Meta vs. the World
How the Metaverse will embrace large companies and remain open
Hi friends 👋,
The glamour of NFT.NYC has ended, but in its place rises another epic Web3 conference: Solana’s Breakpoint event. Did you know there was also an Ethereum conference in Lisbon three weeks ago? I don’t know if this is coincidence but Lisbon must be doing something right. Bullish on Portugal.
In other news, you may have noticed that last week saw more talking heads discussing the ‘Metaverse’ than likely ever before in human history. Despite it being less than two weeks since Facebook’s momentous rebrand, it somehow feels as though the Web3 media cycle has moved on. I’ve learned that the echo of yesterday’s news doesn’t last long on Crypto Twitter. Likely people are too busy tinkering, building, and searching for alpha.
In personal news you may notice a potential drop in word count over the next few issues. This is mainly because I injured my shoulder surfing on Saturday and currently have one arm in a sling 🤙 . For the next few weeks I’ll have 0.5x my normal type speed, or as I prefer to think of it, 2x more time to think about each sentence 😉. I’m lucky to feel so motivated to write this content, and a huge part of it comes from those of you who have reached out to share your thoughts! I hope this content can continue to stretch your mind and give you a window into the wild world of Web3.
It seems each week I vow the next article will NOT be Web3 related - if only it could stop being so damn interesting! I AM working on building my content consumption habits into new areas like quantum computing and genetics/longevity research so those are likely candidates for future articles.
But… no promises.
Let’s get to it 🚀
P.S. If you’re looking for an in depth look at the Metaverse value chain, there is no better place to start than Matthew Ball’s Metaverse Primer.
Meta vs. the World
Last week a majority of the western world had to mentally grapple with the term ‘Metaverse’, forcing many to revisit a dusty corner of their brain smelling faintly of Mountain Dew and Isaac Asimov. It all started when the company formerly known as Facebook boldly rebranded to ‘Meta’, prompting the leaders of all major tech companies to assure investors that they too have a metaverse strategy.
I’d wager that several months ago, 99% of the world was wildly unprepared to have the Metaverse mic-dropped by the Zuck at a company keynote. But much has changed over the last few months as NFTs have managed to front-load the mental processing needed to prepare oneself for ‘the talk’.
Seeing their opportunity, Facebook, or rather, Meta, became the first major tech company to tee up the Metaverse concept for the public. After watching their keynote and its resulting interviews, I have to say it was incredibly well done. They managed to simply explain key concepts, like interoperability, while sharing an easily digestible roadmap for upcoming products and experiences that will plug people into what you might consider the ‘early Metaverse’. Shortly after Meta’s keynote, Microsoft announced their own intentions to onboard 250M Teams users into collaborative ‘Metaverse’ of virtual work spaces, with the promise that Excel and PowerPoint integrations would follow shortly.
Both announcements have left little room for interpretation: the Metaverse will be the next major compute platform. Tech companies are practically knocking down the virtual doors to get in on the action. So what seems to be the problem? Well, once you leave the polished path of corporate PR... lets just say people become slightly more skeptical of the journey ahead.
Bloomberg @businessMicrosoft’s take on the Metaverse is coming next year and will have PowerPoint and Excel https://t.co/Sc2QRP0GMW
It took mere seconds for Crypto Twitter to unleash their collective groan after Meta’s distasteful claim on what many consider a term owned by the public. After all, if you identified as someone building out the internet’s next great platform, you’d feel slightly trampled on as well. But of course, we all know the internet has developed excellent coping mechanisms for moments like this: while some feel downtrodden, others choose to meme.
Meta’s announcement has left us with difficult, unanswerable questions about the future of the internet, some of them critical to determining how power, wealth and control will be distributed for generations to come.
In our recent Web3 Explained series, we defined the next generation of the internet (Web3) as a fundamentally open platform, owned by users and builders instead of companies. But for the open web to win, it’ll need to go head to head against today’s modern giants. And victory is hard to imagine with Facebook alone committed to spending $10 billion dollars per year on Metaverse technology.
I think this dilemma is best summarized with the following proposition: a future open web is only guaranteed if the Web3 model proves to be impervious to centralization (if you want a contextual explanation of why we should move away from centralization, please click here).
