The Metaverse: A Breakdown of The Current Landscape
An explanation of Play-to-Earn, digital ownership and the 'open' metaverse
Hi readers, welcome to Part 4 of my deep dive into the metaverse and the world of virtual real estate. Feel free to catch up on Part 1, Part 2 and Part 3 if you haven’t already.
Today I’ll be taking a closer look at the gaming industry and the Play-to-Earn model, and will explain their strong connection to the metaverse. I’ll also explain the idea of digital ownership and explore the dichotomy of open and closed metaverses (some would argue there is quite literally a battle for the future of humanity currently being waged). These are all very important concepts to understand for anyone wanting to properly dive down the metaverse rabbit hole.
As we’ve previously spoken about, some early iterations of the metaverse have taken the form of decentralised, blockchain-based video games, which are owned by the players (who each may own a tiny piece), rather than the people who developed the game.
While the future of the metaverse may likely be more tied to hyper-realistic digital worlds that can facilitate life-like meetings, virtual concerts and so on, gaming can be viewed as the first step of humanity’s journey into the metaverse. The reason for this is that gamers already have a relationship with the idea of virtual worlds, through popular games like Minecraft, Roblox and Grand Theft Auto.
A (highly speculative) potential timeline of our voyage into the metaverse
Let’s talk Gaming
Video games are already massively dominant in the entertainment industry, with anticipated annual revenues of over US$200 billion by 2023, more than the entire global movie industry and U.S. sports industries combined (e.g. the NBA, NFL etc.). The gaming industry has grown steadily year on year, with current estimates suggesting there will be as many as 3.2 billion gamers worldwide by 2023. People into their 30’s and 40’s grew up around video games, and while some have ‘grown out’ of their gaming days, many have continued playing games through to the present day. Per Statista, as of July 2021, an estimated 14% of U.S. gamers were 35-44 years old, and a further 12% were 45-54. This trend will only continue as time goes on, with Gen Z (1995 – 2009) being the first generation considered to be truly digitally native, with no memory of a time before the Internet.
An important point to make is that gaming is no longer the isolated, single-player experience it once was. Many of today’s most popular games, e.g. Fortnite, are massively social with a total focus on multiplayer gaming.
The naturally evolving growth in gaming looks set to be supercharged by the rise of blockchain-backed Play-to-Earn games and metaverses that provide players with true digital ownership. In fact, Yat Siu, an NFT pioneer and founder of behemoth blockchain gaming company and investor Animoca Brands, expects that as blockchain-backed games become more popular, gaming could very quickly become a US$1trillion+ industry. In doing so, it could become bigger than the global TV, movie, sports, and music industries combined!
How will Play-to-Earn (P2E) revolutionise gaming?
When we think about the traditional gaming industry, there are generally two types of gamers:
1. People with lots of time and not much money, e.g. students
2. People with not much time but lots of money, e.g. young corporate professionals
98% of players in a multiplayer game might play completely for free, while 2% of players (who e.g. might not have too much time on their hands) might spend money in the game to stay competitive.
The game publisher makes all of its money off of the 2% of gamers that spend money. The problem is, the game still needs the other 98% of players so there’s activity in the game, otherwise the game would empty and the 2% wouldn’t be willing to pay anything.
While the typical argument is that the 98% playing for free are having fun, really, they are being exploited, as they are giving their time to the game completely for free.
The P2E business model flips this on its head, by allowing the free players to monetise their time and make money from playing the game. It does this by rewarding players with monetizable rewards when they accomplish things within the game. The rewards can be in-game NFTs, or digital tokens that can be exchanged for Fiat currency (i.e. USD, AUD etc.).
This is opposed to traditional gaming, where the in-game assets that you might ‘own’ really belong to the game developer, meaning there’s no way for you to get any actual financial reward out of them. In reality, these assets are merely licensed to you inside the game.
Axie Infinity
The whole P2E model might sound confusing, but a great illustration is the blockchain-game Axie Infinity. Axie Infinity is a relatively simple, mobile-style game, built as a a Pokémon-inspired universe where players collect, breed, battle and trade token-based creatures called ‘Axies’, as well as build a land-based kingdom for their creatures. Each Axie is an NFT that can be sold on the Axie marketplace, and Axies can be bred together to produce new offspring, which can be used or sold on the Axie marketplace, and ultimately swapped for U.S. dollars.
Axie Infinity also has a token called Axie Infinity Shards (AXS), built on the Ethereum blockchain, which gives holders the right to vote on governance decisions within the game ecosystem, and on how funds in the Axie Community Treasury are spent. As at December 28 2021, AXS is trading at ~US$103, giving Axie Inifinity a market capitalisation of over US$6.3 billion.
Sky Mavis, the game developer, takes a 4.5% commission on all in-game transactions, meaning that transactions are much more peer-to-peer oriented between players. From June 2021 to today, estimates suggest Axie Infinity’s NFT sales volume has totalled over US$3.7 billion. Based on a 4.5% commission, this would suggest total income to Sky Mavis of over US$166 million (keeping up this pace would suggest a total 12-month income of over US$320 million).
