Value Creation in Virtual Worlds

Notes from my opening comments at a recent Metaverse working group meeting

Thoughts on minimal requirements for building a sustainable ecosystem of value creation in any prospective ‘Metaverse’, with examples from Second Life and other worlds:

Creative Building Blocks

The world must have some sort of building blocks that are sufficient to enable people to create interesting things that will be of value to others. For YouTube, by example, the atomic unit of creation is a video. For many NFTs, the building block is an image and associated metadata. Minecraft offers 1 meter cubes with different interactive properties and scarcity (if in survival mode). Second Life has graphical primitives that can be connected together and scripted to create behaviors and optionally attached to avatars.

For a counter-example: Many so-called “Play-to-Earn” (P2E) games do not meet this criteria, as value is generated through artificial scarcity and speculation rather than creative work. A signature mark of a creative economy is that GDP-per-Capita grows over time, as creators discover how to better use the tools and building blocks.

Clear Property Rights

The difference between what rights belong to a creator versus the platform operator must be clearly defined, along with the rules for how creators can use each other’s works. Creators should, for example, be able to easily understand how they can and cannot build on each other’s works in creating new assets. This can be especially difficult given that real-world intellectual property rights are often different for different creator’s nationalities. If creators cannot be sure whether and how they own their creations, they will not create.

A good example of a failure case impairing growth is the lack of clarity around whether ‘minting’ a profile picture NFT gives you the right to re-use the image itself, versus the more limited ability to re-sell the one you minted. Here is an article illustrative of the complexity of this issue.

Enable Circular Trading

Creators should be able to very easily use earnings from their own sales to buy things made by other creators. This amplifies growth by increasing the internal velocity of transactions. Also, many early creators derive a high emotional reward from helping other creators succeed. To enable this type of circular economy, fees for in-world transactions should be low and the currency should also have a stable value relative to real-world currencies. Virtual world transaction sizes are typically small (for example the average Second Life transaction is about $2 USD-equivalent), meaning that even minimum credit card fees would be a material encumbrance.

An example of a failure would be Meta’s stated intention to charge almost 50% fees on digital goods in the Horizon’s Virtual World. Two creators wanting to trade back and forth in this world would see their funds drained almost to zero in just a few exchanges. Similarly, high cryptocurrency transaction fees strongly dampen any potential for circular trade.

Maintain a Stable Currency Price

If a virtual world currency used for trade is also increasing in value due to speculation — as has been the case with many cryptocurrencies — the buyer of a virtual good will have to balance the appeal of having the item against the profits that would have been enjoyed by appreciation of the required currency. Buyers will buy less goods with an appreciating currency. This problem is worst when purchasing an experience, but is equally problematic with digital assets that might not appreciate at the rate of the underlying currency. A separate problem with an unstable currency price is the risk that the prices set by a fully-employed creator may not cover real-world costs (such as rent) if the price drops between sales and conversion of the currency to fiat.

To keep the currency price stable, the amount of currency in circulation must grow at a rate proportional to new value creation (or roughly, GDP growth in traditional economic terms). In the specific case of Second Life, this is achieved by minting and selling new currency on the open market at a rate that keeps the exchange rate constant.

Allow Collective Ownership and Participation

Creators should be able to easily work together in groups on projects and invest or participate collectively in returns. Given that specialization is likely (one person might be good at writing code while another is good at 3D modeling, for example), requiring each person to fully create their content will set a low upper bound on the appeal of creations.

Virtual land that can be developed equally by all members of a group, along with a mechanism for creating and populating those groups and a way to pool and distribute funds is an example from Second Life of how this can work. A failure example would be choosing to use blockchain addresses to control the contents of virtual land, due to the difficulty and risk of managing multiple signatures under the presumption of a frequently changing set of contributors.

Support Live Collaboration rather than Offline Editing

Having someone stop by and compliment your work-in-progress is a powerful amplifier for participation, as is the ability to recruit passersby to help with a project. Reducing the time delay between content creation and publishing is effective in both virtual worlds and programming languages (compiled versus interpreted). A great temptation in virtual worlds is to take advantage of powerful offline editors (Unity, Blender, etc) and standardized file formats by creating an edit/publish sequence. Roblox, VRChat, and Sansar are examples of worlds taking this approach. But the problem is both that the creator cannot enjoy social interaction while working, and also that multiple creators cannot then work together on one place or project.

Free Access

If the virtual world provides a potential source of real-life income for creators, some would argue that open access is a moral imperative. But even without this perspective, free access seems vital and competitive: Virtual worlds are often an uncertain proposition for new content creators wondering if they have something useful to add, and imposing a fee before answering that question is likely to eliminate a lot of creators and their potential content. Further, the diversity of available content should be maximized as much as possible with the hope of discovering promising content that can then be refined through competition amongst creators. Free access maximizes this diversity by increasing the pool of creators that will make a first effort to build something unique.

VR Headsets are an example of a high access cost. Even the loss-leader $300 price of the Oculus Quest is still a very high fee to bear to be able to begin experimentation with content development. If virtual worlds are to be of service to the world by providing a source of income, they need to be accessible via existing devices — ideally smartphones — using freely available software.