My take: I believe the forces of the open web are too powerful for companies to pursue a ‘closed web’ strategy. I think the character of the existing open web, small and premature as it is, makes it economically unwise for companies to go against the grain. There are two reasons I think the dynamics are right for an open metaverse:
Protocol competitiveness: Protocols exert immense competition on facilitator-style business models. Closed business models will find it difficult to compete in areas where protocols can create markets.
Consumer reach and the multiplicity of value: Reaching more consumers increases the value of a market’s assets. This will motivate adoption of open protocols and greater interoperability on the web.
I also feel that in light of the recent Meta announcement, we should define reasonable bounds on which layers of the metaverse value chain will remain open. Certainly an open web doesn’t mean an entire ‘open economy’. There are limits to the influence of these forces, and there will remain opportunities in both hardware and software that are ripe for proprietary, even monopolistic, success. Using Meta as a case study, we’ll also discuss how value will be distributed in an open Metaverse.
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We know that in Web3, value transfer is dictated by protocols. A protocol gives us a standard way to perform some data operation, like a transfer of funds between accounts (e.g. Bitcoin), or reserving an amount of storage and compute power on a distributed network (e.g. Ethereum). In fact, when we say ‘value transfer’, we really are abstracting the idea that protocols alter data in a way that reflects a new allocation of resources within a network. These resources often have implicit or explicit value in the real world, and so this change of data is reflective of a new state of value distribution.
The core idea here is that protocols typically facilitate an exchange of resources and thus are a type of market-maker. This is one of the most popular business models in software. In a sense, all markets are created by a facilitator that brings togethers suppliers and consumers. Uber act as a facilitator in a market of car-owners looking for part-time employment (suppliers) and people/goods in need of no-frills transportation (consumers). Being a facilitator in the right market can be a very good business. The best facilitators own a large segment of their market, grow as cheaply as possible, and earn revenue based on a fee taken from both suppliers and consumers. This is what makes app-based services like Uber, Etsy, and AirBnB great businesses.
But as we’ve learned, protocols are also great facilitators. Arweave, a Web3 network that offers permanent data storage, is incredibly efficient at providing consumers a place to store certain types of data forever - like storing a permanent copy of the artwork/photograph attached to an NFT. In fact, protocols are one of the best types of facilitators for both consumers and creators because they are minimally extractive. Chris Burniske writes that protocols are incentivized to extract the least value possible from the transactions they facilitate, while still keeping their market viable.
This pressure comes from two places: (1) protocols are easily copied and (2) protocols have low switching costs for marketplace participants.
Whereas a typical SaaS marketplaces remains entrenched because they’ve built a feature-rich marketplace on top of thousands of lines of code, protocols are painfully simple. Often they consist of a few hundred lines of code that coordinate the transaction. For this reason, any protocol taking unnecessarily high fees assumes the risk that a new protocol willing to accept lower fees will emerge. The chance of this is even greater when you consider that many protocols operate on open source code.
The structure of operating as a permissionless network means that your suppliers and consumers can move to this competing protocol with relative ease (Ctrl+F: Principle of Fluidity). It also means the least extractive protocols will capture a large segment of the available market, as participants quickly become aware of the protocol with the friendliest fee structure. So the terminal state of a protocol is to adopt a fee structure near the line of marketplace viability, and facilitate transactions for a global network of suppliers and consumers.
This is in stark contrast to businesses, which aim to maximize the value they can extract while still keeping the market viable. Consider the infamous 30% take rate of Apple’s App Store. No doubt there are suppliers (i.e. app creators) that simply can’t remain profitable with this fee structure. To Apple, this is acceptable opportunity cost. But a consequence is that many consumers are unaware of the low prices they could be receiving if suppliers didn’t have to upcharge simply to keep the lights on.
But we should not paint such a sinister picture. Businesses themselves have no choice but to play an extractive game, as they must continue to pay the employees and distribution partners that keep the marketplace running. Apple has dedicated teams for validating an app’s code and providing support to apps planning to launch.
Protocols, on the other hand, are minimally extractive as they simply exist as a system of logic (i.e. code) stored on an open network. They serve the function of putting suppliers and consumers in touch in an open and permissionless way.
