(2021-01-25) McCormick The Value Chain Of The Open Metaverse

Packy McCormick: The Value Chain of the Open Metaverse. Some of the most fascinating work in tech is being done rebuilding the underlying structure of the internet and the economy, and I’ve wanted an excuse to dive in. We’re going deep on Web3, NFTs, and the Metaverse.

I’ve been a Metaverse bull for a while, and I’m now finally understanding the huge potential of decentralization

Tim Sweeney, CEO, Epic Games: This Metaverse is going to be far more pervasive and powerful than anything else. If one central company gains control of this, they will become more powerful than any government and be a god on Earth.

Beeple’s Everydays collection was composed of digital art backed by non-fungible tokens (NFTs) used to prove the validity, ownership, and scarcity of digital items or experiences.

over the course of those three days, Beeple earned $3.5 million.

I think that Web3, a decentralized evolution of the internet. might hold the key, and that NFTs are a bridge between Web3 and the virtual economy of the Metaverse.

Yes, there’s idealism, but there’s also a sense of building a new economy in which the value accrues to the people who create the value

Web3 and the Metaverse are two separate ideas that may or may not intersect. I think the future is much more exciting if they do

What is Web3 and Why is it Important?

Web 2.0 (mid-2000s to present)

These companies didn’t just capture state, they aggregated it, building up huge troves of valuable user data.

Web3 is the next version of the internet, built on top of crypto-economic networks, like Bitcoin and Ethereum. According to Dixon, “Cryptonetworks combine the best features of the first two internet eras: community-governed, decentralized networks with capabilities that will eventually exceed those of the most advanced centralized services.”

Instead of building siloed products, Web3 is built for interoperability. This is a key concept, keep it in mind. Decentralized Finance (“DeFi”)

A common analogy for the way DeFi products are built is with “money legos.”

There is also a competitive advantage to be gained from how you leverage APIs to build your company and product.

Web3, too, uses APIs for software to talk to each other.

It’s not about who doesn’t own your data, but who does: you. That’s what crypto folks call “Self-Sovereign Identity.”

I’ve always viewed the Web3 movement as anti-capitalist. That couldn’t be further from the truth. The movement is really about doing one of the most capitalist things there is: cutting out the middleman

Part of the magic is that money is built directly into Web3 protocols. Bitcoin and Ethereum, the two main protocols on which Web3 is built, both have mechanisms for rewarding contributors baked directly into the code.

New, directly-exchangeable internet money unlocks entirely new business models. That’s what excites me most

Cryptocurrencies are fun and valuable and I’m incredibly excited about DeFi’s potential, but I hadn’t seen a convincing killer app used by regular people until I discovered the resurgence of NFTs.

Three years before Beeple’s Everydays auction, in November 2017, a small Canadian venture studio called Axiom Zen set the blockchain on fire when they released a series of digital trading cards with pictures of cats on them.

their legacy is as the first digital asset to use the ERC721 asset standard for NFTs.

As more of our lives move online, the ability to own scarce digital items is only becoming more important, and the NFT-based digital asset market will increasingly mirror the luxury market

Each copy of the book or song is fungible

*So too with tokens on the Ethereum blockchain that represent digital currencies. I don’t care which ETH, BAT, UNI, or SUSHI I have, just that I have the right amount.

These tokens are all built based on the same standard, ERC20, that defines a bunch of important information like the total supply, how to transfer tokens, and how transactions are approved. ERC20 tokens can represent almost anything worth tracking with an Ethereum Smart Contract: money, reputation points on a Web3 social media platform, skills of a character in a video game, an ounce of gold.*

But if Web3 and digital worlds are going to replicate the physical world, and some of the best parts of Web 2.0, they need a way to prove ownership of unique and scarce digital assets.

Currently, for example, I can buy a skin (or outfit) on Fortnite, and maybe it’s the only version of that skin that Epic sells. That’s non-fungible, but it’s mediated by Epic

NFTs solve that problem by leveraging the blockchain to prove ownership and authenticity of rare digital items

*Today, I want to highlight three more, because each represents a step forward, on different fronts, for NFTs:

NBA Top Shot: Through an official partnership with the NBA, Top Shot combines sports cards and NFTs, bringing each to a wider audience.

$WHALE: The “first social currency backed by high-value assets.”

DIGITALAX: Creating a Digital Fashion OS through an NFT-based supply chain.*

NBA TopShot

$WHALE

*He spent over $1 million, and then in May 2020, decided to put all of his NFTs in a Vault and use it to collateralize a new social token, $WHALE.

