The Value Chain of the Open Metaverse (Audio)

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Happy Monday! Today is an essay that I’m both excited and nervous about. 

Excited because some of the most fascinating work in tech is being done rebuilding the underlying structure of the internet and the economy, and I’ve wanted an excuse to dive in. We’re going deep on Web3, NFTs, and the Metaverse. It’s all more mind-blowing and more legit than I expected coming into this piece.

Nervous because, like APIs All the Way Down, I am airdropping into a couple of different worlds in which thousands of people smarter than me have spent years building, investing, and exploring. I’m trying to explain topics that are so much deeper than I could cover in even a year. 

In doing so, I am definitely going to get some things wrong, or explain in the most surface-y way something that hides tons of complexity, but I hope that in getting those things wrong, it will help people building and evangelizing Web3 to understand where the holes in the communication are. 

This is a risk - I’m fully ready and willing to get dunked on (read Building in DeFi Sucks). In fact, if you’re building in this space, I’d love for you to give feedback or poke holes publicly, like Lillian Li did when I wrote about Alibaba.

Here’s the tweet about this essay, do your thing: 

[INSERT LINK TO TWEET]

I’ve been a Metaverse bull for a while, and I’m now finally understanding the huge potential of decentralization. My goal today is to translate to a broader audience, and flesh out some of the business models and value chains underlying the future. 

Let’s get to it. 

The Value Chain of the Open Metaverse

This Metaverse is going to be far more pervasive and powerful than anything else. If one central company gains control of this, they will become more powerful than any government and be a god on Earth.

Tim Sweeney, CEO, Epic Games

Beeple’s Millions

Between December 11th and December 13th, an artist named Mike Winkelmann, who goes by Beeple, sold his works directly to collectors via online auction house Nifty Gateway. 

The welcome bidders received upon entering the site was the first sign that this wasn’t going to be like something Sotheby’s or Christie’s would put on: 

hahahah, ok so we're going balls deep on this motherfucker.

Then, there was the structure: 

* Three works were priced at $969 each and left open for five minutes. Anyone who wanted to purchase one or more, could. 

* One work priced at $1 each, and only 100 were made available. They sold out within seconds. 

* Twenty-one works were sold one at a time, normal auction rules, highest bidder wins. 

* At the end, the artist auctioned off “THE COMPLETE MF COLLECTION,” including all twenty-five works sold prior. 

Finally, and most notably, there was the art itself. Beeple’s Everydays collection was composed of digital art backed by non-fungible tokens (NFTs) used to prove the validity, ownership, and scarcity of digital items or experiences.  

Oh, and over the course of those three days, Beeple earned $3.5 million. 

Where Web3 Meets the Metaverse

Beeple’s auction is one of many wisps that have started to come together recently that have piqued my interest in Web3, NFTs, DeFi, and whether and how they’ll interact with the Metaverse. 

I have been excited about the potential of the Metaverse for a while. I’ve written about it here, and here, and here. I think that Web3, a decentralized evolution of the internet. might hold the key, and that NFTs are a bridge between Web3 and the virtual economy of the Metaverse. 

I know some of this sounds out there. I’m more bullish on the Metaverse and the blockchain conceptually than most non-crypto startup people. Relative to the more finance-y folks here, my views are downright techno-utopian. And yet, whenever I heard that the Metaverse would become a multi-trillion-dollar economy, or that Web3 is the new internet, Bitcoin will hit $100k, DeFi will obsolete fintech, and decentralization is our best bet in the battle against big scary corporations… I didn’t quite get it. 

The vocabulary around Web3, like that of many early movements, is very idealistic. It’s all about using technology to create trustless systems, wrest power from corporations, and give it back to the people. I think that vocabulary is why I haven’t taken it seriously as a real alternative to the status quo. 

But I have gone deep down the rabbit hole, and I think I get it now. I can see how the decentralized web might make the leap from passionate early adopters to the mainstream, that there are real economic advantages to a decentralized internet, and that Web3 architectures will play a crucial role in a robust Metaverse.

What has been missing for me is a clear use case, like NFTs, and an understanding of the business models and value chains underlying a lot of these concepts. Yes, there’s idealism, but there’s also a sense of building a new economy in which the value accrues to the people who create the value. That’s capitalism, baby. 

Today, I’m going to do my best to unpack it. Web3 and the Metaverse are two separate ideas that may or may not intersect. I think the future is much more exciting if they do. To understand why, we’ll start by understanding Web3, dive into NFTs, then move onto the Metaverse, and then look at what could happen when these ideas converge. 

* What is Web3 and Why is it Important?

* Non-Fungible Tokens and Digital Ownership.

* NFTs in the Wild.  

* The Size of the Metaverse Prize.

* The Open Versus Closed Metaverse.

* Crucible and The Direct-to Avatar Economy. 

* The Value Chain of the Open Metaverse. 

You’re going to be hearing a lot more about Web3 (including DeFi), NFTs, and the Metaverse, and if you dismiss it, you could be left behind. So join me down the rabbit hole. 

