From the Archives: Digital World Layer aka Metaverse

Image from Archillect

The creation of a Metaverse VC, a Digital Currency Group backed venture capital fund, investing exclusively in companies building products and services for Decentraland pushed me to share an old concept of mine I came up in summer 2016 with the similar name — Metaverse. Instead of it being buried in some ancient folder I might never open, I decided to publish it here in hope some readers find it entertaining.

The concept resembles a mix of what FOAM and Decentraland came to be in my opinion.

Table of Content:

1. How Pokémon GO developers’ mistake created a brand new market and no one noticed

2. What is Metaverse?

3. Virtual Reality vs Augmented Reality

4. Regulation & Mechanism Design

5. Cryptoeconomics and the Blockchain

6. Getting to the Point

7. Metaverse Use-Case

8. Single Decentralized Metaverse

9. Conclusion

1. How Pokémon GO developer’s mistake created a new market and no one noticed

In July 2016 one seemingly insignificant event, happened. It went mostly unnoticed and was covered just by several meme media outlets like 9GAG, and has given birth to a whole new market, potentially one of the largest ever created.

A man in US has filed a complaint to a Pokemon Go developer Niantic for mistakenly recording his house as a ‘poke-stop’ (important in-game location/coordinate) in their viral semi-AR game. The problem was that there have been a lot of people next to his home at all times, walking around his property trying to catch the in-game Pokemon. This seemingly insignificant event has created a new class of ownership — a digital ownership dimension to physical products, thus creating demand for virtual representations of the real-life objects. As a result a whole new market was created in an instant.

Shortly after that McDonalds and Mitsubishi Bank in Japan have reinforced the notion of existence of such demand by contracting with Niantic and making their physical locations into digital poke-stops as well.

The concept of digital representations of real world objects is nothing new. We already have a rudimentary market of such nature — trademarks. The companies have claimed the unique right of using their logos, characters etc in any digital dimension, be it a game or on the internet. But as we have seen with Pokemon GO example this is clearly not enough since the said person did not have a trademark on his house and/or location. So let’s imagine he sort of could. Imagine if there was digital dimension, which is duplicating our world, a Metaverse, with its own rules and economy. Pokemon GO world is already a sort of very basic and inconsistent Metaverse which one can experience in short glimpses and with no actual interaction with the real world.

But let us slowly break it down.

2. What is Metaverse?

Metaverse is not a new term either and is defined as a collective virtual shared space, created by the convergence of virtually enhanced physical reality and physically persistent virtual space, including the sum of all virtual worlds, augmented reality, and the internet. It has been introduced as early as 1992 in Neal Stephenson’s book Snow Crash.

One thing is to understand what Metaverse is. Another thing is to figure out how it can be interacted with and what actual use-cases it can bring. The key to understanding the way we interact with such world is the way we can experience it. Around 70% of all information we process comes through our vision, so if we wanted to give a person an interactive window into the new dimension, to create a new reality for him, the key sense would be vision. There are currently two ways one can provide a window into a Metaverse — VR and AR.

So far, however, all developments and projects moving in the direction of creating something similar to a Metaverse have been considering it in a completely decoupled from reality manner, creating a separate world detached from our real one. This is the VR approach.

3. Virtual Reality vs Augmented Reality

Image from Archillect

VR — or as I call it 0.7 reality (since a person is isolated in a limited space experiencing the new world only though vision, hence 0.7 reality). Some articles started to emerge recently about putting VR on the blockchain, even a project called Decentraland.

I am skeptical, however, since in a virtual world (think video game as an example), the laws are already programmed in code, and thus they are self-enforcing by design. Code is a native environment in the VR world, the beauty of the blockchain is influencing the real world where the code is not the main medium (unless you like Elon Musk believe we live in a computer simulation, which in my opinion is not an ungrounded claim). Thus the “only” added benefit of securing a code on blockchain in a code-native environment is security, so that no one can tamper with the rules of physics in a video game for instance or ensuring a safe transfer of in-game assets and their monetization.

AR on the other hand has a great potential for blockchain since it is the bridge between real and virtual, it uses virtual world to augment physical one, thus we can call it 1.7 reality, meaning we maintain all of our senses but our visual apparatus gets augmented through virtual world layered on top of the real one (hence double the vision). Unlike VR, what happens in AR can influence our actual behavior straight away in the real world. There is a strong contrast between the impact VR has on the user, who is limited to a room in house and a person actually navigating through a real world and being able to act on any intervention from the virtual on the go while being in the two worlds at the same time instead of in only one as it is with VR.

This is the key value proposition of AR, that’s why the poke-stop cases with both an individual and corporates made sense. This shows a commercial potential behind the technology to create whole new ownership and asset class and thus a market comprising these assets.

4. Regulation & Mechanism Design

Image from Archillect

Coming back to the Pokemon GO example, the author of that original article has only elaborated on the fact that there is no regulation until now to govern such systems and there is no established concept of a digitalized property. But this is exactly why technology and innovation should take the lead, just like they always have in a new industry and newly created markets.

