk to 2), and often limit the trade-ability of the items (risk to 3). A sound digital collectible should be worth at least an order of magnitude more.

Applying Gresham’s law, we should expect people to have a high preference for the more sound version of digital collectibles. Users will be quick to rid themselves of non-crypto collectibles and will hoard crypto collectibles–storing trillions of dollars. The opportunity for sound (digital) collectibles is at least as big as the opportunity for “digital gold”.

In sum, blockchain offers sound money and sound digital goods. Both opportunities are on the order of trillions of dollars and if realized will have widespread consequences. Today’s money and collectibles are both problematic, but the path to mass-market adoption is still unclear with substantial execution risk. While users should prefer sound digital goods like they prefer sound money, incumbents are unlikely to support adoption and crypto-native social worlds are unproven and require considerable time and effort. Despite these challenges, the gravitational pull is towards sound digital goods, a win for users.”

A Path to Adoption

In the near term, a lot of activity is likely to be driven largely by speculation. Crypto-folk are hardened by previous bubbles, and despite the large 2018 crash most people who stuck around are doing pretty well for themselves. There remains a meaningful amount of opportunistic capital sitting in this ecosystem. The Nonfungible 2019 Report  forecasted that $250M of value will be transacted in the form of NFTs in 2020, but that turned out to be an underestimation. As a result, we see the occasional headlines of artworks fetching $750,000 or NFT cars selling at $113,000 that inevitably draw the eyes of all in proximity. Broadly speaking, there are four major categories so far that have begun to draw distinct audiences: art, collectibles, virtual worlds, and video games.

Artistic communities have always tended to be progressive and willing to engage with new technologies, so I’m cautiously optimistic on this angle spurring meaningful experimentation with art itself. Interestingly, “Crypto Art” appears to be the first NFT category to really find product-market fit, here the technology required to deliver upon its core value propositions already works. Due to reduced frequency of exchange, there are fewer scalability concerns when it comes to moving art around on-chain, and the UX is in a tolerable state that isn’t too disruptive to the user journey. Already, the space has drawn in creators with significant audiences such as Beeple, who sold $3.5M of art in a single weekend. Since then, sale volume has almost doubled on secondary markets.

Another category coming to fruition is the collectibles market, branded IP such as the NBA, global football leagues, and UFC are issuing tokenized content to fans. Kylian Mbappe recently sold for $66,000 as part of a global fantasy football game, rumoured to be completing a raise at a $300M valuation. Ja Morant’s dunk on Phoenix Suns is selling for $100,000. Both of these collectible games saw significant growth in 2020, yet NBA Top Shot has already beaten its year one volume in the first 3 weeks of January. This is another sector that is drawing large audiences and could well tap into the most passionate tribes on the planet—sports fans.

In other parts, blockchain-based virtual worlds where users own parcels of land upon which they are free to build whatever they like are still selling estates for north of $50,000 years after the initial boom. Other crypto-infused VR worlds such as Somnium Space and Cryptovoxels have reached a degree of interoperability such that you can play one inside the other. These are places and platforms as much as they are games, and appear to be finding resonance with global, distributed teams operating asynchronously. Clans, collectives, and even large companies are beginning to develop virtual headquarters where their employees and fans can meet.

Axie Infinity is a Pokèmon-inspired digital pet game that allows users to trade, breed, battle, and even develop virtual real estate. (Disclaimer: Delphi Digital built and invested in their token). It appears to be moving into a parabolic growth phase driven by a sound economic backbone and a passionate user base. Axie might be our best game example of the power of cryptoeconomics in bootstrapping adoption (user base grew 11.6x in 2020), promoting loyalty, and providing the correct incentive structures for evangelism. Axie Infinity has stuck true to the ethos of blockchain gaming, with all data and game assets accessible by 3rd parties allowing others to build tools and experiences for the Axie universe. Furthermore, the team is focused on making Axie Infinity the first game to truly be owned and operated by its players. As such, the goal is to shift to a decentralized organization over time.  In order to help achieve this, the game has issued (and will continue to) something called a governance token to players in the ecosystem which is roughly proportional to how engaged they are and have been. The token grants its holders voting power in key decisions on how funds from the community treasury which sits in a smart contract on-chain are allocated. Zooming out for a moment, reflect on the idea of players getting to vote on the allocation of resources for things like new maps, weapon tweaks, cross-game partnerships, and ultimately perhaps even which developer team is contracted to build the next season of a user-governed game.