It’s going to get weird. Ready Reader One? 

What is Web3 and Why is it Important? 

I’m going to make a gross generalization about you based only on the knowledge that you read Not Boring: you’ve heard the terms Metaverse, Web3, and NFT, but you wouldn’t bet money on your ability to define them, and you don’t know how and where they intersect. That’s what we’re here for. 

To start to unpack it, we need to define Web3. It’s the foundational concept here. 

Web3 is a return to the vision of the early internet, with built-in superpowers. Decrypt, a media platform covering the decentralized web, kicks off its Web3 explainer with this description: “the next major iteration of the Internet, which promises to wrest control from the centralized corporations that today dominate the web.”

While that explanation might build fervor among early adopters and builders, it doesn’t do Web3 any favors with a wider audience. It says what Web3 is against, not what it’s for. 

The best way to describe the positive attributes of Web3 is to take a quick trip through internet history, with Tony Sheng and Chris Dixon as our guides. 

The early internet in the 1980s through the early 2000s, Web 1.0, was decentralized. It was built on top of a series of open protocols that anyone could build directly on top of, like HTTP for websites, SMTP for email, SMS for messaging, IRC for chat, and FTP for file transfer. The benefit was that these protocols were generally agreed upon and not subject to change; I could build a website on HTTP and if people had my website address, they could go directly to my site, not intermediated by anyone else. 

As Dixon said, “This meant that people or organizations could grow their internet presence knowing the rules of the game wouldn’t change later on.” It was a direct relationship between creator and consumer. There were some major challenges, though: 

* Stateless. Web 1.0 protocols were stateless, meaning that they didn’t capture state, or user data. “Capturing user data” has negative connotations today, but stateless protocols meant that website owners didn’t even know whether I’d visited a site before, and couldn’t tailor experiences accordingly. 

* Too Technical. You needed to be technical to build a presence on Web 1.0, which meant that regular people were left out. 

* Missing Protocols. Web 1.0 didn’t have standard protocols for many of the things that power the internet today: payments, search, apps, social media, commerce, credit, and more.

* Protocols Didn’t Make Money! Imagine developing HTTP, seeing trillions of dollars worth of value being built on top of it, and not being able to participate in the upside aside from some speaking fees, consulting gigs, and book sales. Oof. 

Web 2.0 (mid-2000s to present) emerged as entrepreneurs recognized the holes in Web 1.0 and built products to fill them in, and capture the value in the process. These companies didn’t just capture state, they aggregated it, building up huge troves of valuable user data. They made it so that anyone could participate and build a presence -- think about how easy it is to set up a Facebook page versus coding a website. They wrapped existing protocols in frictionless user interfaces and created de facto products where no protocols existed. Sheng describes the transition:

State aggregators became the dominant players of the internet and one surprising result of Internet 2.0 is that many of the original open protocols have been replaced by state aggregators. Internet 2.0 also showed us the power of networks. In the absence of open protocols, state aggregators acted as protocols for new areas. 

Web 2.0 is fucking awesome. I’m writing this newsletter to you because of Web 2.0. The probability of me figuring out how to write to all of you directly on top of SMTP is exactly 0.00%, and many of you found Not Boring through state aggregators like Twitter. 

But there are challenges, too. Twitter, for example, could decide to shut down my account whenever it wants to, and I can’t take any of my followers with me. It did so to the President of the United States (my take: there was no good solution, they chose the best among bad options). In a less charged example, Facebook famously allowed brands and publishers to build up audiences on a seemingly free platform, and then changed the rules, forcing them to pay to reach their own audiences. 

Dixon describes the transition as an S-curve. In the beginning, centralized platforms do anything they can to attract users, developers, and businesses in order to build up multi-sided network effects. 

Once they’ve built those network effects, though, and they know that users, developers, and businesses are locked in, they switch from “attract” to “extract.” The easiest way to grow revenue is to start charging businesses and developers to reach customers, and to serve customers ads or products based on the data they’ve accumulated. 

To be clear, I don’t think there’s anything inherently evil in this. I could leave Twitter if I felt that I was getting screwed, and indeed, many people deleted Facebook after the Cambridge Analytica scandal and after many incidents since then. 

It’s a market. The way the internet is currently architected allows for companies to capture value, and they do. 

Web3, then, isn’t as much an idealistic repudiation of Web 2.0 (although that’s a good marketing tool) as much as it is a natural evolution of the market made possible by new technology. 

Web3 is the next version of the internet, built on top of crypto-economic networks, like Bitcoin and Ethereum. According to Dixon, “Cryptonetworks combine the best features of the first two internet eras: community-governed, decentralized networks with capabilities that will eventually exceed those of the most advanced centralized services.” 

At the heart of Web3 is the idea of consensus protocols and standards with money baked in. I think about it like a series of open source APIs that anyone can use to build according to an agreed upon set of rules, that gain financial value over time which is shared with everyone who contributes to the API. 

