Web3, NFTs, and the Metaverse

There are lots of parallels between the physical and digital world. In the physical world we have public squares. In the digital world we have social media applications. In the physical world there are a plethora of retailers, in the digital world there are a wide array of e-commerce companies.

In the physical world people travel to theatres, cinemas, and concerts, in the digital world they access streaming services and music platforms.

But while people own assets in the physical world - there has not been anything comparable in the digital world. In fact for most of the internet's history nobody has owned any form of digital property. Domain names are merely paid for on a subscription basis. And purchasable video game items, cannot be taken out of the confines of the game, and are ultimately beholden to the centralised institutions maintaining such games.

This was until the creation of NFTs…

Non-fungible tokens first rose to prominence with CryptoKitties. A blockchain-based game that launched in October 2017, in which players bought, bred, and traded, digital kittens. As a consequence of the game’s popularity the economic value of the digital kittens soared.

So what are Non-fungible tokens? NFTs are units of data that are stored on a blockchain, and which represent unique digital items. This is a more complicated way of saying that they are representations of digital objects that only exist in one form. This is because NFTs establish provenance (chronology of ownership), and hence demonstrate the authenticity of a digital item. Although they first rose to prominence with Crypto Kitties, (see above), they really hit the zeitgeist when the artist Beeple (real name Mike Winklemann), sold an NFT for $69 million at a Christie's auction, in March of 2021.

A common comparison used to explain the premise of NFTs is that of the art world. For example, while the Mona Lisa is effectively priceless, copies of the famous painting, that can be purchased at the Louvre gift shop are inexpensive in comparison. The reason? The original celebrated masterpiece was painted by the Renaissance Polymath Leonardo Da Vinci, the others are merely duplicates. Similarly, NFT art such as the Bored Ape Collection, (shown below) was created by a group of digital artists. And the people who purchase/own these “Apes”, own the actual art; rather than just copies of it. Not only does this mean that their ownership is visible on the Ethereum Blockchain, and they can potentially sell the NFT for a greater price in the future. But as can be seen in the first image, there are also membership benefits.

These two images were taken from OpenSea, an exchange for NFTs. This popular collection shows NFTs as art. And most of the nascent buzz around NFTs is currently focussed on their application as art, but virtually anything can be represented as an NFT. “NFTs really started initially with the digital art side. But it's going to be a lot more powerful,” says Eric Anziani, COO of Crypto.com. He notes that, “It will be the tool that represents any digital type of assets in virtual worlds going forward. So the applications are tremendous.” OpenSea also sells NFTs for music, virtual worlds, collectibles and more. There are other exchanges as well, such as Rarible, Nifty Gateway, and SuperRare.

In addition, NFTs can have programmed in them the ability to distribute royalties from resales. This is obviously a huge deal for artists/creators who can earn money from each resale of their original work. Beeple, for example, will earn a percentage royalty each time his breakthrough NFT is sold.

NFTs can also be used in the physical world. There is lots of potential for real estate to be tokenized, which means that homeowners/investors are able to buy and sell fractional ownership of properties without any middlemen, or the associated costs and fees. As will be shown in the Metaverse and Web3 sections, a similar phenomenon is taking place with digital real estate. These two sections will highlight the fact that NFTs make the internet ownable, they provide a new aspect of the web that did not exist before, property rights. These rights are protected by a distributed network of computers known as the blockchain.

The metaverse, which gained huge amounts of attention, with the news that Facebook would rebrand as 'Meta', does not yet exist. But ever since Neal Stephenson coined and used the term “metaverse”, in his 1992 sci-fi novel Snow Crash, there has been wide-ranging debate and discussion about what the Metaverse will (if created) entail, and whether or not it will be good for society. These debates accelerated with the publication of Ready Player One, a 2011 book by Ernest Cline, that Stephen Spielberg took to the silver screen in 2018.

In his outstanding nine-part essay, Matthew Ball has provided what many consider to be the greatest definition of the Metaverse yet. He lists seven main bullet points, which describe what he believes the Metaverse will entail:

In points four and six, Ball is referencing NFTs. He expands, much further on the application of NFTs in his section on Metaverse Payments, where not only does he note the importance of NFTs for the Metaverse, but also DAOs (decentralised autonomous organisations), and Smart Contracts. He begins by making the general assertion that “For many, the idea of the Metaverse is not just intertwined with blockchain, it fundamentally requires it”. And goes on to explain that blockchains make a lot of sense as a platform for ensuring the interoperability of worlds in the Metaverse. Furthermore that many people and organisations, would take issue with having a tech monopoloy, such as one of the 'FANGs', or ubiquitous video game publisher/developer corporation, maintain centralised control over the Metaverse.