Markets should self-regulate and only when proven to be unfair or incentivizing “bad” behavior should some government bodies interfere to regulate the market. But I would argue that if the market incentivizes the “wrong” behavior, this is purely the problem of the system and its design. If conducted correctly, introducing new market incentives, rewarding the “good” behavior by tweaking the value distribution should do the job of fixing the broken system by shifting the payoffs towards the desired behavior.

This is what the subset of game theory called mechanism design is dealing with — designing or fixing markets in such a way for the markets to yield optimal outcomes for its participants through game theory. In such a case no regulation is needed, rather clever mechanism design.

This, however, does not work so well with our complex and archaic systems due to their dependence on already established governance structures, authorities and powerful intermediaries, who have no interest in changing the system (top 0.01% for example). There are some efforts underway to fix the systems, one example being the works of Hernando De Soto, an economist, who elaborates on the importance of a property registry as an economic enabler and has considered a tenuous land title as the main cause of poverty in the developing world:

“When something is not legally on record as being owned, it can therefore not be used … as collateral to get credit, as a credential that you can be able to transfer part of your property to invite investment in. Things are owned, but when they’re not adequately paperized or recorded, they cannot fill the functions of creating capital and credit.”

He is currently working with Bitfury on a blockchain land registry in the Republic of Georgia. But changing already existing systems can be probably accomplished on a rather local level and even then it can prove hard. It is hard to apply mechanism design to an existing global market, be it real estate, commodities etc.

5. Cryptoeconomics and the Blockchain

Say “Blockchain” again! I dare you, I double dare you!

In contrast to what was said earlier though, the notion of mechanism design can work quite well when we actually design new systems and markets from scratch. One good example of successful mechanism design implementation was the radio spectrum auction happening between 2000 and 2008 depending on country, when just like right now, technology created a new market for a completely new asset — radio frequency, which was recognized as a public good, just like the digital world around us and our right to extend our ownership rights into the digital dimension could or should be.

This is where blockchain finally comes into play. If we were to design our current systems of governance, voting, constitution knowing what we know right now about blockchain and smart contacts, the world would most definitely have looked rather different. We as a species are gradually shifting into digital dimension however there is no environment ready for us to occupy and move within, we browse the web on our phones, getting partial glimpses into the digital but not really experiencing it as an environment.

There is an opportunity now to create such an environment — Metaverse. The key point is that but should be accessed as a visual interactive layer to our world instead of a completely separate and disconnected digital video game-like world which it would be in case with VR. And as any universe, it should be governed by a set of laws, blockchain and smart contracts being an ideal platform for the enforcements of those laws. Coming back to the US guy example and to what Hernando De Soto was pointing out, if in the Metaverse we could have a clear ownership system based on mechanism design and/or cryptoeconomics and enforced through self-executable smart contracts, the system can then be used commercially within itself.

6. Getting to the Point

Image from Archillect

So far I have been rather abstract and vague, so let us now finally see how such thing as Metaverse could be put in practice. In order to understand the use-cases behind Metaverse it’s important to understand how we could experience it. As was mentioned before, in my opinion AR is the go-to technology. This means one would require a piece of hardware, a head-mounted display (HMD) like Microsoft Hololens or MagicLeap.

So far AR only layers some pre-defined objects, apps etc with very little connection to the real world. It can identify a wall in an apartment and place a calendar widget on it for example. It is understandable, since there is no Metaverse so far, an environment for this digital calendar or anything else to exist in. So when we do create this environment in form of a Metaverse, one needs to figure out how can the hardware figure out where we are in the Metaverse and for that we need two additional “senses” — visual recognition and geo location (see picture).

Visual recognition engine can help to figure out exactly what we are looking at in a certain location and match the direction or object we are looking at in real life with a digital representation of this object or content anchored to it in the Metaverse. This is however too complicated procedure since the visual recognition engine should go through the database of all objects in the world and conduct matching in order to find the exact object you are looking at. There have been real-word tries like Blippar app, which calls itself a visual browser. The idea is to point a camera at a chair for example and the app will recognize the item and tell you “it’s a chair”.

I have personally tried the app and it almost never guesses any object, which is understandable in my opinion. How many different objects are in our universe and how hard would it be for a computer to identify objects just by their looks regardless of the angle or perceptive and consistently provide correct matching. This is why we need geo-location. Instead of searching through a database of all the objects in a universe, system can search within a certain location, which the objects are mapped to (be it a square, hexagon or any other measurement unit of space). This would increase the precision of the visual recognition and decrease processor load since visual recognition engine will be referring to a certain set of mapped images particular to this location and probably also a set of universally recognizable objects like branded items. This is also more feasible to run on the blockchain or a data layer on top of blockchain, since the data volumes are much less than it would be in case of only visual recognition.