Instead of building siloed products, Web3 is built for interoperability. This is a key concept, keep it in mind. Decentralized Finance (“DeFi”), which, as the name implies, is attempting to build a new financial system without central financial institutions, is one of the most promising layers being built on Web3. A common analogy for the way DeFi products are built is with “money legos.” In a 2019 post, Building with Money Legos, DeFi company Totle wrote:

There are roughly 200 projects listed on DeFi Prime alone, each with their own unique features and infrastructure. This means that if you picked any 3 out of the roughly 200 listed tools, you’d have 1,313,400 different combinations to choose from to build a new financial product.

That mirrors one of the benefits of APIs that I wrote about, namely:

There is also a competitive advantage to be gained from how you leverage APIs to build your company and product. 

Using a bunch of APIs that are really flexible, and figuring out good ways to connect them, leads to a combinatorial explosion of potential workflows. API-first companies turn software into like customizable building blocks.

There’s a reason for the similarity. Web3, too, uses APIs for software to talk to each other. 

The main differences between Web 2.0 and Web3 are Levels 0-2, and the implications of the architecture on where the value accrues within the system. 

While some people love the privacy that Web3 offers, or the fact that “the man” will no longer own your data, that gets it backwards in my opinion. It’s not about who doesn’t own your data, but who does: you. That’s what crypto folks call “Self-Sovereign Identity.” 

Despite the large sums of money made by the people who own Bitcoin, Ethereum, and other altcoins, I’ve always viewed the Web3 movement as anti-capitalist. That couldn’t be further from the truth. The movement is really about doing one of the most capitalist things there is: cutting out the middleman. It means that instead of value accruing to the Aggregators, there can be a more direct connection between suppliers and consumers. 

It’s not about taking money out of the system, it’s about moving the money around to the people who create and the people who consume, and to the people who maintain and improve the network itself. And it’s about attaching each user’s data and money directly to them (Self-Sovereign Identity), creating a public record that they own what they own (blockchain), and letting them take it with them, and profit from it, wherever they go on the web (Interoperability). 

Part of the magic is that money is built directly into Web3 protocols. Bitcoin and Ethereum, the two main protocols on which Web3 is built, both have mechanisms for rewarding contributors baked directly into the code. If the same were true for Web 1.0, Tim Berners-Lee would be worth a hell of a lot more than $10 million.

New, directly-exchangeable internet money unlocks entirely new business models. That’s what excites me most about Web3: the new business models it enables and the new value chains that emerge when the middleman is removed. 

New projects are being built on top of open protocols that hope to transform finance (DeFi), commerce (dCommerce), and each of the things that we currently do on Web 2.0. All plan to replace the middleman with algorithms and let users own their data. By supercharging the protocols themselves, they enable a peer-to-peer internet in line with the original vision of the web. 

The world is starting to take notice (or at least, Twitter is). According to audience intelligence platform Pulsar, “DeFi” was mentioned on social media 8.8 million times in the past year (up 571% YoY), and in August, passed mentions of “Blockchain” for the first time.

That’s a good sign - when the use cases start getting more buzz than the underlying technology. It means that reality is starting to catch up to the potential. 

Still! While all of this makes sense on paper, the interfaces are often still clunky and unapproachable to the non-technical. That’s why Coinbase, a centralized exchange, is still the most valuable crypto company. Cryptocurrencies are fun and valuable and I’m incredibly excited about DeFi’s potential, but I hadn’t seen a convincing killer app used by regular people until I discovered the resurgence of NFTs.  

Non-Fungible Tokens and Digital Ownership 

As origin stories for new economies go, NFTs’ takes the cake.

Three years before Beeple’s Everydays auction, in November 2017, a small Canadian venture studio called Axiom Zen set the blockchain on fire when they released a series of digital trading cards with pictures of cats on them. 

CryptoKitties were a relative flash in the pan that will have an enormous long standing impact. Besides being (arguably) cute, allowing for breeding (combining two CrytpoKitties to create new ones with unique characteristics tied to their parents), and spawning over $30 million worth of secondary market transactions for CryptoKitty breeds, their legacy is as the first digital asset to use the ERC721 asset standard for NFTs. 

Let me back up. Non-Fungible Tokens (NFTs) are cryptographic tokens that prove authenticity, ownership, and scarcity of digital assets. That is a massive unlock for the digital economy.

As more of our lives move online, the ability to own scarce digital items is only becoming more important, and the NFT-based digital asset market will increasingly mirror the luxury market. An authentic Birkin bag is able to fetch prices hundreds of times higher than the exact same bag in knock-off form because owning the real thing says something about the person who owns it. The same is true for digital items, fashion-related and otherwise. 

One of the beautiful things about the internet is that you can produce something once and distribute it infinite times. No more printing physical books or CDs; users can just download the eBook to their Kindle or stream the song via Spotify. 

Each copy of the book or song is fungible. I don’t care which digital version of Old Town Road I stream, I just want to hear the song. 

