Build a Metaverse with a Fully Functioning Economy Through Tokenomics

Matterverse

A Fully Functioning Economy Requires Good Tokenomics

While building a metaverse poses many challenges — technology, product, funding, culture, and many more, no one can deny that achieving a sustainable and growing economy is the most challenging but also the most rewarding factor in building a real metaverse.

Matthew Ball sees a “Fully Functioning Economy” as a defining attribute for metaverse

Thanks to the development of blockchain technology and all the innovations in the web3 space, this could be achieved through well-designed tokenomics. Tokenomics, or token economics, described the economics of a crypto token (used in that metaverse).

Just like each country/region has its own economic situation, there is no “one size fits all” solution for different web3 projects, including a metaverse. The mechanisms should be designed to align all stakeholders’ interests and incentivize them to work together for a common goal. In our case, we need to make sure everyone’s choices and actions lead to a sustainable and growing economy for the metaverse. Therefore, our first step is to map out who these participants are and what they want.

Decipher Each Stakeholder’s Motivations

Just like in a real economy where we need to analyze consumers, producers, importers, and exporters, we also need to design the metaverse tokenomics with all parties in mind.

There are in total four top-level roles for all types of participants in the metaverse: creators (who develop the platform and contribute the content), players (who consume the content by joining and playing in the metaverse), investors (who deploy capital into the metaverse to fuel its growth), and businesses (who purchases/rents land and benefit from its traffic).

It should be noted that while we created those four top-level categories with many different roles to make it simpler to analyze those stakeholders, someone could have multiple roles and the exact roles they play might change over the course of time as well. Each role could be played by individuals or organizations, which involves more complicated motivations.

Creator

Creators, as an umbrella term, refer to developers, designers, 3D artists, and more. Collectively they work together to develop and improve the platform and creation tools on top of which the metaverse is built and contribute content used in the metaverse.

Ethereum Community Conference in 2021 (from https://ethcc.io/)

There are two categories of creators, internal and external, and each has two subcategories:

• Internal Creators: founding team. While the end goal is to have an open metaverse owned and run by the community, there needs to be a founding team to build it at its infancy stage to go through fast iterations, raise initial funding, and eventually build a community around it. As the community grows, a DAO (decentralized autonomous organization) will emerge to gradually allow the community to take over the governance and operation of such a metaverse. That DAO will employ more developers to continue the development and iteration of the metaverse. Internal creators either from the founding team or the DAO are incentives by their career motivation and performance compensation, based on the outcome of the metaverse.
• External Creators: A wide range of creators will contribute to the content and experience in the metaverse, and most of those creators are external creators instead of internal ones. “Create-to-Earn” creators create new architecture designs, 3D assets, functionalities, and more to earn from it (their product could be rented/purchased by others or rewarded by the system). “Create-to-Express” creators provide a similar or the same content/experience, except that their top motivation is to express themselves for fun or for recognition of the community. Most creators have both motivations at the same time, except in different proportions.

Creators are the foundations of the metaverse and have the most complex motivations. Their incentives should be managed through a combination of opportunities to express, community recognition, and financial reward.

Players

The majority of all participants of the metaverse are players. All other parties are involved to ensure the metaverse can provide good experiences and utilities for players. Intuitively we might think the players here are very similar to the players of any other common MMORPG (aka, a massively multiplayer online role-playing game) games like World of Warcraft or Lost Ark. Despite the similarity, players in the metaverse typically have more expectations and motivations than the ones in those games.

Philippines-based YGG owned vast digital assets though Play-to-Earn NFT games

Overall there are two categories of players in a metaverse:

• Play-for-Fun players are very similar to traditional MMORPG players — they are simply here to enjoy the content and the experience provided in the metaverse. However, besides the leisure from playing and exploring in the game, they could also enjoy other utilities provided in the metaverse, e.g., shopping, working, or even dating. Because of this, many of the play-for-fun players will spend money/tokens in the metaverse, to access premium features or purchase digital/physical assets.
• Playe-to-Earn players are players whose top motivation is to earn tokens or fiat money through participating in the metaverse. To engage all players and encourage them to participate in the metaverse, throughout the metaverse there will often be rewards for players when they explore certain areas, achieve certain tasks, and perform specific actions. The rewards can be in the form of special gears, NFT badges, or tokens.

It should be noted that if there is not a healthy token mechanism or anti-bot system in place, Play-to-Earn players could cause some severe damage to the metaverse and accelerate its collapse. Despite this, they are an integral and unavoidable part of this metaverse community: you cannot easily differentiate the two types of players and set up discriminating policies to prevent play-to-earn players from doing so. Even Play-for-Fun players also enjoy being able to make some income from participating in the metaverse.

With well-designed tokenomics, their success would depend on the long-term growth and stability of the platform. Therefore they could provide virality for the platform’s growth and liquidity for trading all digital assets.