“There is no Ethereum Corp, for example, which could suddenly decide to increase Ethereum gas fees, or to take a fee for every NFT sale, deny an emerging technology or standard, launch a first party service to compete with the most successful developer businesses, or repossess user accounts/entitlements/assets. (Chris Dixon likes to say that if the ethos of Web 2.0 was “don’t be evil,” a blockchain-based web 3.0 is “can’t be evil.”).” The blockchain cryptographically prevents certain actions from being taken which would be detrimental to users and builders, but beneficial for the platform. Web2 doesn't have such safeguards.

In addition, he notes how meta-chains/meta-protocols such as Polkadot prevent fragmentation, because they prevent the Metaverse from being limited to a single chain such as Ethereum or Solana’s blockchain, instead allowing it to exist cross-chain.

Lastly, Ball shows how the token model (i.e. smart contracts) offers the gaming industry (the industry closest to what could eventually become the Metaverse) a simple technical solution for one of its hardest problems: revenue leakage. He says that: “most players would love to bring their assets and entitlements from game-to-game. However, many developers generate the bulk of their revenue by selling players goods that are exclusively used inside their games. Therefore the ability for a player to “buy elsewhere, use here”, endangers the business model of game developers. For example, third party developers might ‘race to the bottom’ on pricing because, unlike a game-maker, they don’t need to recoup on a games’ initial development nor operating costs. Or perhaps players will simply stop buying virtual items because they’ve already bought enough in other games. Or they just like Developer A’s skins more than Developer B’s, but prefer Developer B’s game to Developer A’s.

Developers are similarly held back by the worry that in an open item economy, they might create far more value than they themselves capture. For example Developer A might produce Skin A for Game A, only for Game A to decline, and Skin A become a popular (and valuable) item in Developer B’s longer running title. In this case, Developer A has actually created content for a competitor that beat them! Or maybe it just turns out that Developer A’s creations have become iconic and highly valuable, thereby netting players orders of magnitude more profit than the developer.

The challenges above can be partly addressed by a ‘tax’/’duty’/’fee’ whereby the creator of an item is compensated every time it’s brought into a third party environment or traded. This doesn’t prevent leakage – as prevention requires this system to be fully optimized – but it ensures that a creator receives more revenue as their creation produces more value. However, this solution is incredibly hard to technically implement. In essence, every participating developer, publisher, and intermediary must track and manage an eventually-infinite number of in-game items and related data, then make (auditable) reconciliation payments. This can be done but it’s hard. The token/smart contract structure, meanwhile, makes this all automatic, provable, instant, and without need for “trust”. Dapper Labs, for example, receives a cut of every Top Shots secondary sale, even if it’s a true peer-to-peer sale that happens using third party wallets”.

One of the games that most resembles the Metaverse is Decentraland (MANA).

This is how Decentraland describe themselves in their documentation:

Decentraland is a decentralized virtual reality platform powered by the Ethereum blockchain. Within the Decentraland platform, users can create, experience, and monetize their content and applications.

Companies, individuals, and DAOs have purchased land in Decentraland. And it has had a booming property market, ever since opening to public users in 2020. On November the 23rd, 2021, a record sale for virtual land took place on Decentraland, whereby an NFT representing said land was sold for approximately $2.4 million of the game's virtual currency/tradable token (MANA). Two days later this record was surpassed, when an NFT representing virtual land in the play-to-earn game Axie Infinity, (which became the largest NFT collection ever in Q3 2021) was sold for 550 Ether, (worth about $2.5 million at the time). Then on November 30th, the Sandbox metaverse registered a new record, selling a plot of virtual land for a whopping $4.3 million. Many believe that overtime these virtual land sales will be far overtaken, as the Metaverse transitions to existing in large part in fiction, to fact.

Web3, or Web 3.0 as it was originally termed by Polkadot co-founder Gavin Wood, refers to what many consider to be the next era of the internet. Unlike how the Metaverse could be accessed through a virtual reality/augmented reality headset, Web3 can be accessed through mobile, pc, or laptop, just as previous iterations of the world wide web, (Web1 and Wed2) were. There is no clear timeline for when each phase of the internet ended/began. But, fortunately the venture capitalist and originative Substack writer Packy McCormick lays it out well:

Web1 (roughly 1990-2005) was about open protocols that were decentralized and community-governed. Most of the value accrued to the edges of the network — users and builders.