Axie Infinity represents an explicitly “play-to-earn” (P2E) environment that, unlike existing games where gold farming might be a loose proxy for P2E, is not adversarial to these dynamics. The game has seen an explosion of activity in the Philippines where throughout COVID, playing it has actually resulted in many families earning more than they would from a “real” job. A fascinating aspect of these technologies is recognizing the ability with which virtual game worlds can actually level the economic playing field globally. Don’t underestimate how quickly word of mouth can spread across communities as more people stumble upon these opportunities. We’ve heard hollow echoes of “banking the unbanked” throughout the crypto industry for years, but what if this is how it manifests? What if games, leading the virtual economy, are the trojan horse for empowering billions with blockchain and crypto?

“The anonymity afforded by the Virtual Economy obviates the traditional characteristics that would preclude the unprivileged from accessing the opportunities presented by great industrial change. The Virtual Economy is notably distinctive in that it is possible for almost anyone, young or old, rich or poor, regardless of gender, ethnicity, religion, location, heritage or social status, to succeed as long as they have the intellect, decisiveness and the technical capacity to see the opportunities emerging within it.” — L’Atelier’s The Virtual Economy

An interesting takeaway that struck me from “Play Money”, a documentary that tracks the early evolution of virtual economies, was how sticky gold farmers became as players in their own right. Surely, one would think, that after a 10 hour day of gold farming on some Westerner’s account the workers in rural Chinese communities would want nothing to do with the game for a while. Interestingly, that wasn’t the case. As soon as their shifts would finish, they’d log into their personal accounts and keep grinding. I’ve often heard that as soon as a game becomes play-to-earn it defeats the point of it, because games are about fun. I’m yet to see good evidence of that. I know first-hand that at the top end of MMORPGs, many players that partake in high-stakes player vs player combat are using it as supplementary income. Great FPS players will also often enter money tournaments via 3rd party platforms. Whilst I’ve never been in a position where my income depends entirely on playing a certain game, I’m of the view that a monetary component actually accentuates the enjoyability of a game more often than not. These dynamics appear to be emerging across a game ecosystem like Axie Infinity already.

Lastly, I think it would be remiss to not draw attention to the solid institutional backstop behind some of the core early players in the ecosystem. For example Dapper Labs, the creators of the notorious CryptoKitties, closed an additional round of $12MM in 2020. Their total funding amount now sits at $50.9MM with big traditional names such as USV, Samsung Ventures, a16z, Venrock, and Warner Music Group behind them. They are currently working on building the aforementioned Flow blockchain off the back of their experience with developing the biggest crypto game to date (by $ traded) and the scaling constraints experienced by networks such as Ethereum. Beyond the obvious fact that they are very well capitalized, the combined reach of their backers makes for a formidable partnerships division. Some of which I’ve noted, they are already working with well-known brands such as Dr.Seuss, the NBA, the UFC, and Ubisoft. What is also encouraging to see are high-profile sports personalities such as Spencer Dinwiddie investing in Dapper, and André Schürrle investing in Sorare—the global fantasy football game powered by limited-edition NFTs like the Mbappe that was sold. As mentioned, it’s not clear that these purpose-built chains stand a better chance than Ethereum with new scaling solutions coming to market, but drawing major brands into this nascent world is a win for the whole ecosystem.

In the medium term, we can expect early wins (perhaps Axie!) that prove out these business models to drive further interest from large studios, brands, and creatives. For now, most consumers don’t think twice about their deeply ingrained transaction habits—people still don’t know or care about any alternatives. I think it’s really up to the crypto industry to make a deeply compelling experience that demonstrates all of the new functionality available to us. In doing so, it will emphasise the stark contrast between the restrictive old models and the new, open, and collaborative ones. If we can reach that point, I’m confident these technologies will self-perpetuate. The granularity with which one can use tokens to incentivize and reward certain fan behaviours is unprecedented. Whilst not strictly using NFTs, projects such as Socios are making use of football fan tokens which empower customers and make them feel like stakeholders in the brand. A recent case in point was Juventus fans being able to decide their home goal song. All this is done whilst securing additional revenue streams that are digital, secure, transparent, and directly driven by value-add experiences for their user base. Ultimately, these types of initiatives can become platforms from which a brand is able to coordinate their audience. For example, Pokèmon Go-styled augmented reality “hunts” using gamified location data can incentivize users to complete certain real-world tasks. Perhaps collecting a proof-of-location NFT whilst queueing outside a store on the day of a new fashion drop would grant you access to a limited-edition sale in the future. The only limit to applications for these technologies right now is our imagination. As the world grows in familiarity with this new toolset, I’m hugely excited to see how they augment existing consumer behaviours and guide us towards a much more interactive and participatory digital landscape.