The same is true for money, which was created for its fungibility. Instead of worrying about how many shells to trade for how many bags of rice to get how many pounds of meat, people could just sell their shells for money, and then use that money to buy meat. $1 is $1 is $1. 

Although technically Bitcoin hashes are traceable and therefore unique, the value use case of Bitcoin is fungible. I don’t care which Bitcoin I get. They’re all the same. So too with tokens on the Ethereum blockchain that represent digital currencies. I don’t care which ETH, BAT, UNI, or SUSHI I have, just that I have the right amount. 

These tokens are all built based on the same standard, ERC20, that defines a bunch of important information like the total supply, how to transfer tokens, and how transactions are approved. ERC20 tokens can represent almost anything worth tracking with an Ethereum Smart Contract: money, reputation points on a Web3 social media platform, skills of a character in a video game, an ounce of gold. 

In November, Sari Azout and I wrote about Fairmint, which lets companies give equity to their stakeholders via a Continuous Agreement for Future Equity (CAFE). CAFEs are ERC20-compatible digital securities. 

What everything I just listed has in common is that they’re all fungible: I don’t care which share I own in the company or which reputation point I have. 

But if Web3 and digital worlds are going to replicate the physical world, and some of the best parts of Web 2.0, they need a way to prove ownership of unique and scarce digital assets. 

Currently, for example, I can buy a skin (or outfit) on Fortnite, and maybe it’s the only version of that skin that Epic sells. That’s non-fungible, but it’s mediated by Epic. They could decide that they’re going to make more of the same skin (which, incidentally, they did with a Skull Trooper skin that they had originally only given to early players), that they’re discontinuing that skin, and certainly, that you can’t take that skin with you to other virtual worlds, like World of Warcraft.

Any digital asset faces these same challenges: if it’s easily copyable, I have no way of proving that I have the real thing without an intermediary, and if it’s mediated by a third-party, it’s subject to change. 

NFTs solve that problem by leveraging the blockchain to prove ownership and authenticity of rare digital items. Built on the ERC721 standard, NFTs treat each item they represent as scarce, unique, and authentic. 

An NFT serves as a digital certificate of authenticity, backed by math, on a public ledger, that incontrovertibly proves that the holder owns a one-of-a-kind digital (and sometimes physical) asset.

NFTs have exploded in popularity since October. According to Pulsar, “NFT” was mentioned nearly 2 million times on social media in the past year, up 840% YoY, faster even than DeFi.

The surge was likely propelled by the rise in the price of Bitcoin and Ethereum, which turned thousands of crypto enthusiasts into millionaires, but it was also driven by Beeple. In late October, Beeple auctioned off an NFT that would change based on who won the US Presidential Election. If Biden won, the winner would own an NFT depicting people walking by a big, fat version of a passed out and donged Trump, on whom a Twitter bird lands and chirps a clown face. If Trump won, the NFT would transform into a muscular Trump walking through flames.

Anyone can view the digital works. All three states: Election, Biden Win, and Trump Win, are viewable in this thread. But just like a real work of art, the value is in owning the verifiably real thing, not a print. As a result, the winning bidder, The Museum of Crypto Art, paid $66,666.60.

Then, in December, NFT interest spiked again when Beeple auctioned off his Everyday collection for $3.5 million. 

All told, the value of NFTs increased massively at the end of 2020. When OpenSea released its Non-Fungible Token Bible in January 2020, average monthly NFT volume was $2-3 million. By December, dapp tracked $10.15 million worth of sales over the previous 30 days. It’s still a small market, but it’s growing fast, and the technology has huge implications. 

Three projects showcase the growing role, and potential, of NFTs: NBA TopShot, $WHALE, and DIGITALAX. 

NFTs In the Wild

There is a wave of new products and projects being built that leverage NFTs. When we wrote about Fairmint, for example, we highlighted Foundation, which bills itself as “Culture’s Stock Exchange” and allows people to buy and trade NFTs.

Today, I want to highlight three more, because each represents a step forward, on different fronts, for NFTs: 

* NBA Top Shot: Through an official partnership with the NBA, Top Shot combines sports cards and NFTs, bringing each to a wider audience. 

* $WHALE: The “first social currency backed by high-value assets.”

* DIGITALAX: Creating a Digital Fashion OS through an NFT-based supply chain.

NBA TopShot

After the overwhelming (literally) success of CryptoKitties, the Axiom Zen team: 

* Set up a company called Dapper Labs, 

* Raised $12 million from investors including Samsung, a16z, USV, and a roster of NBA players, 

* Launched a blockchain for Open Worlds called Flow, to avoid the congestion issues they had on Ethereum, and 

* Announced partnerships with the NBA, UFC, Samsung, Warner Music Group, and even Dr. Seuss. 

The team launched NBA Top Shot in partnership with the NBA. They sell packs of the best highlights in limited numbers, backed by NFTs, and then allow owners to trade the individual highlights from their pack. This Zion Williamson block, for example, is asking $39,000! 