Web2 (roughly 2005-2020) was about siloed, centralized services run by corporations. Most of the value accrued to a handful of companies like Google, Apple, Amazon, and Facebook.

We are now at the beginning of the web3 era, which combines the decentralized, community-governed ethos of web1 with the advanced, modern functionality of web2.

Web3 is the internet owned by the builders and users, orchestrated with [fungible and non-fungible] tokens.

As Web3 will exist on a range of open and public blockchains, it will possess a number of important benefits. This section will address three of these benefits, in doing so it will use contemporary examples to help explain fundamental concepts and technologies.

Permissionless, nobody needs to ask for permission to join a network/application or even share their details, often the only necessary step is just to connect a crypto wallet with a Web3 application. One common way that this can be done is through a MetaMask Wallet.

In their documentation, MetaMask say that they: inject a global API into websites visited by its users at window. This API allows websites to request users' Ethereum accounts, read data from blockchains the user is connected to, and suggest that the user sign messages and transactions. This is very unlike many Web 2 applications which ask for your information, and then (as in Google, Facebook, and others) sell it to advertisers. They can even refuse your entry into their walled gardens, because you do not meet a certain criteria. In Web3, intermediaries will have less power and consumers and creators will have more. MetaMask is the most popular non-custodial crypto wallet, surpassing ten million MAUs in August 2021, and by November 2021 hitting a staggering twenty one million MAUs.

MetaMask can currently only be used to store, send and receive ETH and ERC20 (tokens issued on the Ethereum blockchain). There are a plethora of other wallets, many of which deal with other cryptocurrencies. Some of which are also stored on hardware, or are custodial. To get a stronger understanding of why there are different wallets, and the costs and benefits of each type; the crypto exchange and custodian, Gemini, has a great breakdown of wallets that can be viewed here.

Another example of the permissionless nature of blockchain is the field of decentralised finance, which lets anybody in the world access financial tools and services, without needing the permission of intermediaries.

The Coinbase website provides a good definition for DeFi:

DeFi (or “decentralised finance”) is an umbrella term for financial services on public blockchains, primarily Ethereum. With DeFi, you can do most of the things that banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but it’s faster and doesn’t require paperwork or a third party. As with crypto generally, DeFi is global, peer-to-peer (meaning directly between two people, not routed through a centralized system), pseudonymous, and open to all.

Trustless, when Gavin Wood was asked to explain Web3, he gave a simple definition. “Less trust, more truth”. He says that rather than having to place trust into institutions, we can all just look at the smart contracts that serve as the base for an application, see the code for ourselves and know, just as we know that 2 + 2 is 4, that something works in the way it says it does.

Wood explains this concept, by using the example of WhatsApp, (which uses encrypted communication).

He says that “if WhatsApp introduced into their service a key that allowed them to decrypt all conversations? How do we know that it’s not there? You have to trust. We can't see the code, we can't see how their service runs, we can't see their key structure. So all we have is the blind trust that they are telling the truth…

I think a degree of truth is necessary. And by this I mean openness, transparency. Blockchain technology uses both cryptography and certain game theory economics to deliver its service. We need to understand the node infrastructure of the network; is it really peer-to-peer or is it actually run from one data center by a company that manufactures and sells hardware and is required to be consulted before a new node can come online? The details make the difference as to whether it's basically just Web 2.0 in disguise or whether it is actually legitimately open, transparent, decentralized, peer-to-peer”.

The word decentralised, “means I personally can become a provider or a co-provider of this overall service just as easily as anybody else in the world”.

The full article can be viewed here.

A special example of trustless systems in the crypto space are DAOs...

Wikipedia defines DAOs as:

A decentralized autonomous organization (DAO), sometimes called a decentralized autonomous corporation (DAC), is an organization represented by rules* encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government.

*It is important to highlight that these encoded rules are known as smart contracts, these will be explained later.

DAOs change the face of collective organisation. They allow the token holders to vote on decisions to change the rules encoded in the infrastructure. As well as collectively decide how to allocate the DAO's treasury. Much like as Satoshi intended with Bitcoin, they successfully overcome the Byzantine Generals Problem, and empower people, who don't know one another, to be able to work together on a project, be that pooling together money to try and buy something inaccessible to the masses, or forming a more democratised company. People can also work on multiple DAOs simultaneously.