An adjacent area of interest is the rise of social tokens which are a close neighbour of NFTs and help to achieve similar functions where it relates to audience building, coordination, and  interactivity. They enable an interesting take on speculative assets that trade based off the back of personal brands in a manner we haven’t quite seen before. What’s more, they can be used to incentivize certain actions for their issuers from subscribing to newsletters, participation in product betas, or engaging with other types of content a creative might want tested. Once token-community fit is achieved, it seems these new instruments could become forces to be reckoned with throughout the creator economy. They allow the most avid fans to take bets on the success of creators very early on, often before the artist has achieved escape velocity or use cases for their token have even been established.  Whilst the lines can be somewhat blurry when it comes to securities law, I’m confident both the structure of these tokens as well the laws they are bound by will eventually harmonize.

On a longer time horizon, it is clear the world is becoming more digital. COVID has served as a huge catalyst for a number of underlying trends. The feasibility of remote work has been demonstrated at massive scale—shaking up our perception of and relationship to our “work environment”—which in turn is driving a gravitation towards spending even more time digitally. Couple huge investments being made into web infrastructure with the ongoing rollout of advanced satellite internet networks from Starlink, and we can begin to wonder what the future looks like. Do people ultimately reside in dense cities, or do we see geographical shifts as technological infrastructure from drone deliveries to advanced solar tech expands optionality for vast swathes of the population? My bet is the latter. As people move apart in a local sense, and closer together in a global sense, viable substitutes to previously dominant interaction models will have to emerge. Dynamics such as real-time audio translation breaking down barriers to international business fusing with “good enough” virtual reality simulation of primary social cues such as eye contact, body language, and shared spacial awareness are truly not that far away from disrupting the current way of things. Many remain sceptical of VR’s utility as a substitute to physical interaction, but I strongly believe they will ultimately be shocked by how effective the aforementioned features are in fulfilling that exact function.

I’ve never met a skeptic of VR who has tried it. — Tim Sweeney

More broadly, The Age of Augmentation is also upon us. A virtual membrane will soon live all around us, enhancing our perception of the natural world.  Dilapidated billboards will one day emit dazzling pulses of light as the fractured paintwork tries in vain to compete with the brilliant neon pixels that sit atop it—the same world, but not. In time, as our digital presence becomes arguably as or more important than our physical one, people will equip their digital beings with digital goods. As a result, the transition from direct-to-consumer towards direct-to-avatar (D2A) business models strikes me as a when not an if—our avatars are already important forms of self-expression. The underlying infrastructure for this brave new world is continually advancing, and we will one day reach a point where everybody has the option to live, work, and play entirely within the Metaverse. In that world the value of natively-digital, decentralized mechanisms for the issuance and management of scarce and unique digital “things” speaks for itself.

“Anything scarce will ultimately be tokenized because the benefits of digitization and increased liquidity are so great”. — Balaji Srinivasan

An interesting project that I have invested in is Crucible, pioneers of the aforementioned direct-to-avatar commerce model. The company is building something called the Emergence SDK which looks to provide an easy on-ramp for game engine developers to access new decentralized web3 technologies (NFTs + DAO's + DeFi) along with networks of players & marketplaces where users will spend billions. These users are given the tools to maintain and protect the same identity across the metaverse -- and prove ownership for all the value they accumulate in the form of skins, digital collectibles and other in-game assets. A substrate like this seems to be the strongest foundation for a player-first metaverse economy. Crucible also leads Blueprints for the Open Metaverse, a cross-industry consortium focussed on advocating that the Metaverse be built on open standards. Whilst still early days, neatly embedding these technologies into the game engines themselves could accelerate adoption timelines as it becomes easier than ever before for developers to experiment with them and players to broaden their horizons.