(Ed. Note: I picked this example at random on Friday, and yesterday, it became the most expensive Top Shot of all-time when the #1/50 edition traded for $100k. NFT life comes at you fast.)

The most expensive sale yet happened just last week, when a LeBron James dunk sold for $71,455. That’s real money! (Again, keeping this to show the speed of this market.)

The main takeaways from NBA Top Shot transcend the highlight numbers. What’s most interesting to me is that it’s a prime example of an NFT-based platform partnering with a mainstream organization and bringing NFTs to the masses. To do that, they’ve abstracted away the crypto -- they don’t mention “NFTs” or “crypto” on the homepage -- and instead focus on what crypto allows them to do: offer limited edition, verified, digital assets to collectors. 

$WHALE

After some success in non-crypto ventures and early Bitcoin and Ethereum investments, the man known only as WhaleShark started buying up NFTs in gaming, art, and real estate in 2019. He spent over $1 million, and then in May 2020, decided to put all of his NFTs in a Vault and use it to collateralize a new social token, $WHALE. 

Unlike many crypto tokens, whose value is backed by math and belief, $WHALE is the first and most prominent example of a cryptocurrency backed by NFTs, whose price should appreciate based on the value of the NFTs in the Vault. WhaleShark continues to buy more NFTs and put them in the vault, and NFTs’ value is increasing more broadly, and as a result, that $1 million has turned into a token with a fully diluted market cap of $58 million, fractionally owned by the community via $WHALE tokens. 

You can check out WhaleShark’s Vault on OpenSea to see the full portfolio. 

DIGITALAX

DIGITALAX is creating a Digital Fashion Operating System by reimagining the supply chain in a digital world with NFT-based scarcity. 

DIGITALAX is based on a parent-child structure, in which the Parent NFT - the final piece - is composed of child NFTs representing all of the materials, patterns, and colors that go into the construction of the garment. The company created The DOF Sheet, a “Periodic Table of Digital Fashion Elements,” which assigns prices to an ever-expanding range of inputs. 

The Child NFTs are based on another, newer standard called ERC1155, used for semi-fungible tokens that represent a category of things without concern for exactly which one is used. For example, all of the turquoise patterns in the bottom right of the table would be backed by the same ERC1155 tokens. Some inputs, raw materials like diamonds and gold, are tied to, and fluctuate with, real-world prices. Others, like patterns, are algorithmically priced based on their complexity and usage. Taken together, all of the inputs add up to a base price for the piece of digital fashion, helping to solve a challenge in fairly pricing digital goods. 

NBA Top Shot, $WHALE, and DIGITALAX are just three of the many use cases being explored in the NFT space. They represent the beginning stages in making digital items behave more like physical ones. 

In another, more famous post, The next big thing will start out looking like a toy, Chris Dixon wrote: 

The reason big new things sneak by incumbents is that the next big thing always starts out being dismissed as a “toy.” Disruptive technologies are dismissed as toys because when they are first launched they “undershoot” user needs.

NFTs are in the toy stage today. CryptoKitties obviously started there, and TopShop, Beeple’s art, and other digital collectibles still feel toy-like. DIGITALAX feels more like a glimpse into NFTs as a business model, and yet more projects are on the way that combine DeFi and NFTs to build new business models and value chains. 

Importantly, NFTs don’t just prove authenticity and ownership. They also give interoperability and portability to rare digital assets, allowing their owners to take their NFT-backed digital items with them across the open web, to wherever will host them. 

That’s as good a bridge as any to jump into the Metaverse. 

The Size of the Metaverse Prize

Proponents of the Metaverse predict that it will be a multi-trillion-dollar digital economy that replaces the internet with shared virtual worlds. If the internet is 2D and siloed, the Metaverse is 3D and interoperable, like if video games and the physical world had a baby. 

In some ways, the seeds of the Metaverse are already here. We meet on Zoom, work in Teamflow, talk on Clubhouse, tweet on Twitter, shop on Amazon, and game in Fortnite. Today, though, all of these pieces are disconnected, like walking around a city and changing outfits and ID every time you enter a new building. Web3 and NFTs might hold the keys to stitching together the back-end of the Metaverse by building connective tissue and interoperability into the system.

Just as it was for Web3 and NFTs, 2020 was a coming out party for the front-end of the Metaverse, namely virtual worlds and video games. The natural evolution of virtual worlds mixed with COVID to create a cocktail of new use cases, increased interest, and higher valuations. 

Of course, there are the concerts. As someone writing about the Metaverse, I’m (smart) contractually obligated to mention a couple of events. First, in 2019, Marshmello held the first ever live concert in Fortnite. 10 million people attended. 

Then, in April 2020, Travis Scott kicked it up a notch and broke Marshmello’s record, when 27.7 million unique attendees viewed his five Astronomical concerts in Fortnite a total of 45 million times.

