NFTs: The metaverse economy
How non-fungible tokens enable the growth of societies within immersive virtual worlds
A typical day in the metaverse – a shared immersive virtual world – may before long closely resemble the familiar world we live in. We will visit shopping centres, drive across town, meet friends in cafes, and exchange contacts in ways that seem strikingly real – thanks to rapid advances in virtual reality and 5G communications.
Metaverses have existed for decades in the form of multiplayer online games. But we may soon enter an age of immersive experience hardly distinguishable from our real world – fostering new modes of interaction for gamers and non-gamers alike.
Prototype next-generation metaverses such as Decentraland and Somnium Space already show the beginnings of true society, with individuals settling land, interacting socially, exchanging goods and asserting ownership rights. Any society (physical or virtual) needs a functional economy. And in the metaverse, the economy depends on authentication of digital properties, such as one’s metaverse home, car, farm, books, clothing and furniture. To flourish, it also needs the ability to travel and trade freely between realms that might have different laws and rules.
Non-fungible tokens – records of digital ownership stored in the blockchain – will be the linchpin of the metaverse economy, by enabling authentication of possessions, property and even identity. Since each NFT is secured by a cryptographic key that cannot be deleted, copied or destroyed, it enables the robust, decentralised verification – of one’s virtual identity and digital possessions – necessary for metaverse society to succeed and interact with other metaverse societies.
Beyond the hype of multi-million dollar digital art sales, the significance of NFTs may lie in enabling the beginnings of something resembling genuine human society, based on free markets (for goods, services and ideas), independent ownership and social contracts, to flourish in the metaverse.
“NFTs really started initially with the digital art side. But it's going to be a lot more powerful,” says Eric Anziani, COO of Crypto.com. “It will be the tool that represents any digital type of assets in virtual worlds going forward. So the applications are tremendous.”
Property development in a brave new world
Strolling through Decentraland, you discover people chatting by fountains, shoppers in fashion boutiques, joggers on seaside promenades, casino croupiers inviting guests to high-stakes poker.
These interactions are the spontaneous result of virtual real estate development by people who have purchased land and built environments that happen to capture the imagination of other Decentraland denizens.
The experience is far from hyper-realistic (and Decentraland creators themselves say the world is still in its “Iron Age”). Yet even in these early iterations the potential is clear. Just as in physical communities, people flock to interesting places in the metaverse. And popularity naturally drives up the value of virtual land – exactly as it would in Paris or Beverly Hills.
A key economic concept of Decentraland and other metaverses is adjacency of land. All metaverse parcels are contiguous to others at a fixed location – within a finite geography. This creates scarcity due to the limited amount of property supply. And scarcity enables property value to rise and fall, based on universal laws of supply and demand.
A framework is thus created for, according to the Decentraland manifesto, “a social experience with an economy driven by the existing layers of land ownership and content distribution”.
NFTs enable the property transactions that drive the metaverse. These tokens provide indisputable proof of ownership that is more secure than any land deed.
“For metaverse property rights, you simply cannot fake it because of the way smart contracts are defined, and the NFTs programmed,” Anziani says. “You know you own an asset and can demonstrate ownership fully. Based on the terms and conditions of that virtual environment, you can then assert ownership rights.”
Property sale worthy of London, New York or Tokyo
Already, the implications of this real estate revolution are being felt in emphatic fashion. In June, digital property investment fund Republic Realm bought a parcel of land in Decentraland for more than US$900,000. Republic Realm, owned by investment fund Republic, is turning the plot into a virtual mall called Metajuku, modelled after the Harajuku district in Tokyo.
Such activities suggest it won’t be long before real estate investment trusts (REITs) begin sniffing out opportunities in the metaverse. Property values move in line with economic activity, which is also booming in Decentraland. This is precisely what its creators envisioned when launching their virtual world in 2017.
“Decentraland’s value proposition to application developers is that they can fully capitalise on the economic interactions between their applications and users,” the metaverse’s manifesto says. “To allow those economic interactions, the platform must allow three things to be traded: currency, goods, and services.”
Fashion is one of the earliest sectors to grasp the economic potential of NFTs and the metaverse. Luxury house Burberry created NFT accessories for the Blankos Block Party video game, while Louis Vuitton launched its own NFT-studded video game, LOUIS THE GAME.
Meanwhile, RTFKT – bespoke shoemaker to the metaverse – designs limited edition NFT sneakers that can be worn in virtual worlds and has already posted millions of dollars in sales.
With such momentum in the Iron Age of the metaverse, the business model for virtual worlds – underpinned by NFT technology – promises yet untold economies of scale.
“Even five months ago, we were at 100 million crypto users globally. Now, we're more than 200 million users,” Anziani says. “We have a strong belief that the next wave to get to a billion or two billion is going to happen through metaverses – the integration of virtual worlds with blockchain tech – in particular NFTs.”