What’s important about protocols being minimally extractive is that this competitive pressure will translate to any market that can be facilitated by a protocol. Put otherwise, in the long run, all protocol-addressable markets will need to compete with protocols on fees.
Imagine that Meta has a choice to either create a closed marketplace OR compete with the Internet to create the best open protocol for facilitate a set of transactions. If they create a closed marketplace, Meta will need to offer a better fee structure than some open protocol willing to connect suppliers and consumers at a very low cost. And if Meta is trying to compete on cost, they are better off being the lowest cost open protocol so they can gain access to the global market of suppliers and consumers.
But assume Meta doesn’t compete on cost, but on experience. Perhaps by offering proprietary features alongside market facilitation. By doing this, they would attempt to take a segment of the market willing to accept high fees in the name of a better service.
However, I’d argue this again leads them to relying on open networks. To understand this, we’ll have to explore our second power keeping the web open.
Consumer reach and the multiplicity of value
In a world of open protocols, both consumers and suppliers have immense choice of where to take their business. Whereas consumers will go to markets that can meet their specific needs, a supplier will go to a market that highly values their products.
From what we’ve seen so far, Web3’s open networks are far more lucrative marketplaces for the creator class. One reason for this is that open state network and their protocols provide distribution for all assets on the network (Ctrl+F: Law of Implicit Distribution). Any NFT can be bid on by any network user, and so creators have a drastically increased addressable market for their work.
This is especially the case for illiquid/low-supply markets like 1/1 NFTs and digital art, which tend to be given higher valuations because they are now able find their highest possible bidder.
By comparison, imagine owning a digital asset on a closed network. This would not only limit potential buyers but also potential observers. Such a thing would be detrimental to the pricing of a digital asset, which most of the time is priced as a store of perceived cultural value. Whether or not storing cultural value is sustainable is an entirely separate question (but it certainly seems to be working for certain pieces of traditional art).
This leads to an interesting rule of thumb: digital assets increase in value with their number of observers. I say ‘observers’ and not ‘buyers’ because observation is typically a prerequisite to purchasing behaviour. This is especially the case when determining the value of subjective, cultural goods. Just for fun, here’s a silly counterexample that shows observers don’t even need to see the art itself for this cultural-price-determination to take place:
Imagine if there was a piece of digital art that could only be seen by its current or past owners. This asset would have a very small set of actual observers, but a huge set of possible observers (anyone can ‘buy it’ to become an observer). It’s not hard to imagine that a socialized curiosity for this asset would turn into an obsession, pushing its price up as more people consider ‘buying in’ to release the cultural tension surrounding this mysterious JPEG. Clearly, such an asset can still find its highest possible bidder even with a small set of true observers. It might even accrue additional cultural value beyond that of the underlying art itself because of its ‘observer-scarcity’. (P.S. if you want to build this, DM me).
This example hints that there are many ways observership can be constrained while still increasing value. So let it be known: digital assets increase in value with the size of their audience.
Taking it back to our Meta example, we stated that one way for Meta to compete with open networks is to offer a better proprietary experience on a closed network. Imagine if Meta created limited edition avatars or VR-spaces that are restricted to operating on the Oculus platform. Well, if limiting market participants has the effect of reducing the price of assets, Meta would be decapitating their own profit opportunity. A closed marketplace would offer anemic value to sellers and thus drive away suppliers and creators. So Meta’s better option is to maximize the price of all on their assets by building on top of an open network, and instead find ways to take a fee on asset creation and ownership.
We’ll soon see that their keynote indicates this to be their exact strategy. Meta knows they are rationally boxed in to building on top of open networks, so they are finding clever and value-additive ways to participate in the Metaverse economy.
Value distribution in the open metaverse
It should be stated that when we discuss the benefits of Web3, we are often speaking from the context of a network-effects based application or businesses. Don’t get me wrong, network-effects comprise a massive class of problems, including peer-to-peer transactions and the composability of intellectual property; but network-effects are not everything. This line of thinking is important because it extinguishes the assumption that everything in the Metaverse will follow Web3’s open model.
Every framework starts and stops somewhere. For instance, the competitive pressures of open protocols won’t have much effect on Metaverse layers like consumer hardware or graphic design tools. But open protocols will affect how and where we store our data, acting as a snapshot of value distribution.