Minecraft, one of the world’s most popular games with over 130 million active users, generated a total estimated income of US$415 million in 2020. The big difference? Blockchain-games are a niche concept right now, and Axie only has around 2.5 million players currently! Its incredibly scary to think about the potential sales volume the game could have if it ever reached a Minecraft level of popularity…
This really reflects the power of the Play-to-Earn model. Many players are happy to spend more money when they can actually make an income. For those gamers who don’t have a lot of money to put into the game, they can earn a real income by spending time in the game battling and creating new Axies, which they can then sell on the Axie marketplace.
Importantly, Axie Infinity is built in a decentralised and open fashion (the game developer doesn’t control the game, the players do). This means that entrepreneurial players are free to think up different business models to implement in the game.
As a result of this, the ‘guild’ system was born on Axie Infinity. This is a revolutionary system in gaming, whereby people who own an Axie can rent it out to players who can’t afford one. These players pay rent on the borrowed Axie using in-game income they get from playing the game. Notably, through this guild system, Axie Infinity has become popular in the Philippines, which accounts for over 50% of players, who have been driven by the potential to generate income from playing a game.
Guilds (e.g. Yield Guild Games) have removed a big barrier to entry for P2E games, and have resulted in millions of players being onboarded to different blockchain games. For savvy investors, they can generate passive income by buying Axies and renting them out. This idea of investing in in-game assets to generate a return touches on a whole other topic, being the connection between DeFi (decentralised finance) and P2E blockchain games. I’ll save this for a future article as it merits a writeup of its own.
While Axie is unlikely to be the most popular blockchain game forever, it has undoubtedly been a trailblazer in blockchain-gaming, showing what’s possible under the P2E model.
Digital Ownership and the ‘Open’ vs. ‘Closed’ Metaverse
It is very important to highlight that the future direction of the metaverse is by no means secure. Some would argue that Facebook’s move into developing a metaverse platform will fundamentally challenge the ability for an open, decentralised metaverse to succeed.
When we think of the shift from Web 2.0 (where the Internet as we know it currently is) to Web 3.0, we largely refer to the shift from centralization to decentralization. Web 2.0 is dominated by oligopolistic tech giants like Google, Facebook, Apple and Twitter, who have a lot of control over, and access to, our personal data. In fact, Yat Siu would refer to these companies’ business models as ‘digital colonialism’ – they essentially take our data, analyse it, sell it to businesses, and then feed it back to us in the form of advertisements.
Under Web 2.0, in order to use these tech giants’ platforms and connect digitally with the world, as a society we’ve been conditioned to give up our data completely for free. When you really think about it, considering tech companies have made billions off of our data, in reality individuals should be compensated for providing their data. Whether the price is 10c, $1, $1,000 or $10,000, there is an inherent value associated with our data.
Web 3.0 attempts to change the narrative, with the idea of an ‘open’ metaverse: a decentralized (owned by the majority of people, not a small minority) virtual plane, where people can interact virtually with each other and communities, and where everyone can retain ownership of their own data.
A key idea central to the concept of the ‘open’ metaverse is that there will be many ‘mini-metaverses’ (virtual worlds), which together will form something along the lines of a ‘virtual universe’. These worlds (e.g. blockchain games, virtual social media platforms etc.) will be interoperable, whereby people will be able to move their digital assets between different virtual worlds (e.g. being able to move your avatar from one world to another).
Facebook’s ‘closed’ metaverse would likely challenge this vision, as they would spend billions building a highly sophisticated virtual world for people to interact in, only to then control and access all of our data within this walled garden. This is almost the exact same scenario as Web 2.0, but now with the addition of virtual reality.
In this regard, the battle for the success of the ‘open’ metaverse is underway. Will Facebook’s billions invested into developing a sophisticated, but ultimately ‘closed’ metaverse prevail? Or, can the idea of an ‘open’ metaverse gain traction through gaming, and eventually be developed into a sophisticated virtual universe of many different decentralised social games and virtual worlds?
The Roundup
Under the idea of the ‘open’ metaverse, an interesting analogy is that projects like The Sandbox could be considered just one ‘city’ (e.g. New York City) in the overarching world that is the metaverse. Under this perspective, it’s very exciting to think that we are yet to discover the London, Tokyo, Paris, Berlin, Sydney etc. of the metaverse…
2022 looks very much like it will be the year of the metaverse and Web 3.0. As P2E games gain sophistication and popularity, we will begin to see which platforms rise to the top, and whether society (beginning with gamers) has an appetite for a more decentralised approach to social interaction via the Internet.
About the author
Raphael is a young property investment professional at AMP Capital. He has had previous experience in healthcare investment, investment banking and boutique private equity. Outside of work he loves all things investing, a good crypto call, poker, basketball, getting outdoors and keeping fit.
Connect on twitter @raphaelsebban1