7. Metaverse Use-Case

Here you can find a pretty exaggerated example of how the Metaverse might look like in the future

So the whole process of Metaverse creation should look similar to assembling a jigsaw puzzle. So first our world has to be split into a geo-spacial unit (N*M meters for example) and the physical objects in it (a house, a street etc) should then be mapped on this defined unit of space and the objects’ visual data should be stored in the square. One can even imagine the creation of the private blockchain where each block contains the geo information with all the visual parameters of the objects coded into it. The ownership of these objects can be described as a token and can be distributed according to certain rules and according to a defined distribution system. This way the objects in real world get a digital dimension to them, ownership of which can go along with the physical object, be traded, utilized and protected from usage. If we come back to our Pokemon example, if the guy also had a token signifying the ownership of his house in the Niantic Metaverse (more on this later), he could protect his digital asset and Niantic would then have to ask him to use it or pay him digital “rent” for utilizing his property in its Metaverse. He could also rent his house on a free market as an advertising space in the Metaverse.

Scene from Back to the Future II

The use-case for companies is the access to the Metaverse, on top of which they could build applications. They can also use those newly created digital spaces for advertising (think Google ads in the browser, but the browser in our 1.7 reality), imagine the scene from the Back to the Future (see picture). This can also separate the advertising and information world from the real one by shifting the information flows completely into digital and freeing up the real world from the clutter of ads and information.

8. Single Decentralized Metaverse

Ready Player One poster

So I was talking about Niantic Metaverse. Niantic has created their overly simplistic but nevertheless a version of Metaverse. Some companies might want to create their own versions, which in Niantic’s example was not so costly. If we were to talk about the “full” Metaverse though, this will be very costly to develop and thus a standard should emerge, something along the lines of Metaverse OS.

Another question is the concept of ownership, once the new market and good is created, who gets the original ownership rights? Hardware companies are likely to claim (extract value) of the space since they will be the ones producing the equipment through which we can experience Metaverse. This is similar to the situation with our data and Facebook using it. But is it right for a default state to be that a hardware manufacturer automatically claims the ownership of the whole digital dimension, even if they were the ones enabling it?

There have been similar debates concerning virtual economics in famous MMORPG games such as World of Warcraft from Blizzard entertainment. The developers who created the game also created the in-game economy, which has a real dollar value to it since the in-game items could be exchanged for fiat. Thus, the question was who owns the items, the players, who have invested their time and money acquiring these items or the developer who created this opportunity for them in the first. This centralization of power is not healthy for any system. This centralization might still be ok if we talk about a game, completely detached from a real world and with relatively small user base. If we, however, were to talk about the Metaverse, which as we mentioned is connected to our real world and is a digital extension of our reality, such centralization of power for one party to control our digital property should not be possible.

Thus, we can pre-distribute wealth by design by auctioning the property though a smart mechanism or putting a free market economy in place. Some infrastructure objects and some municipal areas could possibly distributed to legal entities instead. I am currently working on a distribution system involving auctions and mechanism design.

9. Conclusion

Image from Archillect

I think creating a Metaverse accessible through AR or even VR once it becomes more portable and mobile (first by phone and later by HMDs) can have large commercial potential due to the new powerful nature of having our world digitally mapped and tokenized. The tokens can provide dividends in case of renting out central parts of the city to possess certain properties in the Metaverse (like the McDonalds and Mitsubishi Bank example). Such an environment can be a basis for an array of applications and can establish a common framework and standard, where large companies and hardware manufacturers would like to connect to the already available and mapped platform instead of creating their own.

There is also chicken-egg problem in AR, when not much effort is being put into hardware while there are no ‘killer-apps” and vice versa. In my opinion humans as a species have started shifting into digital a long time ago and the maturation of several technologies such as blockchain and AR has given us tools to accommodate this shift by putting an economic system in place, which can provide economic benefits to its participants as well as creating a better and more flexible wealth distribution system, which might help us in here, in the 1.0 reality.

The concept and notion behind might sound too farfetched, however the recent projects like FOAM and Decentraland, as well as investment in these might prove otherwise. FOAM focuses on location-specific smart contracts and an alternative to GPS. While Decentraland creates a brand new world for VR applications, owned by its user. I am excited to follow the progress of these projects in 2019.

P.S. This is a summary of the whitepaper. There I go deeper into the actual economics behind the Metaverse to describe its functioning in more detail.

I hold LAND as well as MANA. Here is my twitter thread on the second LAND auction of Decentraland.

About the author

As a blockchain consultant at T-Systems Multimedia Solution’s Blockchain Competence Center, I am involved in a wide spectrum of activities in context of meaningful enterprise blockchain applications.

I am passionate about:

- Application-specific blockchains and their interoperability as means to address current limitations of the technology

- Novel crypto-native business models like generalized mining, staking and validation

- Crypto-asset analytics and valuation

- Applying cryptoeconomics and mechanism design to engineer tokens

- Smart contract platform research and analysis

- ICO/STO consulting

- Blockchain “deeptech” research

If you liked this piece, follow me on Twitter and here on Medium.

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Gleb Dudka

Blockchain Analyst & Researcher | Staking and Generalized Mining | Infrastructure Provision. VC @GreenfieldOne, ex @StakingRewards, Deutsche Telekom