This article was originally published by the Oliver Wyman Forum.
Technology has created an opportunity for a reset that could fix some of the well-known problems of today’s internet, such as the reliance on data mining and the concentration of economic power. A metaverse built on so-called Web3 design principles employs blockchain to integrate virtual worlds with new types of money and assets. This model promises more opportunities for creators and users alike and offers them a greater share of the benefits of these virtual worlds than today’s internet. Companies related to the metaverse raised over $10 billion in 2021.
Web3 is only one vision for the metaverse. Skeptics contend the model faces technical and regulatory challenges, and a metaverse based on centrally owned platforms like the ones that dominate today’s online gaming sector may thrive. But policymakers and executives need to understand the economics behind Web3 concepts like NFT trading and metaverse marketplaces in order to evaluate that vision. We seek to promote that understanding in a new paper, “Reckoning With the Metaverse: Understanding Web3 Marketplaces and Economics.”
The hallmark of Web3 relative to today’s Web2 architecture is its focus on decentralization to give users control over their data and identity. It is built on public blockchains and uses self-custodied wallets for transactions and identity verification. A variety of tokens serve as the foundation of Web3 economies. Assets like art works and property exist in the form of non-fungible tokens, or NFTs, while fungible tokens can serve as the currency for transactions (such as with Bitcoin and Ether) or can put the power to make changes to a platform in the hands of users rather than a centralized corporation (through governance tokens).
A Metaverse World or Worlds?
A key technical challenge for Web3 is interoperability. For NFTs, avatars, and digital currencies to move across metaverse worlds, the architecture must be interoperable at multiple levels, from graphics to back-end programming to blockchains and everything in between. Different styles of graphics for different games and worlds gives them character and appeal to users, but the complexity and variation of rules and graphical elements make it challenging to seamlessly connect virtual worlds. And if virtual goods are strictly connected to individual platforms, that may lower their value relative to a metaverse of interoperable platforms.
Immature intellectual property rights and enforcement also pose risks. Developers, executives, and policymakers will need to come together to agree on standards to address those legal and technical challenges. The industry also needs to forge agreement over codes of conduct to avoid fraud like wash trading, where users repeatedly buy their own NFT to inflate prices. Such frameworks may hold the key to consumer acceptance. In a recent Oliver Wyman Forum survey, 76% of respondents in 10 major countries said they were unwilling to pay money to participate in the metaverse.
New Commercial Possibilities
Finding solutions to these issues can create a world of opportunity. Giving users control over their data allows for choice in what is monetized and provides an avenue for users to receive some of the value of their data. Though it faces challenges, play-to-earn (P2E) gaming, for instance, allows users to earn cryptocurrency by playing certain games.
Creators will be able to mint NFTs on a blockchain, ranging from digital art to virtual homes and other objects, that users can purchase. Developers can make money through sales of tokens for their platform and NFTs like avatar clothing and land. Investors and institutions can treat metaverse property and currency as a new asset class. Governance tokens may appreciate, for example, if a metaverse platform grows in popularity.
NFT marketplaces distinguish themselves by the volume and diversity of projects they represent, as well as how they pay creators. An art project may choose to be listed on a certain exchange because of its underlying blockchain and other factors such as smart contract functionality, verification speed, and transaction cost. Marketplaces also distinguish themselves on how they pay creators, including offering different options for royalty fees.
As in the physical world, the value of NFT artwork tends to reflect perceived aesthetic value and rarity. What Web3 can add to the equation is an intangible sense of community. An NFT project can have brand strength that makes it easily recognizable and popular. Airdrops can reinforce that sense of community by giving away NFTs to people who share a social media post or who already own an NFT from the community. Some NFTs also provide additional benefits, such as membership in a club with in-person events. The community aspect is a big factor in gaming and social worlds, the two leading categories of metaverses.
Governance and Regulation
Some metaverses are run by private companies with centralized governance, as is the case with Meta’s Horizon Worlds and the Somnium Space platform. In other cases, metaverses are governed by a decentralized autonomous organization, or DAO, which employs blockchain technology to allow voting by users who own a particular token. Governance is particularly important for land policies as scarcity drives much of land’s value in virtual worlds.
Metaverse-native financial products are beginning to emerge, including metaverse mortgages based on an individual’s real world credit history, fiat loans using NFTs as collateral, and purely digital products, like in-world NFT loans for in-world currency. Legal uncertainties including jurisdiction and intellectual property rights pose significant risks, though. Hacks and cybersecurity issues also must be guarded against. One recent hack led to over $650 million in losses for a top P2E game.
There are countless open questions involving the economic risks of NFTs, consumer protection issues, and prudential issues for developers, creators, and users. The Web3 metaverse may suffer from some of the same issues as Web2 if governments don’t draft adequate regulations to protect consumers. Executives looking to get involved in Web3 will benefit from clear regulation and standards to build and prosper with innovative, interoperable business models that encourage investment. Policymakers and executives need to get to work to turn the metaverse’s value-building potential into reality.