New Business Models

I suppose there’s probably a need to address the elephant in the room, which is that there are still major disincentives for large video game publishers to engage with crypto.  When they have spent years refining transactional mechanics that revolve around user lock-in, platform-specific spend, and bordering-on predatory psychological practices, it will be difficult to rewire their thinking. Especially true where shareholder accountability is concerned and outlandish changes to a functional business model are likely to be quashed. The topics of which I speak necessitate many new approaches, all the way down to game design itself which will need to accommodate new economic realities. The idea that surrendering elements of economic control to your user base can unlock fundamentally new, potentially larger, revenue streams is, admittedly, counterintuitive at first.

Be that as it may, the forces of innovation trump those of self-preservation. One needs only to glimpse at crypto’s broader impact on the world thus far to see that. Remember, the core ethos of this entire thing is open, not closed. As communities form around blockchain games in which players feel they have actual ownership, either of tradeable virtual goods within it or governance power around it, evangelical forces are unlocked. We are beginning to see the holy grail of customer acquisition, driven largely by the early user base. Not only that, the ARPUs observed in these new virtual goods ecosystems are dramatically higher than what we observe in their non-crypto equivalents. Due to this new age of interoperability, inter-game partnerships whereby you can use one set of virtual assets in the other (perhaps for a limited-time event), have unlocked a new growth angle. This explosive form of community cross-pollination tends to bolster both sides of the equation. The more expansive and outwards-looking mindset seems to be infectious, and I think it will ultimately disrupt the tribalism around individual games that permeates the industry. The opportunity is there for the taking. If I were building an indie game, I know where I’d look. Rather than fight over what there is, why not grow the pie together? This is not dissimilar to Tim Sweeney’s strategy behind Epic Games and their approach to the Metaverse.

Speaking of which, Fortnite provides an interesting example of companies surrendering control, not explicitly economic, but of their IP.  As Matthew Ball points out, it is very unusual for brands to do so when they don’t have control over the editorial experience. For Marvel Comics, DC Comics, the NFL, Nike, and so on, I’m sure there will have been endless discussion and plenty of hesitance before approving of such collaborations. The game might be the only place in which Star-Lord can meet Batman who can meet a Stormtrooper who can meet John Wick, and the brands have no say in the nature of their interactions. He mentions that “this is, in part, a reflection of the fact that Hollywood still lacks a clear gaming strategy and capabilities. As a result, they’ve little choice but to embrace the opportunities available to them. Accordingly, such multi-IP experiences are likely to become more common in the years to come''.  Reflecting once more on the concept of increased IP liquidity, what might the future hold as entirely new dimensions of monetizing this stuff open up?

As a case in point, I logged into Fortnite to splash some hard-earned V-Bucks on Kratos from God of War the second he was introduced to the game. These mash ups work to stimulate the player base of both games. In a world of crypto perhaps I would be able to access a special style for Kratos for having the God of War platinum trophy (no apologies for the flex—I was one of the first 100 and I’m proud k thx). Imagine the astronomical demand if these skins were limited-edition and tradeable via a Fortnite-operated secondary market through which they could capture fees. Perhaps in order to even qualify for a drop I’d need to have completed a certain function in other games, or better yet, other types of media. Maybe I can’t access an auction for a legendary mandalorian skin unless my Disney+ account can verify I’ve watched it all. We could actually make that an elegant reality without having to sacrifice user data in the Fortnite/Disney+ verification instance. The point is, there are exciting ways that we can stimulate and monetize mutually beneficial engagement without stooping to loot boxes, ad-driven business models, or failure to recognize man hours and in-game purchases as a form of investment.

"My revulsion is to business models that are adversarial to the consumer. Where you make money by doing things that are detracting from the consumer's experience. An honest business model makes money from selling consumers things that they want, or delivering great experiences to users and making money from economic activity around it." — Tim Sweeney

One of the most exciting aspects of the NFT space more broadly are the radically new funding models that are being explored. An entirely new spectrum of monetization mechanisms has been unlocked for developers and creatives. For the first time, selling “land” or individual items within your virtual world is actually a feasible way to finance yourself. Projects like Cryptovoxels have been able to fully bootstrap by auctioning off scarce virtual real estate as the world grows in popularity. In this particular example, we have even seen the gentrification of different virtual neighbourhoods as artists have spontaneously coalesced in certain parts (it has become popular for crypto art collectors to display their pieces in virtual art galleries built in blockchain-based virtual worlds). Art platforms like SuperRare are allowing artists to directly finance themselves by selling tokenized digital art. They are now able to capture royalty fees in perpetuity on secondary market sales—something that is typically impossible or very difficult in the traditional world. How long before similar options are extended to designers of game assets, UGC world builders, and other creative mediums? There is a broad shift towards the creator economy happening globally, an anticipated decline in labour as automation increases, and most recently COVID accelerating our transition towards a predominantly digital species. We are really just at the tip of the iceberg as the disintermediation power of crypto technologies proliferates across a number of verticals and dramatically collapses the boundaries between the creator and the consumer.