Investors

Any platforms will face the same challenge: they are only as robust and valuable when they already have the ecosystem — a large userbase and a well-functioning system, but they all need to start very small. At the early stage, most platforms could not be financially self-sustainable, or doing so would slow down their growth and chances for long-term success. This is where investment would come into play.

Investors would provide investment to fund the metaverse at its early stage, by investing in the founding team, purchasing land or other digital assets as NFTs, or purchasing/holding the metaverses’ tokens. Investors provide investment to the metaverse for different reasons, but the majority of them expect to see a financial return from their investment.

BitDAO’s investment chart — bitdao.io

There are four types of investors:

• Backers: investors who believed in the metaverse’s vision and the founding team’s credibility at the early stage. Their investment holds more risks but also potentially the highest amount of return. A good backer is not eager to exit because he/she knows the growth potential in the metaverse, and would hold all assets in the time of crisis. They can be institutional investors (who manage a portfolio of investment for other limited partners in the fund) or angel investors (who invest with their personal wealth).
• Speculators: speculators purchase the metaverse’s assets like lands and tokens because they simply are betting that its value will appreciate over time, and when it does they will sell for a profit. They have a less sophisticated investment strategy and the threshold to invest is often much lower. Investors who focus on speculation and arbitrage tend to panic sell in the time of difficulty, but do provide liquidity to the market.
• Managers: some investors believe in the future of the metaverse and will purchase digital assets in the form of NFT in the metaverse at its early stage. They could plan to rent out the land to other brands and players for a profit. Managers would help to build the land they are managing and attract brands to rent and move into their land to increase their gains.
• Governors: because the metaverse will be governed by a DAO, all members will have governance power through voting with their NFTs or tokens. Some creators/players/investors/brands care about the metaverse a lot and hope to participate in its governance by investing in/purchasing digital assets to protect their stakes. They are the most important force to manage the metaverse and help it grow in the DAO.

Building a metaverse is nearly unfeasible without the early-stage investment, but the web3 innovation has made it possible that the founding team could also rely on investment from the community, instead of only from venture capitals.

Brands

All of the land in the metaverse, except for the ones reserved for public use or future sale, will be used and operated by brands. This should by no means be seen as simply a virtual 3D storefront or showroom because the metaverse platform would offer a tool for the land owner/operator to design its space and its functionalities. One should be able to easily create even a mini-game on that land to promote its branding, showcase its product/service (physical or virtual), and engage its communities.

Despite the name of the brand for this category, they should include both businesses and individuals, both traditional institutions and decentralized organizations. There will be three types of brands:

• Metaverse Native Projects: all DAOs, NFT communities, Dapps (decentralized applications), or GameFi projects could own a piece of land in the metaverse. Currently, all web3 native projects rely on platforms like Discord to gather their community due to the fact that most of them would only interact with each other online. Having a branded space in the metaverse would allow them to create a more personal, inclusive, and long-lasting community.
• Metaverse Adoption Brands: either you die as a web2 project or you live long enough to become a web3 one. The same applies to the adoption of metaverse for all traditional institutions, just like how each of them needs to have a website on the internet. Traditional brands will gradually purchase or rent a piece of land in the metaverse to give an immersive and engaging experience to their customers and partners. We are expecting to see the adoption starts from fashion and luxury brands but could go all the way to education, financial institutions, and more.
• Personal Brands: with the influence of the internet, personal branding matters now more than ever. More influencers will also need to have their own land to meet their fans, portray their products (arts, literature, or even NFT collections), and improve their branding. The metaverse would allow them to more easily achieve the 1000 True Fans effect.

What Does the Token Promise

After analyzing the motivations behind each party in the metaverse, our goal is to use tokenomics to align their interests and incentivize them towards working together to build a sustainable economy. But before analyzing how we can use tokens to do so, we need to know what they can do with the tokens in the metaverse.

There should be two types of tokens used in the metaverse to build a functioning economy — a fungible token that is divisible and interchangeable, and a non-fungible token that is indivisible and irreplaceable.

The Metaverse Fungible Token

The fungible token will be the foundation to facilitate the majority of transactions and cooperations among different parties. Acting as a form of currency used in the metaverse, it also promises other use cases:

• Medium of Exchange: the token can be used to access utilities in the metaverse (and thus a utility token). This includes using special in-game gears and skins and accessing premium features; the token could also be used as a form of payment token — purchasing goods and services in the metaverse, either virtual or physical, including land, digital collectibles, and physical products sold in the metaverse and more.
• Representation of Ownership: the token could also be used as an equity token, similar to traditional stocks that it could earn interests/dividends and vote to govern the platform, except only happening digitally on the blockchain. If the holder stakes (can be seen as “invest”) that token, he or she would be able to claim some returns on the platform, and govern through voting for different proposals in the metaverse DAO.

While the second use case — representation of ownership helps the metaverse towards its goal to become a decentralized metaverse for the community and by the community, there are more complicated regulations involved.

