Part 3: Metaverse Building Blocks — Monetization

Part 3: Monetization

This is Part 3 of Agya’s series on Metaverse Building Blocks.

To read the series to date, check out:

• Part 1 on Infrastructure.
• Part 2 on Hardware.

Now that we have context, in this edition we discuss what monetization in the Metaverse looks like.

Let’s dive in.

Monetization is one of the defining features of the Metaverse. Without it, most Metaverse experiences would simply be more engaging alternatives to existing internet browsing. Monetization is essential for the Metaverse because it’s what will enable tangible use cases for a large number of industries beyond just simple AR/VR applications — and what ties the virtual world to the physical world.

Suppose a Metaverse existed without monetization. Here, all the same social interactions, games, and digital twins could exist, but the ecosystem would lack currencies, ownership, and commerce. A Metaverse without monetization would mean that digital assets would have no relevance to the physical world; they would be completely separate and unrelated to one another. In this scenario, users would not be incentivized financially to engage with the virtual world. Users may still choose to engage with other users, but it would be for the purpose of other non-financial benefits like learning, or advancing a skill. A Metaverse without monetization would primarily include private users who engage for a variety of reasons, and would not include many profit-driven enterprises. Monetization is an essential part of what makes the Metaverse a multi-trillion dollar opportunity.

The two pillars that are central to the existence of a Metaverse economy are ownership and currency. These two pillars are what enable commerce within the Metaverse, which will exist across both the physical and virtual worlds.

A. Ownership

Ownership in the Metaverse is what bridges the physical and virtual worlds. Digital asset ownership is made possible through NFTs, which attach ownership of any digital item to a user via blockchain. If a good is fungible, it means it can be exchanged for another identical item. Commodities, common shares, options, and dollar bills are examples of fungible goods. In contrast, each NFT that is minted on the blockchain is unique and therefore non-fungible, which makes each NFT inherently scarce. This has revolutionized how we engage with our digital worlds; instead of viewing digital items as pixels on a screen that can be easily copied and pasted, NFTs allow them to attain intrinsic value.

NFTs can be categorized by the value that they provide. They either (1) serve as a collectible like digital art or memorabilia, (2) are backed by some underlying tangible utility that incentivizes ownership, or (3) are a combination of the two.

Many of the NFTs with underlying utility that are being traded today are early forms in which we will bridge the virtual and physical worlds. The Metaverse will include experiences in which virtual engagements with other users and digital assets will unlock value in the physical world. This value might manifest in different forms: access to exclusive social clubs, parties, or venues; ownership of products, merchandise, or services not yet available to the public; ownership verification of real estate, facilities, intellectual property, and much more.

B. Currency

If ownership is the bridge between the physical and virtual worlds, then currency is the key enabler to incentivize engaging with that ownership. If you were to ask most people today what the currency of the Metaverse would be, they would likely answer with some reference to cryptocurrencies. This is perhaps one of the biggest misconceptions about the Metaverse — that in order to have a Metaverse, it must operate on decentralized finance (DeFi), cryptocurrencies, and web3 guide rails. Before unpacking further, a few concepts relevant to Metaverse monetization include:

Cryptocurrencies: Digital or virtual currencies that are secured by cryptography, which makes it nearly impossible to counterfeit. Most cryptocurrencies are decentralized networks based on blockchain technology — a distributed ledger enforced by a disparate network of computers. Examples include Bitcoin, Ethereum, Solana, and many others.

Stablecoins: A stablecoin is a type of cryptocurrency where the value of the coin is pegged to another asset class, such as a fiat currency or gold, to stabilize its price. This can remove the drawback of volatility, which other cryptocurrencies often face.

Central Bank Digital Currencies (CBDCs): A CBDC is a digital liability of a central bank that is widely available to the general public. As of August 2022, there were 110 countries that were exploring CBDCs. Among them, 51 countries are in an advanced phase of digital currency exploration (development, pilot, or launch).

Native Gaming Tokens: Cryptocurrencies that are native to a specific blockchain-enabled game. The market capitalizations of native gaming tokens fluctuate, but some of the largest as of August 2022 include Sandbox ($1.4 billion), Axie Infinity ($1.2 billion), and Enjin ($480 million).

Centralized Finance (CeFi): The financial system that we are all used to. This system is full of third parties such as profit-driven banks or companies who facilitate money movement between parties, with each one charging fees for using their services.