Whilst gaming represents just one of these areas, I believe it to be the most visceral and informative as it relates to the Metaverse. Over the last 20 years, the communities formed around games have evolved into real economies. Gamers ascribe value to virtual goods based upon perceived status and utility. In doing so, these digital worlds present unique environments in which to study economics whilst being able to track (almost) all inputs and outputs. They allow us to glimpse how emergent value is given to natively-digital goods, as well as how that value leaks into the real world such as with the Venezuelan gold farmers. Games teach us that scarcity of rare and sought after things is critical for driving competition and creating market-making dynamics. They teach us of emergent cultures that transcend geographical boundaries, often with rich history, lore, and traditions. They teach us of effective distributed organizational structures, governance, and decision making. The gradual formation of large clans across leading MMORPGs shows us not only that order is possible without imposition, but that community-oriented initiatives are a key driver of longevity in otherwise ephemeral digital worlds. What’s more, they reveal a resulting defensibility in the form of an endowment effect: even if a “better” world worthy of equal or greater consideration comes along, humans would rather hang on to that which is theirs. With crypto, a large clan would not have to choose, instead they could champion a proposal for collaboration between the two. In the ever-lasting quest for continuous engagement, games have taught us of the perils of inflation driving growth at all costs with many game economies ending in ruin. As more value goes digital in a boundless Metaverse, some assurance of scarcity will surely matter. Video games show us a near-universal appetite for virtual labour arbitrage. Across the global playing field, we can expect poorer nations to continue to export these services and in doing so provide useful market-making forces. Most game economies don’t really operate within a discernible regulatory framework, and thus can inform how virtual economies behave untamed.  Studying gaming communities grants us key insights into how we might unobtrusively weave new crypto technologies into future virtual communities in a manner that is synergistic to what has naturally evolved.

Investable Surface Area

I wanted to touch upon how the investable universe is dramatically expanding whilst collapsing barriers to entry. I’ve noted that uniqueness and tradability of content could play a huge role in the creator economy, but let’s hone in on games. Prior to crypto, options for gaining financial exposure to a game you believe will be successful are highly restricted. Perhaps, if you are lucky, the company behind the game is listed and focuses primarily on that game. Or maybe a desirable portfolio of private game companies is partially owned by a public one such as Tencent, through which you can seek proxy exposure. If you wanted to get more granular, you might end up dabbling in the dark arts of grey market account or item trading and face the potential repercussions. In crypto games not only are there channels for very direct exposure, you are handed a variety of options on a platter. As we witness the increased financialization of games and other virtual goods such as crypto art, we could well see an entirely new generation of investors born. As developers are able to raise money from a broader capital pool, the variety of ideas that actually get funded could well expand. Perhaps we will ultimately see an increase in the amount of capital available to the gaming industry altogether.

Zooming in on the Axie Infinity example again, users are presented with a number of options to both invest and generate yield on their investments. Remember, these exist on global, liquid marketplaces where anyone is able to buy and sell. Importantly, most of the following can also be earned:

• Purchase of individual Axies (can be traded, battled, or bred for profit)
• Purchase of in-game land (can be developed upon to provide services for profit)
• Purchase of items (deployed on land, often with functional utility such as stat boosts)
• Purchase of Small Love Potions (SLP) an in-game ERC-20 token used in the breeding of Axies.
• Purchase of Axie Infinity Shards (AXS) governance tokens (can be staked to earn additional yield as well as used for voting power in Community Treasury resource allocation)

Presenting all of these opportunities to the user also enables equal opportunities for fair monetization to maintain and develop the game. Below are the corresponding examples from their fee-based business model that earns a portion of the value flowing through the game economy:

• Bonding curve auctions of provably scarce Origin Axies
• Small marketplace fees captured on the trading of Axies
• Small marketplace fees captured on the breeding of all Axies
• Primary auction of provably scarce virtual real estate
• Primary auctions of scarce game assets.
• Sale of tokens from treasury to establish early strategic investors as well as later public sales.
• Fees on in-game spend such as leveling up characters, developing land, or crafting.
• Fees on in-game battles and tournaments.

