(2021-06-29) Ball Payments Payment Rails And Blockchains And The Metaverse

Matthew Ball: Payments, Payment Rails, and Blockchains, and The Metaverse. Throughout this primer, the Metaverse has been positioned as both a successor state to the mobile internet, as well as a platform for human leisure, labor, and existence at large. The success of this vision depends on whether the Metaverse has a thriving economy (virtual economy).

Payment rails and services. These technologies enable and manage the flow of money throughout the economy and define the basic “cost of doing business” for every enterprise, worker, and consumer in said economy. And they’ve already become a problematic battleground for hegemony in the budding Metaverse.

But before getting to that, I’ll start with a primer on payments.

ACH (“Automated Clearing House”), Fedwire, CHIPs (“Clearing House Interbank Payment System”), Credit Cards, PayPal, and peer-to-peer payment services like Venmo.

These rails have different requirements, merits, and demerits.

digital payment networks such as PayPal, Square, and the Cash App. Individual accounts are primarily funded via ACH or credit card, at which point the platforms then serve as a centralized/single bank used by all accounts. As a result, all transfers between users of the same payment platform are effectively just reassignments of money held by the platform itself. Given this, payments are instantaneous and when money is sent between friends and family, these platforms typically charge no fees. But when a business is paid, 1.5–3% transaction fees to the business are common. And if a user wants to move their on-platform money to their bank account, they must typically pay 1% (up to $10) for it to arrive same-day, or otherwise wait two to three days (during which the platform collects interest).

There is no direct way to send cash from one digital payment network to another. In addition, many are US only.

more important than their technical attributes is their competition

In theory, the virtual world should have “better” payment rails than the “real world.” After all, its economy primarily involves goods that only exist virtually, which are bought via purely digital (and thus low marginal cost) transactions, and are, for the most part, $5–100 each.

But in truth, the “rails” of the “virtual economy” today are much worse than those of the “real world.” They’re more expensive, cumbersome, and slow to change. In fact, they’re based on precedents that are closer to the founding of CHIPs in the 1970s than either PayPal or the iPhone.

The console platforms have several justifications for collecting nearly a third of post-tax revenues from a game developer’s work

These arguments have some merits, as well as some flaws.

Instead, the online services offered by the platforms are largely used to put extra distance between developers and players, and to lock both groups into hardware-based platforms

More important than the policies of Nintendo, Sony, and Microsoft’s respective gaming consoles is how their closed distribution and 30% fee model has been adopted by general purpose mobile devices, such as Apple’s iPhone and iPad. (app store)

Furthermore, Apple offers a fraction of the online services of the console platforms — there’s no real player network, nor player-to-player communications service, nor accomplishments/achievements services.

the majority of Apple’s App Store revenues come from gaming

irrespective of whether the smartphone or digital ecosystems are suffering from market failure, the distribution model described above does significantly constrain the budding Metaverse ecosystem.

To maintain control, each hardware platform gatekeeps or cripples potentially competitive Metaverse-related technologies

For example, Apple uses its control over the App Store to prevent iOS browsers (whether made by Apple, such as Safari, or others, like Google Chrome) from using most of WebGL.

Similarly, Apple prohibits applications from using its NFC chips for payments, thereby ensuring Apple Pay is the only digital payment solution that can use tap and go.

Cloud game streaming is another good example.

these services would have to pay Apple 30%, too, which is effectively impossible given these services usually take 30% themselves. As a result, none of these services have launched on the iOS App Store

They can stream to the Safari browser, but Apple doesn’t allow browser-based experiences to use an iPhone’s camera (thus no AR), send notifications (e.g. game requests), automatically connect to Bluetooth, etc. There’s a reason we prefer to use Netflix’s app to Netflix in a browser. And it’s relatively a simple app!

As a related aside, these platforms also reject applications based around nudity or pornography

Another issue concerns restrictions over player-purchases currencies.

The biggest issues, though, are about funding “Metaverse platforms.”

Unfortunately, however, it’s hard for developers to increase revenues given Roblox pays developers only 24.5% of every dollar spent on their games, assets, or items. While this makes Apple’s rates 70-85% payout rates seem generous, the reverse is true.