A notable example of a DAO using it's treasury to try to achieve a goal, is from November 2021. When a consortium of people holding ETH (the token of the Ethereum network) pulled together the equivalent of $47 million, inside the Constitution DAO to bid for a very rare copy of the U.S. Constitution, at a Sotheby's auction. Their hope was to collectively pool together the funds, so that they could all own the copy of the Constitution, in spite of it being far too expensive for most individuals to afford by themselves. They were outbid, but the potential of DAOs was introduced to millions of new people around the world.

As mentioned before, another use of DAOs is to form a more democratised company. A notable example of this is Uniswap. Uniswap is an extremely fast-growing DEX (decentralised exchange), where people exchange tokens, and pay very low fees.

Uniswap is a DeFi protocol that (as a DAO) is community-owned. The Uniswap protocol is deployed as a set of smart contracts. The community controls the treasury, and votes on proposals. Here is an example of the result of a vote by those who hold the UNI token, many of whom received the token in an altruistic airdrop in 2020.

🗳 The Uniswap community has voted to deploy v3 on @0xPolygon through the governance process.

⚡️ Uniswap Labs will deploy Uniswap v3 contracts within a few days.

👀 Stay tuned. pic.twitter.com/LwVLwEngPl

— Uniswap Labs 🦄 (@Uniswap) December 18, 2021

The tweet below, features a chart from OpenOrgs.info, (that has its data because of the transparency of DAOs), which shows the size of the treasuries of the largest DAOs, (as of 01/12/2021).

also pretty nuts that the ENS DAO has the second biggest DAO treasury, behind only Uniswap https://t.co/zLOqmJ3pw5 pic.twitter.com/ZuySePNPX6

— brantly.eth (@BrantlyMillegan) December 1, 2021

All of these protocols are held together through smart contracts. Smart contracts are the building blocks of DApps, (decentralised applications). Smart contracts were originally proposed as an idea by the computer scientist and legal scholar, Nick Szabo in 1994. They are pieces of code, (written in Solidity in the case of Ethereum), that self-execute, much like how a vending machine would, when certain conditions are met. They are useful for a number of reasons, largely linked to the fact that they take away the need for third parties like banks. These reasons are:

The image from Blockgeeks below expands on some of these reasons, and includes others as well!

The founder and CEO of the crypto exchange FTX, Sam Bankman-Fried has tweeted that smart contracts are what brought crypto from being "digital gold" to "web3/metaverse/defi/etc".

4) What crypto already has:

a) A solid userbase. There are probably ~200m crypto users worldwide.

b) Smart contracts. I think it's hard to overstate how important this was for the space: it's what brought crypto from digital gold, to web3/metaverse/defi/etc.

— SBF (@SBF_FTX) December 27, 2021

Decentralisation is for many the most important aspect of Web3. The theme of decentralisation has penetrated and run through so much of this page, and it is the third and final benefit of Web3 that is addressed here. So much has already been said with regards to DAOs (decentralised governance), DeFi (decentralised finance), NFTs (decentralised ownership), smart contracts (decentralised agreements). So rather than repeating what has not already been explicitly linked, this page will finish by showing how cryptography (a so far largely unaddressed concept) is integral to maintaining decentralisation.

Cryptography, which refers to the study and practice of secure communications in the presence of adversaries, represents the first half of the portmanteau that is cryptocurrency. The prefix "crypto" literally means secret in Greek. Cryptography is not a new concept. The Enigma Machine that Alan Turing cracked, as well as more ancient forms of communication such as the scytale cipher, used cryptography. It is important with regards to decentralisation, because cryptography makes blockchain-based currencies, and applications less vulnerable to technical faults, malicious attacks, or corporate/government coercion, than centralised systems, which have a central point of control. With Web3 and cryptocurrencies, the cryptography will often be used in a peer to peer manner. In transactions the sender will use a public key (such as a Solana wallet address) to encrypt a message (such as a token, or NFT); the receiver will then use their private key to decrypt the message. This process takes place without intermediaries or third parties in the middle of the transaction.

This page has already shown why decentralisation is beneficial with regards to Web3, it’s trustless, permissionless, self-evidently frictionless. And as highlighted in the earlier discussions about NFTs and the Metaverse, it allows people (users and builders alike) to own unique digital items, including their own data. It is secured by advanced cryptography, which prevents the crypto from being controlled by anyone except the person/group who own the private key. All of this cumulatively brings power to the people! The Web3 era is just beginning!

Top