Sector primer: Metaverse
This article is part of our sector indices primers. Find out more about this series here and get the full report here.
Definition The metaverse is a 3D virtual world that can provide entertainment, training and experiences that enrich or could even enable otherwise impossible physical experiences. It can also serve as an alternative to in-person interactions in the same way a phone call, conference call or video conference does, or even in the same way that internet shopping provides an alternative to in-person shopping.
The decentralised metaverse is the crypto industry’s answer to centralised entities building metaverse offerings. The decentralised metaverse is designed to be user-governed and interconnected.
History The science-fiction writer Neal Stephenson coined the term “metaverse” in a 1992 novel. As the fictional concept is becoming realised by both centralised and decentralised metaverse projects, Neal Stephenson backs the decentralised version as a co-founder of a blockchain protocol called Lamina1, which is optimised for decentralised metaverse applications and offers metaverse-as-a-service software kits.
Interest in the metaverse concept received a significant boost with the 2011 novel Ready Player One. The Steven Spielberg movie adaptation in 2018 made the idea more vivid and led to widespread interest.
An important enabler for metaverse projects was the concept of non-fungible tokens (NFTs), which were first introduced in 2012. These tokens represent unique items and allow users to own interoperable digital goods in the metaverse, including titles to virtual real estate and domain names, or personal identifiers, such as avatars and status items that enhance an avatar. Work on the first decentralised metaverse project, Decentraland, started in 2015 with a 2D version called Stone Age.
In 2016, Decentraland developed its 3D form, and in 2017, it held both its initial coin offering and its first virtual land sale.
The user-generated content game The Sandbox brought its IP to the blockchain ecosystem in 2018, building a decentralised metaverse. As blockchain-based gaming projects like Axie Infinity got started, many chose a metaverse setting for their games.
The rise of the gaming sector since 2020 fuelled growth in decentralised metaverse projects as well. But it was not until Facebook rebranded to “Meta” in October 2021, with plans to invest USD 10 billion a year to build their centralised metaverse, that interest in the decentralised metaverse sector really accelerated. Companies started opening offices in the metaverse, and concerts, festivals, art exhibitions and fashion shows have taken place. Major brands, such as Nike, have been designing virtual versions of their products and started opening shops in the metaverse to sell them.
Games based in the metaverse form the largest subsector, with leading examples mentioned above, as entertainment is the primary use case of the metaverse for now.
Projects like CEEK VR connect music, movies, sports and other content creators with fans in the virtual world and provide virtual show experiences.
Other decentralised projects building a world with virtual land, buildings, shops and concert halls, seek to incentivise a global network of users to operate a shared virtual world.
Reimagining retail in the metaverse is another growing area, with projects like Highstreet Market.
Developing digital identities for the metaverse and managing the challenges of verifying authenticity and preserving privacy is another important area.
We are also seeing the beginning of education and training-related uses of the metaverse, as well as immersive experiences, such as virtual travel, collaboration and communication or design.
Metaverse projects primarily serve the users who enter the virtual worlds represented by their digital identity avatars and embrace the growing range of experiences and activities that the metaverse offers. Metaverse users can also become content creators.
Artists performing or interacting with their fans is another set of users, as are shops and brands creating virtual products.
Companies can use the metaverse to open virtual offices and interact with customers.
Organisations may also choose to perform certain functions in the metaverse, such as design work or training and education.
Opportunities and challenges
Although celebrities, brands and corporations are increasingly interacting with the metaverse, it is mostly still a concept at this stage. As augmented and virtual reality technologies improve, the potential impact on the way we conduct business, learn, perform certain activities and tasks and interact with others is likely to be transformational, with tremendous opportunities along the way.
A challenge is that further technological advances are required before the metaverse can provide experiences that improve on the physical world, and users who engage with it early on may be put off by the quality of the experience.
Meta’s (Facebook’s) failure to attract users remotely close to the numbers they expected, the steady decline in their active users and the fact that the majority did not return after their first month on the platform highlight that, at this stage, the experience is not captivating or sufficiently interesting and useful – although the problems are in part specific to Meta and their approach.
The current close association with gaming and the gamified nature of the visuals is also limiting – a meaningful portion of the adult audience finds that off-putting.
As the technology improves, a lot of these obstacles will diminish, and the long-term prospects for early investors are very promising. However, even when the quality of the experience and the breadth of the offering reaches its potential, there will be objections to substitute experiences that are meant to replace real-world interactions. This will apply to some of what metaverse may develop into, while in other areas the benefits will be clear and unequivocal.
As the metaverse finds favour with users, scalability and bandwidth quickly become a challenge for decentralised projects. Layer-1 and Layer-2 blockchain protocols are innovating hard to offer the underlying platforms that can support the demands of metaverse applications.
While some centralised entities like Meta are able to invest very large sums into developing their metaverse, the decentralised metaverse holds strong appeal due to its privacy-preserving, censorship-resistant nature. When combined with blockchain infrastructure, the metaverse affords users the potential to assume greater ownership rights over their own data, giving them more control over the information that they share with others.
The single most significant value driver for the metaverse sector is technological innovation that improves the quality of the metaverse experience. An early indicator of this innovation is the level of venture investment in the space and new project launches.
Innovation will also identify and develop new use cases, and many of these will point to great opportunities.
Improvements in the blockchain protocol layer’s scalability, transaction speed and cost are also opening up the opportunity set for the decentralised metaverse, including Layer-1 or Layer-2 protocols that specialise in the needs of metaverse applications.
It is also important to monitor how users respond to centralised versus decentralised metaverse offerings.
This article is part of our sector indices primers. Read our previous sector primer on Blockchain-based Gaming here.
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