Bear in mind that from Q1 2021 all fees and primary sales from within the Axie universe will go into the Community Treasury that is governed by holders of the AXS token. Currently, there is a 4.25% marketplace fee and a .005 ETH fee for breeding Axies. In November of 2020 alone, that would have been $250,000 going to the treasury. This doesn’t only apply to Axie by any means, but should give a flavour of the manner in which general investability is evolving online. An additional thought worthy of consideration is that in the same way these technologies are providing new opportunities for engagement, they do the same for disengagement. This results in a brilliant incentive alignment whereby the players actually have meaningful capacity to “fight back” if the game begins to evolve in a less desirable direction. The user base can literally dump their assets and exit the game, cratering prices and impacting the operator’s primary revenue source. These dynamics are likely to keep game creators on their toes, unlike some of the blatant sloppiness and complacency we have seen from many AAA studios in recent years.  In fact, “forking” of the entire game is theoretically possible—a 3rd party developer could build a parallel game version around the NFT set. Users would be free to move their assets over to this new game version and continue to play. It remains to be seen how long it takes for us to arrive at a game that embraces these dynamics and is produced by a continuously rotating developer pool. 3rd party developers would submit proposals about where they want to take the upcoming year or season, and the player base could vote on who they’d like as the next official developer shop.

Another protocol we have invested in is Yield Guild, which operates one layer up from the game I’ve just described. It is a guild that accumulates and matches rare non-fungible tokens with skilled players who deploy them in games and other virtual environments in order to generate yield. Economic activity manifests as farming, battling, breeding, developing virtual real estate, and trading the rarest virtual goods the nascent Metaverse has to offer. The broader vision is to create the largest virtual world economy to date by being a dominant force in multiple worlds. All profits generated by the meta-guild are automatically distributed to guild members via the YGG protocol. Interestingly, there are already others such as Blackpool beginning to wake up to the idea. Perhaps we will soon see more users combine forces and invest in large-scale virtual goods collectives, each with their own objective and raison d’etre.

Takeaways

Investors

As an investor, there are many moving parts to keep track of as opportunities arise in greater variety. Within the industry, we see traditional equity investments in developer outfits, investments in project tokens (including NFTs), and also investments in the protocols that support the projects on top of them. The traditional tests of investing such as the strength of the team, utility, and product-market fit all still apply, but they are often just the beginning. In crypto assessing long-term value capture is crucial. As investors, we typically look for projects with multiple, compounding moats that when combined mean it becomes more difficult to unseat the bigger it gets. In traditional markets investors often don’t need to stress test this angle as much because proprietary technology can take you further. The crypto industry is different in that its open source nature means that projects can often be forked if, for example, protocol rent extraction is deemed to be too high. As a result, the only way to achieve defensibility is through strong network effects. Assuming the traditional market tests as well as its potential network effects are deemed to be robust, there then comes the very unique problem of token economics and value accrual: will value created by the project accrue to the token? If there isn’t a token, where else is the value being captured and by whom?

Sectors to look out for:

• Crypto media, games, sandboxes, collectibles, and art
• Creator economy synergies as content becomes monetized in new ways
• Protocols supporting the above
• Marketplaces for trading virtual assets
• Key infrastructure such as Layer 2 solutions
• Major brands and IP holders incorporating these technologies

Large Companies & Brands

Whilst game companies might intuitively understand this evolving landscape best, large IP holders as well as businesses that have any content creation component can begin to engage with this technology. Already, we have seen companies such as Atari and Square Enix begin to take action. In the Atari instance, they have purchased sizable chunks of land in The Sandbox (a blockchain-based virtual world) on which they are developing 3D versions of classic games such as Asteroids, Pong, Rollercoaster Tycoon. Outside of crypto, we are already seeing companies adapt to new distribution mechanisms. For example, Gucci is selling clothes in Roblox, Fortnite is striking partnerships with IP like Star Wars, and Snapchat Bitmojis have seen collaboration with Ralph Lauren amongst others. Matthew Ball points out that gaming as an entertainment sector is unique in that each new format is almost always additive. Typical disruption models don’t always apply in gaming, it has a hugely varied landscape. What is so interesting about the employment of blockchain is that it has the ability to permeate all devices, platforms, and content types. As concepts like direct-to-avatar commerce come to the fore, it's important that companies remain attentive and familiarize themselves with the new crypto tools that will likely intersect these trends.

