Our Payment Systems Are So Bad, Making the Metaverse Might Mean Moving to Blockchain Systems (Which Have Problems of Their Own)

'I'm blogging Matthew Ball’s must-read, nine part metaverse primer over the Summer; my take on Part 1 (introduction to the framework) is here,  my coverage of Part 2 (hardware) is here, with Part 3 (networking) coverage here, Part 4 coverage (computing) here, Part 5 (virtual platforms) here, and Part 6 (open standards) here.

Part 7 of Matthew Ball’s Metaverse framework, on the challenge of payments facing the Metaverse, is the most daunting so far, veering into some thick if necessary weeds to hack through. If I had to summarize the whole thing in a single sentence, it would go something like this:

The payment options we have to deal with are so inefficient, unfair, and monopolistic, we may never get a Metaverse worth the name unless we switch to a blockchain-based system -- even though that has problems of its own.

To break Ball’s case down into more detail (with some analysis of my own):

• Current/traditional payment systems incur transaction costs and time delays.
• Virtual world-based payment systems, built on these payment methods, are even more costly and slow.
• At the same time, distribution platforms (consoles, Apple, etc.) lock in consumers and developers while hitting the latter with high fees, while also locking out payment competitors. (This is, by the way, starting to change.)

With mobile so dominant, and so necessary to achieving mass market growth, current Metaverse platforms end up paying most of their money to Apple and Google Play. For instance, while ROBLOX’s revenue sharing deal is reportedly harsh for their creators (especially as most of them are kids), the company itself takes a huge hit from Apple:

Consider the illustrative $100 in iOS Roblox revenue (an estimated 75-80% of all revenues). $30 goes to Apple off the top, while $31 is consumed by Roblox’s core infrastructure and safety costs, and another $11 is taken up by overhead. This leaves a total of $28 in pre-tax gross margin dollars for Roblox to reinvest in its platform. This reinvestment spans three categories: research and development (which makes the platform better for users and developers), user acquisition (which grows network effects, value for the individual player, and revenues for developers), and developer payments (which leads to the creation of better games on Roblox). Today, Roblox reinvests 23% of revenues in R&D, 7% on sales and marketing, and the aforementioned 24.5% on developer payments. As a result, it currently operates at a roughly -25% margin. 

Blockchain and NFTs are a potential solution and alternative to all this, but have their own shortcomings -- and for the very reason that they are decentralized, which makes them slow and energy inefficient. As Ball writes:

These shortcomings are so great that almost all NFT platforms store as much as they can (e.g. user accounts, credit card information, profile pictures) on centralized databases, rather than the blockchain. And NFTs, for that matter, typically rely on fragile “pointers” that could go offline at any point. Given this, it’s understandable some see the blockchain as a backwards step. Don’t forget, either, that the virtual economy today already generates over $50B per year and spans hundreds of billions of hours of use - all without crypto or the blockchain. 

My own take: I also see some potential promise in blockchain-based payment systems for the Metaverse. That said, I believe most of the existing ones are putting the blockchain cart before the virtual world horse. For instance, here’s some Matthew mentions:

NFT-based games such as AxieInfinity and Zed Run, meanwhile, are generating up to tens of millions of dollars a week despite their relatively modest user base of 50-250,000 DAUs. The total value of cryptoworlds like Upland, Decentraland, and The Sandbox are in the hundreds of millions (or more). 

The user base is not just modest -- much or most of it doesn't seem to be based around actual gameplay, but rather, in speculation that future gameplay may be coming down the road. And as I noted last week, Upland only has monthly active users in the low six figures. To judge by Decentraland’s web traffic, that world also only has active users in the low (to maybe mid) six figures. And again, “active” seems to be mainly in the sense of speculation == as opposed to, you know, playing and socializing together.

That said, I agree with Matthew on the promise of NFT-driven memberships as a solution for the Metaverse: 

Friends with Benefits, for example, is effectively a membership club where tokens are used to gain access to private discords, events and information. 

Some have argued that by requiring users to buy tokens to gain entry, FWB is simply replicating the centuries-old “membership dues” model of every exclusive club but under the “crypto” hype. However, this misunderstands the potency of FWB’s token design. For example, members do not pay annual “dues”. Instead, they need to buy a certain number of FWB tokens to gain entry – and then hold them to remain members. 

As a result, every member is a part-owner of FWB and can also leave at any time by selling their tokens. And because these tokens appreciate as the club becomes more successful or desirable, every member is incentivized members to invest their time, ideas, and resources into the club. This appreciation also makes it increasingly impractical for spammers to join FWB, whereas under normal circumstances, the popularity of an online social platform encourages malcontents.

Similarly, appreciation means the club must work harder to earn its ongoing role in a member’s life. Finally, smart contracts can be used to directly reward individual members for their contributions, or programmatically welcome new ones into the collective even if they can’t afford it.

Because in the end, the underlying value of virtual worlds is not ownership per se, but being part of a community, and enjoying the same experiences together. And if there’s a way to turn that value into a payment solution that’s fair, transparent, and grass roots, it may be worth using to build a Metaverse on top of after all. 

But more on that after the Labor Day break!

Pictured: Early experiment in blockchain-based shopping in the erstwhile High Fidelity Metaverse (circa 2017).

Comments

[Kyz]

I don't think the problem is traditional currency and payment systems, rather it's that all these companies develop models where virtual product is worth such small amounts that devaluation of labor is the actual problem. Magnified by some companies that are also using currency itself as product.

For instance, I did pretty well in SL riding on the coattails of the breedables craze. Enough for a couple of full time incomes. The pain point of making money was SL. Between limits, virtual currency converted to real money and the extra steps required.

I did the same at various points for selling content for game engines, just being able to find the trends and fill niches. These markets were much less painful because there was no virtual currency to deal with.

Now I'm back to creating real life products, which is my first love. I prefer to make things that you can hold, and that serve a real life function. But in this real life business, I have no problems with money. It moves fast, it's dependable, it's measurable and the fees are predictable and built into my business model.

I would argue that what the Metaverse needs is to nix virtual currency completely and to value labor in the same way that real life labor is valued. People will pay if they really want a product.

Virtual goods as currently handled is sort of a scam. You sometimes work longer and harder than any sweatshop, for unpredictable results, specifically because of the devaluation that virtual currency and business models by these companies implement.

It's kind of amusing that some of the same people that will call for higher minimum wages, will also applaud virtual worlds where sometimes 8 hours of work might net you enough for a cup of coffee.

The only part of the Metaverse that shouldn't be virtual is the money.