Unlike many crypto tokens, whose value is backed by math and belief, $WHALE is the first and most prominent example of a cryptocurrency backed by NFTs, whose price should appreciate based on the value of the NFTs in the Vault.*

DIGITALAX

DIGITALAX is based on a parent-child structure, in which the Parent NFT - the final piece - is composed of child NFTs representing all of the materials, patterns, and colors that go into the construction of the garment

*NFTs don’t just prove authenticity and ownership. They also give interoperability and portability to rare digital assets, allowing their owners to take their NFT-backed digital items with them across the open web, to wherever will host them.

That’s as good a bridge as any to jump into the Metaverse.*

The Size of the Metaverse Prize

Web3 and NFTs might hold the keys to stitching together the back-end of the Metaverse by building connective tissue and interoperability into the system.

In September, Unity, the company behind one of the two main game engines, the Unity Engine, went public. We covered it in the S-1 Club, and as a group, were most excited by the fact that the Unity Engine, along with Epic’s Unreal Engine, may be the rails for the Metaverse’s virtual worlds

Roblox is expected to go public via a direct listing in February

Epic, probably the leading contender in the Metaverse race due to the popularity of Fortnite and the Unreal Engine’s position as the most robust engine for 3D experiences, hasn’t announced plans to go public. The company raised $1.8 billion at a $17.3 billion valuation in August

those valuations imply that investors are starting to put a value on the call option that is the Metaverse

The question is: will they be interoperable and open, or closed and siloed?

The fact that any one person or company can control the OASIS (read: Metaverse) means that Ready Player One depicts a “closed” Metaverse

This is what happens if Facebook wins with Oculus and other Facebook Reality Labs projects

Sweeney and many others hope it never comes to that. They’re advocates for an Open Metaverse. The Open Metaverse is one built from the connection and interoperability of a series of different platforms, worlds, sites, stores, experiences and more.

some FAAMG might support an Open Metaverse. Microsoft recently admitted it was on “the wrong side of history” with respect to Open Source at the turn of the century, and has been much more open to Open Source under Satya Nadella

a December 2020 study found that 63% of gamers would spend more on virtual goods with real-world value

The trend towards buying skins, digital real estate, and art will continue, morph, and expand, people will want to take what they own wherever they go within the virtual world, and the Direct-to-Avatar (D2A) economy will emerge.

In 2018, over $1 billion of Fortnite’s $2.4 billion in revenue came from the sale of skins (outfits) or emotes (dance moves)

Currently, the value of skins and other virtual items is largely contained within each individual game.

Crucible is trying to change that. Its co-founder & CEO, Ryan Gill...

Already, smaller developers are making this possible. Last week, Cryptovoxels, Somnium Space, and Decentraland announced that they’re working to let users portal between worlds.

For the Open Metaverse to thrive, that’s what Crucible is working to make possible more broadly. It’s building the Emergence SDK, a “drop-in asset for popular game engines and web frameworks that provides easy, familiar access to Web3's Digital Trust Layer,” compatible with both the Unreal and Unity engines.

As a quick refresher, Michael Porter’s Value Chain insight is that: “Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product."

Crucible currently works with Sovrin and Evernym’s Verity to power a self-sovereign identity.

If the Metaverse looks more similar to Web3 than Web 2.0, a player’s Crucible agent will hold their digital identities and everything that they own in the virtual world, which means that the Metaverse begins to look more like the real world

If it’s successful, it will help to power a Direct-to-Avatar Economy. “Just as Direct-to-Consumer dematerialized the supply chain by 40% and enabled new business models to flourish,” Gill says “Direct-to-Avatar will, dematerialize the rest of the supply chain, allowing brands and creators to sell direct to Avatar.”

Ben Thompson wrote: Breaking up a formerly integrated system — commoditizing and modularizing it — destroys incumbent value while simultaneously allowing a new entrant to integrate a different part of the value chain and thus capture new value.

By dematerializing the supply chain and selling directly to the end user, as represented by the Avatar, the D2A value chain removes entire steps - manufacturing, logistics, and support - and integrates R&D, Retail, and Marketing

In this value chain, the profits don’t accrue to the aggregators, like they do in DTC. There’s no “40% of all VC money goes to Google and Facebook here” if it works.

If done correctly, the Metaverse becomes more than the escape from a bleak reality that it is in Ready Player One, but a new way to earn a middle class income while pursuing your passions with ever-growing and more profitable niches of your people, around the globe.