Decentralized Finance (DeFi): An open financial system that removes third parties from the equation. Through DeFi, one can self manage services (trading, insurance, lending, issuance of money, staking, payments, financial data, over-the-counter trading, asset management, and more), and remove the control banks and institutions have on money and financial products/services. The two prime reasons to consider DeFi are the following: it’s permissionless (no seeking approval or acceptance), and its trustless (you can self-audit the transactions in the code, meaning no central authority needs to be trusted).

While we expect cryptocurrencies to continue to increase in relevance, we foresee a Metaverse in which DeFi will coexist among several other methods of centralized payment and monetization that are very familiar to most consumers and enterprises today.

Metaverse finance (MetaFi) will include a myriad of centralized and decentralized currencies including traditional fiat-based currencies, cryptocurrencies, stablecoins, CBDCs, native gaming tokens, and potentially others. Payment infrastructure such as payment service providers (PSPs), currency exchanges, and wallets like Apple Pay and Google Pay will adapt to encompass all aspects of MetaFi.

With the transition to involve many decentralized currencies in the Metaverse, it will be essential for consumers to maintain the same familiar user interfaces of payment tools as they exist today. In essence, this will require payment infrastructure with web3 enablement, all the while maintaining the front-facing user interfaces and operability of most web2 tools today.

Commerce in the Metaverse

Metaverse commerce describes all the buying and selling of goods and services that will occur in the Metaverse. This next iteration of commerce will differ in that physical assets and digital assets will be more connected and easily exchanged than they are today. Both digital asset ownership and MetaFi currencies will be essential in this. Metaverse experts have identified four categories of transactions that will be present in the Metaverse: Physical to physical (P2P), Virtual to Virtual (V2V), Physical to Virtual (P2V), and Virtual to Physical (V2P). Each of these describes a type of transaction in which the purchase and sale of a good (physical or virtual) provides value in either the physical or virtual world. We expect all four to be relevant with the growth of the Metaverse:

1. Physical to Physical (P2P): This transaction involves the purchase and sale of a physical good or service for value in the physical world. This type of transaction has existed for hundreds of years, and will continue to remain relevant in the age of the Metaverse. An example of a P2P transaction is going to the store and buying a loaf of bread, or even ordering a product on Amazon and having it delivered to your doorstep. Both of these transactions involve the purchase of a physical product that provides value in the physical world. While a P2P transaction doesn’t require any immersive technologies, it may be augmented or improved through technology (such as an improved product experience through AR/VR enabled shopping or e-commerce).
2. Virtual to Virtual (V2V): This transaction involves the purchase and sale of a virtual good or service for value in the virtual world. This transaction exists exclusively in the virtual world, with no tangible value in the physical world. An example of this would be having an avatar go to a Metaverse store to buy a pair of virtual NFT-verified sneakers.
3. Physical to Virtual (P2V): This transaction involves the purchase and sale of a physical good or service for value in the virtual world. One example of this is buying physical clothing from a luxury retailer, where the sweatshirt you’ve purchased has a near-field communication (NFC) chip embedded in the sleeve. An NFC chip is the same technology that allows smartphones to make payments within around 4 inches of a credit card reader (like Apple Pay). When the owner of an NFC-tagged sweatshirt scans the item with their phone, they are presented with virtual benefits such as virtual apparel for an avatar to wear, or an NFT that is part of a virtual collection that reflects their physical wardrobe. Emerging players in this space include Nike x RTFKT, IYK and LNQ Marketplace.
4. Virtual to Physical (V2P): This transaction involves the purchase and sale of a virtual good or service for value in the physical world. An example of this would be purchasing an NFT for virtual sneakers for your avatar to wear, in order to also get access to exclusive membership-gated venues that are only accessible to people whose avatars wear certain items. Most utility-backed NFTs fall into this category, including the famous Bored Ape Yacht Club (BAYC), whose holders get access to exclusive parties and events.

Many of the above categories are still in their early stages of maturity, and while they have grown rapidly over the last several years, they will continue to be refined and improved. As with much of the Metaverse, many of today’s use cases for the above transactions lie within gaming and retail (mostly luxury retail). In the future, we expect the use cases of Metaverse commerce to broaden to the majority of industries across the world.

Should you have any questions or would like to discuss more, please don’t hesitate to contact Aaron Farr (aaron@agyaventures.com).