Roblox currently operates at a roughly -25% margin.

Apple collects roughly $30 in pure profits despite putting nothing at risk.

Consider, for example, “professional” game developers like EA (Electronic Arts), rather than independent Roblox hobbyists. EA would never make a game on Roblox, where they can collect only 25% of consumer spending, when they can instead make an iOS game and collect 70%

Apple has outlawed the metaverse. The principle they state, taken literally, would rule out all cross-platform ecosystems and games with user created modes: not just XCloud, Stadia, and GeForce NOW, but also Fortnite, Minecraft, and Roblox. https://t.co/OAGC7cXfSl — Tim Sweeney (@TimSweeneyEpic) August 6, 2020

Apple does not deserve 30% of a transaction for virtual real estate or virtual avatars that are created by developers that don’t use any of Apple’s standards, built on a virtual platform that runs on nearly every device in the world, and not integrated into any of Apple’s products

this certainly doesn’t work when the proprietors of the Metaverse economy must pay another virtual platform — the one that actually enables their business — and the government.

This is why all of the major NFT platforms and blockchain-based worlds are browser-based and lack console releases and mobile applications

Crucially, we have some view of what happens when digital payment rails are cheap and flexible. When Tencent’s WeChat launched in 2011, China was primarily a cash society. But within a few years, the country was hurled into the digital payments and services era

Tencent grew so powerful so rapidly in China that it even holds leverage over Apple, who allows it to process payment for its Mini Programs without taking a cut.

all of the major virtual platforms have their own proprietary currencies

And you can only buy them in pre-set amounts which rarely fit specific purchase prices

And of course, these currencies aren’t refundable

The utility of these goods are further limited by ownership restrictions. Most games and gaming platforms prohibit users from gifting outfits or items they already own, or even selling even for in-game currency that, per above, can never be converted back into cash. And the publishers that do allow reselling and trading, typically place firm limitations on this behavior. Roblox, for example, only allows “limited items” to be resold (otherwise peer-to-peer trading would undermine the sale of goods from Roblox’s own shop) — and only Roblox Premium subscribers can sell these items. (virtual economy game rules)

And although we believe these are “bought,” they’re really just licensed on an indefinite — and therefore revocable — basis. This isn’t a huge problem for $10 skins and dances, but they’re certainly prohibitive for high-priced virtual land or exclusive items

Ownership rights (property rights) are a foundational aspect of investment and the price of any good, while the opportunity for profit is a profound human motivator.

It also means users should be able to bring virtual goods across and between various platforms and games

consumer spending today is constrained by the knowledge that no games last forever

It’s dangerous for any developer to build a business whose wares or services are limited to the popularity of a given platform or its economy

in-game economies are deeply tied to both publisher revenues and player fun - but also hard to optimize and easy to break (which many major games have in-house economists). Open economies, trading, and increases to commercial item value inevitably trend towards play-to-earn mechanics or behaviors, which can quickly devolve into “work” that ruins a game’s sense of fun and fairness. (virtual economy)

No major developers, at least today, built their in-game economies to interoperate into a would-be successor internet that doesn’t currently exist. And they certainly don’t want open economies to result in situations where their players stop buying virtual items because they’ve bought them from a competing developer and brought them over

Over time, developers will figure out how to support “Metaverse” business models. And they’ll use the Metaverse’s comparatively larger economy to quickly surpass more “legacy” game makers. Free-to-play gaming, after all, was once considered a radical business model

Participating in the Metaverse economy doesn’t mean all assets are shared and a single “Metaverse currency” is embraced.

the market will determine the right model

Might even see new third-party services and technologies emerge in order to manage assets and federate payments. And this brings us to the blockchain.

The Potential of Blockchain and the Metaverse

For many, the idea of the Metaverse is not just intertwined with blockchain, it fundamentally requires it. To others, this is absurd

What matters is not whether the blockchain is technically superior in a given way, especially compared to its current, point-in-time alternatives. Rather, it’s whether blockchain standards can more effectively enhance developer profits over time, and in turn, grow the Metaverse economy.