You knew about those two. But did you know that in July, Tomorrowland, the popular EDM festival, moved online due to COVID and sold over 1 million tickets at €20 per piece, bringing in over $20 million in revenue with a much lower cost structure (and less liability) than the in-person experience? Instead of hosting the festival inside one of the game worlds, Tomorrowland built its own interactive experience using Epic’s Unreal Engine. 

Since they built the capabilities and the world anyway, Tomorrowland launched a year-round virtual venue/world called Noaz. 

In November, Lil Nas X performed four shows over one weekend in Roblox that were viewed over 33 million times. 

As a result of the popularity of new, Metaverse-y use cases, and eye-popping usage and revenue stats, investors woke up to video games’ potential beyond just gaming. 

In September, Unity, the company behind one of the two main game engines, the Unity Engine, went public. We covered it in the S-1 Club, and as a group, were most excited by the fact that the Unity Engine, along with Epic’s Unreal Engine, may be the rails for the Metaverse’s virtual worlds. 

Investors were excited too. The company expected to price its shares between $34-42, ultimately priced at $52, and ended its first day of trading at $68, double its initial target. Since then, it more than doubled again, and now boasts a $41.7 billion market cap. 

Roblox, the gaming platform that lets users play, build, and monetize games, also planned to IPO in 2021. They delayed their IPO in December, not because they were worried about demand, but because they weren’t sure just how high they could price their shares! In early January, Altimeter and Dragoneer led a $520 million round that valued the company at $29.5 billion. Roblox is expected to go public via a direct listing in February, and I wouldn’t be surprised to see that valuation double if the market stays hot. 

Source: Crunchbase

Epic, probably the leading contender in the Metaverse race due to the popularity of Fortnite and the Unreal Engine’s position as the most robust engine for 3D experiences, hasn’t announced plans to go public. The company raised $1.8 billion at a $17.3 billion valuation in August, right before investor interest in the space really started heating up. At the time, the company was projected to do $5 billion in revenue with $1 billion in EBITDA for 2020. What would it fetch in the public markets today? $50 billion? $100 billion? 

While Epic, Unity, and Roblox all sport strong and growing usage and revenue numbers, those valuations imply that investors are starting to put a value on the call option that is the Metaverse. The stakes couldn’t be higher. Proto-Metaverse experiences are increasing in popularity and profitability by the day, and it looks increasingly likely that virtual worlds will indeed capture trillions of dollars in value. 

The question is: will they be interoperable and open, or closed and siloed? 

The Open Versus Closed Metaverse

Put another way, will the Metaverse look more like Web 2.0 or Web3? 

The central premise of Ready Player One, the Ernest Cline book-turned-movie, is the fight for ownership of the OASIS. The OASIS is the book’s version of the Metaverse, a virtual reality world built and owned by Gregarious Simulation Systems and its founder, James Halliday. When Halliday dies, he sets off an easter egg hunt, the winner of which will assume control of the OASIS.

The fact that any one person or company can control the OASIS (read: Metaverse) means that Ready Player One depicts a “closed” Metaverse, a virtual world controlled by one or a handful of companies. Which brings us back to that Tim Sweeney quote: 

A closed Metaverse is controlled by one or more large companies and lacks interoperability between platforms. Think of it like a 3D Web 2.0 with some new protocols. This is what happens if Facebook wins with Oculus and other Facebook Reality Labs projects, for example. If that happens, expect more of what happens today, on an unimaginable scale. 

Sweeney and many others hope it never comes to that. They’re advocates for an Open Metaverse. The Open Metaverse is one built from the connection and interoperability of a series of different platforms, worlds, sites, stores, experiences and more. It’s a Web3 version of the Metaverse, in which players could travel from Fortnite to Roblox to Oculus, bringing all of their data, skins, NFTs, and digital currency with them seamlessly.

In a July 2020 interview with GameMakers’ Joe Kim, Sweeney, who runs one of the few companies with a legitimate claim to being able to build a closed Metaverse, said, “I think the Metaverse as an open platform could ultimately be an order of magnitude larger than any one company, including Epic, built entirely on our own as our own proprietary piping.”

That doesn’t mean that large companies won’t exist or profit on the Metaverse. As Matthew Ball wrote in The Metaverse: 

Some believe the definition (and success) of a Metaverse requires it to be a heavily decentralized platform built mostly upon community-based standards and protocols (like the open web) and an “open source” Metaverse OS or platform (this doesn’t mean there won’t be dominant closed platforms in the Metaverse)... [But] it’s hard to imagine any of the major technology companies being “pushed out” by the Metaverse and/or lacking a major role.

That said, some FAAMG might support an Open Metaverse. Microsoft recently admitted it was on “the wrong side of history” with respect to Open Source at the turn of the century, and has been much more open to Open Source under Satya Nadella. They might be a dark horse candidate to provide corporate muscle to the Open Metaverse movement. And as Ball pointed out, Amazon just wants people to buy things and Apple just wants to make the devices (App Store scuffles aside). There might not be as much resistance to an Open Metaverse as it might seem.