Importantly, these crypto-enabled content types don’t necessarily have to compete with others to succeed. Whilst we’ve noted that it tends to be additive, this is the first time that the new content type itself actually expands the investable universe and therefore increases the pool of capital available to that content domain. What’s more, the content itself has unique characteristics that might make it more desirable such as true ownership, demonstrable scarcity, and provenance as I’ve noted. For example, Muhammed Ali’s gloves from the Fraser fight are worth crazy money due to their historical significance. No such individuality currently exists for virtual goods. How might fans price the skin that Bugha used when won the Fortnite world championship? Or the avatar clothes that The Weekend used in his live Tik Tok concert? These are new drivers of value and as such will likely draw new types of demand.

Key benefits of building virtual goods and experience strategies include (not all unique to crypto):

• Infinitely scalable
• Zero marginal cost of production
• Not constrained by laws of physics
• Very low cost yet high speed of prototyping
• Community co-ownership strengthening loyalty and promoting evangelism
• Ability to generate ongoing revenue fees from secondary sale fees of virtual goods
• Ability to leverage user bases at an unprecedented scale through collaboration (maximized via interoperability!)

If you are a business contemplating your digital content strategy and want to embrace these new technologies, please reach out as our consulting division would love to chat.

Entrepreneurs

The new tools available mean now is an incredibly exciting time for entrepreneurs wanting to build digital products and experiences. Due to composability, participants in the ecosystem are able to pick and choose key infrastructure legos as they go building on the shoulders of all those that came before them. Crypto provides extremely fertile grounds for experimentation. The beauty of these technologies is that there are incredibly tight iteration cycles which compound permissionless innovation faster. Small scale experiments allow developers to harness real market environments and “test in prod” with real-time user feedback.

Those interested should look to familiarize themselves with:

• Bitcoin and Ethereum; Cryptoeconomics
• DAOs, DeFi, Non-fungible Tokens, Social Tokens, Cryptomedia
• New business models being unlocked by decentralized networks
• New governance models being unlocked by decentralized networks
• Intersections of crypto with emerging trends such as direct-to-avatar

If you are working on anything in this domain please also reach out to our venture arm which continually strives to back innovative and unique projects moving this space forwards.

For all of the above parties, our research division ensures our subscribers stay ahead of this emerging landscape.

Conclusion

Deeply-entrenched consumer behaviours are on the cusp of change as genuinely empowering alternatives emerge. The increased financialization of virtual worlds is upon as the technologies to connect thousands of isolated virtual economies are unleashed. Monitoring transitions such as brand-building within the Metaverse as well as the strategies existing brands adopt to tap into this universe of potential will bear fruit for those on the watch. Businesses, brands, and creatives cannot afford to sit on the sidelines as our digital future beckons. Understanding how to build and engage digital communities, as well as the tokens and networks that will likely bind them, will grant an advantage. Virtual goods are becoming an asset class in their own right, yet most still aren’t paying attention. Whilst I have touched upon a few emerging business models, it’s important to stress that we are still at the very beginning of an explosion of innovation and experimentation. Whatever vision we have of the future will likely not be what emerges. Let the combination of a good understanding of the new tools available, a willingness to truly explore them, and imagination be the primary guides. Don’t be afraid of creative improvisation where needed. Those quick to move will be rewarded accordingly. Being first isn’t to be feared, so long as the consequences of being wrong are managed. With every ironed kink, we inch closer to standardized, scalable processes that will drive the ecosystem as a whole into the mainstream. With trillions of dollars flowing through its economy and enabled by decentralized web 3 technologies, the Metaverse will put the user front and center; allowing every member of our species to tap into new lands of opportunity. A modern, digital renaissance is happening on the grandest stage we have ever seen that will span billions of connected minds. In the coming decades, a new era of virtual existence will be ushered in marking our next great milestone as a networked species. Look hard enough and it’s clear where we are heading: Into The Void.

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