The Metaverse Non-Fungible Token

The non-fungible token (NFT) is a digital certificate of ownership to a unique and one-of-kind asset on the blockchain that powers the metaverse. As the “asset” in question varies, there are different use cases for the NFT as well:

• Representation of Ownership: NFTs could be used to represent the ownership of specific land, a digital collectible product, or a piece of special gear in the game (that you bought with the fungible tokens).
• Representation of Membership: NFTs could also have some unique use cases when that asset it represents means the right to access. For some areas in the metaverse, this could mean “No NFTs, No Entry”, like a brand’s VIP room or the metaverse’s founders’ hall. NFTs as membership could also allow one to participate in the voting of that group.

What Tokenomics Mechanisms Are In Our Arsenal

Now that we can see how the two types of tokens could be the medium through which we could incentivize different parties in the metaverse, we also need to dive into how we can manage the tokens (specifically the fungible token native to the metaverse) to achieve the outcomes we hope to see.

We will be discussing a list of mechanisms available to us, assuming the metaverse will use an existing blockchain instead of building a new one.

Minting

Minting refers to the process of creating the metaverse’s token on the blockchain. Most of the mechanisms of the token should be designed before minting and be written into the smart contract.

One of the most important decisions for minting is to set a total supply. While in reality government often have a targeted annual inflation rate (usually 2%), the commonly accepted practice for tokenomics is to set an unchangeable limit on the number of tokens. This, often together with the burning mechanism below, will create deflationary tokenomics, creating scarcity and increasing returns of early token holders and users.

This process is minting instead of mining because we assume the token will be launched on an existing blockchain, like eth or polygon, and all tokens will be minted at this stage and could be distributed later.

Issuance

There could be three types of issuance to build the economy of the metaverse:

• Airdrop: tokens could be airdropped at the early stage (especially when it is first introduced) by sending tokens to addresses for free. This could incentivize more people to promote the metaverse or stay active in the community.
• Reward: tokens could be rewarded to creators for contributing content and developing experiences on the metaverse, helping the metaverse to create a creator economy; players could also be rewarded if they achieve certain tasks, finish certain quests, or meet any other performance/action expectation, creating a play-to-earn model to engage the community members.
• Sale: tokens for the metaverse will be sold first through presell, before it even becomes usable, usually to get early-stage investment from angel investors and crypto funds. Tokens are later sold to the public through Initial Coin Offering (ICO) for greater exposure and liquidity. Players could also make a direct purchase in the metaverse right when they need the tokens for payment or utility.

Staking

Token holders in the metaverse could lock up a token in the metaverse DAO for a set time in exchange for a reward and voting rights. This process is also known as staking.

While if the metaverse runs on an existing blockchain and does not necessarily need to set up its own proof-of-stake consensus mechanism, staking still provides benefits for the ecosystem.

By rewarding token holders to stake, the DAO could adjust the amount of tokens in circulation based on the strength of supply. This would help to avoid unnecessary fluctuation in the token price and even achieve steady and predictable growth of the token price.

At the same time, the staking process means one could only vote with tokens staked in the DAO, thus creating more aligned interests as voters’ financial return depends on the stability and growth of the metaverse.

Taxing

While there is actually no such term as taxing used in tokenomics, they are a great analogy to the actual taxing system in our economy for token-redistributions. All transactions that occurred in the metaverse, including purchasing products, accessing utilities, investing in lands, or even simply transferring tokens, will need to pay a transaction fee.

The founding team (at the early stage) or the metaverse DAO would be able to adjust the frictions in the market by setting up different transaction fees. The friction could be lower when there is not enough liquidity in the market, and higher to achieve demand stability for the token. This could also be done automatically by using a smart contract that can receive external information through oracles.

At the same time, the taxing process, or transaction fees, could also provide the source of tokens for the rewards gained in staking and the tokens to be burnt to better adjust the total supply for the token.

Burning

A token can be burnt by sending the tokens to an unretrievable address, like 0x00… This means that the tokens burnt are forever lost and therefore destructed from the total supply.

Burning, by reducing total supply, could achieve an increasing scarcity, therefore increasing the token price and benefiting all token holders (including those that are not staking). This is considered to be a deflationary model.

A portion of the transaction fee could be burnt to achieve this, and the exact percentage of tokens to be burnt in each transaction could be determined also by the DAO or through a pre-set smart contract.

Principles in Designing the Tokenomics

It should be noted that while the above sections are not a comprehensive and technical overview, they aim to provide a basic understanding of different components in the metaverse’s tokenomics. Now that we have understood the motivations of different parties, major use cases &values of tokens, and tokenomics mechanisms, it is time to put them together.

To design a tokenomics that can support a fully-functioning tokenomics, we need to have the below 4 principles in mind.

See It in Action

While building a metaverse with a fully functioning economy sounds like a crazy plan, it is exactly what we are doing at Matterverse! We are still in the process of building this out with our community, and if you are interested, feel free to follow us on Twitter or join us on Discord! Please see links below.

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