Ball presciently wrote that piece in January 2020, before COVID, increased Metaverse chatter, and the surge of interest in DeFi, NFTs, or Web3 more broadly, and was more skeptical of the Open Metaverse then than I am now. He teased a sequel coming soon, and I’ll be curious to see whether he’s moved closer to the Open side. It seems as if that’s the way things have shifted over the past year. 

In its January 2021 post, Enter the Metaverse, Foundation (a Web3 company, so caveat emptor) takes the openness of the Metaverse for granted, defining it this way: 

I come out on the side of the Open Metaverse, one that looks more like Web3 than Web 2.0. The biggest thing for me is portability and interoperability of digital items and personal data. As NFTs have shown, there is a market for digital items whose value isn’t mediated by a central platform, and that users can showcase in whichever virtual space they choose to inhabit. In fact, a December 2020 study found that 63% of gamers would spend more on virtual goods with real-world value, which is what NFTs enable. 

As virtual experiences become more immersive and our identities are more closely tied to our online personas -- either because these experiences attract older users, or because younger users to whom they are native come of age and drive the economy -- the virtual economy will become more robust. The trend towards buying skins, digital real estate, and art will continue, morph, and expand, people will want to take what they own wherever they go within the virtual world, and the Direct-to-Avatar (D2A) economy will emerge. 

Crucible and The Direct-to-Avatar Economy

To us olds, and I’m including myself here, it seems crazy that people are willing to spend large sums of money on outfits for their video game avatars. In 2018, over $1 billion of Fortnite’s $2.4 billion in revenue came from the sale of skins (outfits) or emotes (dance moves). In 2019, League of Legends generated $1.5 billion in revenue from skins. Kids are asking their parents for Robux (Roblox credits) and V-Bucks (Fortnite credits) instead of cash or toys.

Currently, the value of skins and other virtual items is largely contained within each individual game. In 2019, Louis Vuitton began selling skins in League of Legends, but that skin can’t move with its owner to other games yet.

Crucible is trying to change that. Its co-founder & CEO, Ryan Gill, told me that he thinks the watershed moment for the Metaverse will occur when there's an event that takes place simultaneously across multiple AAA platforms, where players can walk from one to the other as the same avatar, wearing the same skin. Imagine buying an NFT skin from Prada, wearing it to a concert in Fortnite, and then popping into a different version of the same concert in Roblox maintaining the same identity. 

Already, smaller developers are making this possible. Last week, Cryptovoxels, Somnium Space, and Decentraland announced that they’re working to let users portal between worlds. 

For the Open Metaverse to thrive, that’s what Crucible is working to make possible more broadly. It’s building the Emergence SDK, a “drop-in asset for popular game engines and web frameworks that provides easy, familiar access to Web3's Digital Trust Layer,” compatible with both the Unreal and Unity engines.  

Crucible hopes to be the Web3 “interface moment” for the Open Metaverse. Just as Web 1.0 had AOL, the Emergence SDK will make it easy for anyone to interact with the Open Metaverse, smoothing over its rough and complex edges while keeping the benefits intact. 

Crucible is developing a D2A market network with three core stakeholders: developers, gamers, and brands. That’s really fucking hard. It means needing to get buy-in from all three groups in order to succeed. If it can pull off the challenge, though, the potential is enormous.  

For Developers. When a developer uses the Emergence SDK, they’ll be able to plug in Web3 capabilities without worrying about the complexity of building Web3 technology. That allows them to verify identity, reduce friction, and offer more digital items for sale in-game as the industry moves increasingly more toward user-generated models.

For Brands and Creators. Instead of partnering with each game or virtual world separately - which is less scaleable for both parties - brands and creators can sell skins, NFTs, and other digital assets directly through Crucible’s market network. That theoretically allows them to reach a larger audience of people willing to pay more because of the portability of the asset. If I can wear my Prada outfit to a Fortnite concert and a Beeple auction, it’s worth more to me. 

For Players. It starts with identity. Crucible currently works with Sovrin and Evernym’s Verity to power a self-sovereign identity. That means that players can log in using their Crucible agent once, verify their real-world identity, and then create any number of personas or anonymous avatars that are tied back to their core identity, each of which can be used across any game or virtual world that uses the Emergence SDK. Players can also tie their skins, NFTs, and other digital items to their core identity in their Crucible agent, and take it all with them into any virtual space - along with their friends, data, and entire digital lives.

If the Metaverse looks more similar to Web3 than Web 2.0, a player’s Crucible agent will hold their digital identities and everything that they own in the virtual world, which means that the Metaverse begins to look more like the real world. It would be crazy if one store let me wear a t-shirt that I own, but the one next to it told me I needed to put on a different one to come in. That’s how virtual worlds operate today, and it’s the problem Crucible is working on. 