Similarly, our rule on the multiplicity of value will make it more likely that all tools are interoperable, but it gives no guarantee on how extractively they will be priced. So how can we begin to determine where value will be created in the metaverse?
“When the economy goes through a paradigm shift, the embodiment of capital changes—18th century capital: farm land, 19th century capital: factories, machines, gov bonds, 20th century capital: urban real estate, stocks.
During such a shift, the rich from the old paradigm lose out b/c the asset classes which their wealth is denominated in either get destroyed or plummet in value.”
Tascha explains that a change capital embodiment is the primary mechanism that reshuffles wealth in society. But within her analogy, we can find an important throughline that can be used speculate on the next phase.
We can see that our capital embodiment trends towards greater and greater abstraction. In the beginning it was about what you could own (i.e. land, resources), then it was about what you could do with what you owned (i.e. factories, machines). Today, the most valuable things to ‘own’ are representational: stocks, bonds, ideas, software. I believe the Metaverse adds another, perhaps final, layer to the capital embodiment framework, in that it financializes our greatest abstraction of all: CULTURE.
There is no doubt that culture can be embodied through ownership of digital assets: 3D art, music, digital experiences, NFT profile pictures. Given what evidence we have today, these assets look like they will become our most valuable layer of the economy. Already, the networks that settlement the transactions of these assets are cumulatively worth trillions of dollars (Bitcoin, Ethereum, Solana, etc.). NFT Sales volumes are already shockingly high and growing jaw-droppingly fast.
Now whether or not these trends continue, I think we’ve seen a powerful proof of concept for the capital embodiment of culture. The Metaverse is likely to launch us into further untold layers of asset-complexity, storing more and more of society’s value into objects that correspond to personal identity and social clout.
This will dramatically change how Metaverse businesses approach value capture. The proof is in the pudding, as we can already see this taking form in Meta’s keynote. In their presentation, they debuted the following technologies:
A software solution for tracking hand-gestures
AI models that create photo-real textures for digital assets
A marketplace for virtual skins and personal collectibles
A digital home where you can invite friends to hang out and show off what you ‘own’
These are all supplementary tools that aim to enhance the digital experience and increase the potential value of digital goods. This tells us a lot about how Meta thinks of their business strategy. All-in-all, it appears to be incredibly net-positive.
Perhaps Meta could offer the best proprietary gallery experience, and take a fee off any ‘attention rewards’ earned by displayed pieces? Or Meta could make proprietary solutions earlier in the life cycle of a digital asset by releasing tools for creators with a licensed fee model. If Meta can digital asset creation easier and more accessible, they deserve a piece of the pie. It’s likely that in the future you’ll be able to create your own digital avatars in a proprietary ‘NFT studio’, and all the company will ask is a modest fee on your secondary sales.
Importantly, this will be built in the open. Meaning that you can choose to use proprietary tools that ask fees, or open source options that allow you to retain more of the value. Unsurprisingly, this is how business models in the game engine industry play out. According to an interview with Tim Sweeney, CEO/Founder of Epic Games:
“If you want an engine, you can choose Unity, with one business model. It’s based on a per seat license cost. Or you can choose Epic, which is free to use but carries a royalty on profit or you can use like the Godot Engine, which is free and open source. And you can use it for anything you want, not pay a penny, and you can contribute your changes back to the community. So you have great, great competition in the engine sphere”
Consider that NFTs and their fee structures today are fairly simple. Fees get split between creators and marketplaces. In the future we’ll likely see NFTs with embedded license fees based on the tools used to create them.
It appears that Metaverse companies have more to gain by playing by the rules of open networks than by working against them. But then again, should we be surprised? This is exactly what Web3 does best: create incentives for participants to work towards communal gain. Radical collectivism is the ultimate jiu-jitsu move of Web3.
Here at Future Proof, we are optimistic to a fault. There’s no doubt the road to this vision of a Metaverse will have its fair share of ups and downs, but I think we are on a path of an unprecedented era of creator-empowerment and value creation. Companies and their massive resources will find ways to work with creators and consumers to produce the best content the Metaverse has ever seen.
What a beautiful and exciting world to live in.
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With gratitude, ✌️