...why so many in the Metaverse community find blockchain technology so compelling. And at the core of this is the fact that cryptocurrencies are essentially programmable payment rails. Bitcoin, for example, is programmed to automatically compensate those who operate its network using its own cryptocurrency. This differs from traditionally-defined open source projects, which mostly rely on altruism or philosophy

Later blockchains, most notably Ethereum, expanded upon this programming idea by establishing their own programming language (Ethereum’s is called Solidity).

the dapp creator can choose to reward their network for delivering anything they can measure and consider scarce: time, users, content, bandwidth, data entry, good behaviors, or whatever else can be measured. (scarcity)

It also becomes far more difficult and costly for a developer to build on a public blockchain, then cut themselves and/or their experiences off from it once successful.

This is key. I wrote earlier in this essay about how today’s hardware platforms were stifling the growth of virtual platforms which might disrupt them. Hopefully regulators intervene in the United States and abroad, but we don’t want the Metaverse to just change our gatekeeper from Apple to Roblox.

Programmable tokens, meanwhile, enable developers to easily issue governance rights to their users and reward contributions.

But what does this mean in practice, rather than potential and spirit?

Cryptocurrencies like Bitcoin and Ether, can be bought, sold, and traded globally and across almost all wallets

The fact that this system, which has no central authority but instead tens of thousands of independent miners, transferred as much as $68B in a single day and across a dozen blockchains, is remarkable.

Regardless of whether cryptocurrencies become a common form of payment in the “real world”, they’re increasingly being used in gaming via NFTs and blockchain-based studios - and for initial user payments, in-game currencies, and UGC payments. As a result, the “crypto Metaverse” suffers from substantially less currency fragmentation than today’s gaming ecosystem (i.e. Minecoin, V-Bucks, COD Points, Robux, etc.), supports two-way exchanges (i.e. USD to ETH and back), is widely interoperable (the same “currency” can be used in AxieInfinity and Decentraland).

NFT-based games such as AxieInfinity and Zed Run, meanwhile, are generating up to tens of millions of dollars a week despite their relatively modest user base of 50-250,000 DAUs.

Today, only a tiny fraction of online users and gamers even have a crypto wallet, and almost no brands and games issue NFTs. But irrespective of multi-month dips in the blockchain/crypto/NFT economy, we see more of these groups embrace blockchain-based experiences each month. This produces a virtual cycle.

Developers such as Gala Games (which comes from a co-founder of Zynga) and Mythical Games (from a former Activision and Niantic executive), are also building their Unity-based games on the blockchain so that in-game items can be owned as NFTs and players can operate nodes or buy tokens that give them economic participation in (and partial governance over) the games themselves.

And while a variety of competing blockchains exist today, such as Ethereum, Flow, and Solana, a number of meta-protocols or meta-chains are working to solve this, most notably Polkadot.

Blockchain standards also look like the best way to engage today’s major games, gaming platforms, and brands into the budding Metaverse, too.

they’re unlikely to sign onto any system managed by a competing platform

Pixar’s USD format, meanwhile, has only been adopted because it was open sourced.

The most disruptive aspect of digitally-native “programmable” payment rails, however, is how it enables greater independent collaboration. (virtual company)

Using smart contracts, a new, multi-member entity can be created within minutes. No signing documents are required, nor credit checks, lawyers, government filings, or even direct knowledge of the members. Smart contracts also automatically manage all payment flows, governance rights, information rights, and ‘bylaws.’

The most intuitive version of these smart contracts manages fundraising and ‘equity rights’ for a project. Mirror.XYZ (Disclosure: A portfolio company), operates a bit like a blockchain-based Medium. And to this end, a writer can sell tokens to their audience to finance a new essay or series or video, then mint NFTs of said works and automatically share the proceeds with their patrons.

While Mirror focused on media applications, smart contracts can be used to construct a “decentralized autonomous organization” (DAO) that serves almost any purpose, however small and temporary, or massive and persistent.

This may seem slightly afield for a Metaverse essay. But we want it to be easy, quick, and inexpensive for individuals to organize, fund, and govern projects in the Metaverse.

Despite this potential, it’s important to recognize that in addition to the regulatory overhang, blockchain-based games and experiences are still subject to and constrained by the hardware platforms.