If it’s successful, it will help to power a Direct-to-Avatar Economy. “Just as Direct-to-Consumer dematerialized the supply chain by 40% and enabled new business models to flourish,” Gill says, “Direct-to-Avatar will, dematerialize the rest of the supply chain, allowing brands and creators to sell direct to Avatar.” He expects D2A to reach at least $1 trillion in the next decade. The wisps are there. 

The top free-to-play games, like Fortnite and League of Legends, already sell billions of dollars worth of skins. And now, it’s expanding beyond gaming to what Gill calls “designer skins”. 

A designer might sell a one-of-a-kind NFT dress on DIGITALAX and sell it through a Nifty Gateway auction to someone who stores it in their Crucible agent and can wear it in any virtual world they choose. 

Or a basketball fan might watch a Sixers game in NBA World, buy a Ben Simmons 3-pointer highlight via Top Shot, and take it with him to show off in his own Ben Simmons museum in Minecraft. 

That creates a whole new value chain, one in which much of the supply chain drops off, demand increases, and value accrues to the creator and the owner. 

The Value Chain of the Open Metaverse

Trying to describe the value chain of the Metaverse is kind of like trying to describe the value chain of the … world … today, without the benefit of knowing exactly how or when the Metaverse will manifest. 

But looking at this one example - Direct-to-Avatar, built on Web3 tech - gives a glimpse at how radically the value chain might change in an Open Metaverse. 

As a quick refresher, Michael Porter’s Value Chain insight is that:

“Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product."

In Shopify and The Hard Thing About Easy Things, I broke down the Direct-to-Consumer value chain this way: 

In Netflix and the Conservation of Attractive Profits, Ben Thompson wrote: 

Breaking up a formerly integrated system — commoditizing and modularizing it — destroys incumbent value while simultaneously allowing a new entrant to integrate a different part of the value chain and thus capture new value.

So knowing that, what happens to the DTC value chain in a world of Direct-to-Avatar? I think it looks something like this: 

By dematerializing the supply chain and selling directly to the end user, as represented by the Avatar, the D2A value chain removes entire steps - manufacturing, logistics, and support - and integrates R&D, Retail, and Marketing: 

* R&D becomes production, as renderings and previsualizations, potentially using materials and prices from DIGITALAX’s DOF Sheet, merge with the final product. 

* Retail. In the place of Shopify stores, designers might host their own fashion shows or auctions in virtual worlds built with the Unreal Engine. 

* Marketing. Limited edition drops, the word of which spreads through Discord servers, might replace marketing through traditional digital channels like Facebook and Google.

In this value chain, the profits don’t accrue to the aggregators, like they do in DTC. There’s no “40% of all VC money goes to Google and Facebook” here if it works. The creators will earn the profits, as will the owners of scarce digital assets, the value of which may increase over time, supported by robust, decentralized exchanges. 

Even more compelling, new Web3 and Metaverse value chains leave room for more individuals to own that sweet, sweet “earn money while you sleep” revenue. In Alex Danco’s excellent recent piece, The Michael Scott Theory of Social Class, he writes that: 

Losers [meaning people who lose the economic game, not being mean] are the people who are set in roles or stations in life where the output of their effort is wholly realized by someone else. As they learn throughout their careers, their skill or engagement might lead to incremental career progress, but no real leverage of any kind.

Breaking out of the “Loser” band by making your creations and money work for you, even while you sleep is the promise of the Creator Economy, Web3, and an Open Metaverse. Already, Roblox paid out an estimated $250 million to mostly young-adult developers in 2020. Web3 and an Open Metaverse make that dream possible for even more people. 

It’s possible to imagine a world in which a whole economy of creators make patterns and new materials for DIGITALAX’s digital fashion, and get paid every time a new skin using their work is sold. Or that by truly owning their own data, people can get paid to view ads, to submit their data to medical studies, and more. One of the features of Web3 companies is that there are often mechanisms to turn users into owners; people may be able to generate real wealth just by using products they’re excited about. 

If done correctly, the Metaverse becomes more than the escape from a bleak reality that it is in Ready Player One, but a new way to earn a middle class income while pursuing your passions with ever-growing and more profitable niches of your people, around the globe. 

This is not the reality today. Web3 is very early and many don’t believe it will deliver on its promise. The interfaces of decentralized apps are still hard to decipher for most people, myself included. As I was writing this, as if by magic, venture capitalist Jill Carlson tweeted this:

The list goes on. The Metaverse is only here in wisps. There’s a big difference between Beeple making $3.5 million and the millions of digital artists who barely make anything. And the Metaverse, if it does come to fruition, still may be controlled by Zuck. 

The reasons the future described here may never become reality are endless. That said, I hope you leave this piece with an understanding of what might be possible, an appreciation for the fact that this movement is every bit as capitalist as it is idealistic, and a desire to keep learning, and hopefully, start creating.

Thanks to Ryan for input and feedback, and to Dan and Puja for editing! And thank you to Pulsar Platform, the Official Audience Intelligence Platform of Not Boring, for the buzz data.

I’ll be back on Thursday with some more. Enjoy the week until then!

Thanks for reading,

Packy

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