When I heard that Facebook was rebranding itself “Meta” in honor of the Metaverse, I had two immediate thoughts:
- God, I hate the word.
- I wish I’d hung on to the “metamarkets.com” URL in 2001 because it would probably sell for bank today.
The latter is sour grapes, but the former is worth exploring because there’s no question in my mind, a lot of your over-40 clients are going to be a bit confused, and thanks to Facebook, now they’re gonna ask.
The reason I hate the word is manifold, but it starts with Neil Stephenson’s Snow Crash, a book I love from an author I love. I won’t present my deconstruction of its themes here, I’ll save that for some podcast, but it was enormously influential on anyone interested in the internet in 1992 who was paying attention. The MetaVerse in the book is essentially what we saw on screen in Ready Player One — a simulated virtual worldspace that people strapped on glasses and haptic suits to interact with — which replaced the boring old screens, mice, and keyboards we use now to do all the same things (interact, entertain, communicate, work, etc.). That’s the main reason I hate it, because everyone thinks you just mean VR.
And look, VR is cool. I’m on my fourth version of VR hardware (Oculus Quest 2), and it does a few things incredibly well, most notably putting you in an environment. I know traders who spend most of their workday under a helmet now. I know artists who create under a helmet, and I know lots of gamers who play under a helmet (myself included, check out Beat Saber or Superhot). So that’s why I hate it, because that’s not actually what most folks mean right now when they mention the MetaVerse this week, if they’re really thinking about it.
Connection and Ownership
The “real” MetaVerse, as the literal word has come to evolve, has best been articulated by Matthew Ball, a venture capitalist who published the “MetaVerse Primer” in April of 2021. It’s really worth reading, but I will paste one important image:
This is Ball’s Map, and it’s kind of locked into how most folks are describing things. Notice that “Virtual Platforms” is just one small component here. Instead, this is about the interoperability of a whole range of hardware, software, and creative content housed on the internet that will, hopefully, all work together in ways that encourage two primary benefits.
The first is connection — not just “Bob can talk to Alice,” but that all of the actors in this new ecosystem (also referred to as Web 3.0, which I prefer), can not only talk to each other but exchange objects, information, and services with each other. The second is ownership — the idea that actors in the ecosystem have real ownership of the digitally-native content they are interested in owning or consuming or otherwise interacting with.
If that sounds familiar, it’s because this is essentially what many of us were talking about during endless and largely boring standards group meetings from about 1990 to 2001 or so. We all thought we were investing in and building a big interactive, interoperable digital universe. I remember when I was naïve enough to think I could take my CD collection online with me someday.
What happened instead is that many of, if not most of those egalitarian, near-utopian visions of the future were coopted rather quickly by capitalism. So for example, think about what happened with Linux? Linus had grand ideas, Red Hat realized that adoption required a bag-holder so they raised their hands, and IBM took it all over. What about the promise of building communities? Well, for me that started with the W.E.L.L. and Usenet, and by the ‘90s, it was mostly AOL groups, and in Web 2.0? It’s Facebook. In music, we went from “share everything” with Napster to “well actually just license the tracks” with Apple to “musicians now just work for us directly” with Spotify.
I’m not actually saying this is all bad. I’m saying that this is a pattern we have seen before, and the reason we have the current highly-dysfunctional, ownershipless, connection-challenged, multiply-siloed internet is because the influence of capital on a system perturbs the best of intentions. And now, thanks to the culmination of hardware development, network effects, the interoperability afforded by (particularly smart-contract based) crypto, and perhaps mostly the catalyst of 18 months of learning how to live online whether we want to or not, there’s a growing movement to make living online… suck less? Be cooler?
And I’m all for it. The problem is, here’s how I see the landscape. Bitcoin was going to be a kind of anti-capitalist, or at least anti-statist money. It became heavily capitalized on by, well, almost everyone, but particularly folks like the exchanges and trading communities. The grand ideas from Snow Crash (which wasn’t a blueprint, it was commentary, but there were SOME positive ideas) were expressed almost immediately (and successfully) inside Second Life, but was then much more successfully capitalized on by the VR community (led largely by Valve/Steam and Facebook/Oculus), and mostly by the video game industry (who learned how to finally make bank off shared virtual spaces). And as for the “object ownership” part of things, well, we went form art NFTs, like Cryptopunks, to Axie Infinity.
And now we’re at this very, very tentative part of the story where things have been and are being capitalized, but have not yet been fully co-opted. It’s the window where butterfly wings might matter.
To try to REALLY explain this to people this last week, I’ve been using the example of Axie Infinity, and it’s just so bananas I’ve literally had people accuse me of making this up. You’re going to hear a lot about Axie, because it’s heralded as the future of the Metaverse. Here’s how I see Axie, which, I am sure, I will get lots of hatemail about telling me I’m wrong. My Twitter DMs are open, if I got facts wrong, I’ll note them here:
Axie Infinity is a game made by a company called Sky Mavis. Seemingly all young dudes, the company started in 2019, is private, and is headquartered in Vietnam. They’re on their B round, which just closed for $152 million, giving them a private implied valuation of about $3 billion. Axie is their only current game. The game itself (with all due respect) is mediocre. I’ve played a lot of games, and made a point of always playing games with my kids as well, so I feel confident in saying that very few people are playing Axie solely for it’s Pokémon-derived card-battling system. But at the core, the game is about getting three of your monsters (called Axies) to go beat up three of someone else’s monsters, using a bunch of cards and abilities.
It’s… fine. It’s no Slay the Spire or Hearthstone.
The reason Axie is interesting is because instead of just standing up servers to host their virtual world (like, say, Blizzard does with their Battle.net client, online stores, and individual games like World of Warcraft), they chose to develop the entire ecosystem on a private blockchain called Ronin, which is modelled after the Ethereum network. What that means, in practical terms, is that how you get into the game is completely unique.
Historically, with most games, you just buy ‘em and play ’em. That still happens, but “free-to-play” or “game-as-service” have become the dominant model. For example, Fortnite is free to make an account and download and play, but skins, weapons, even some content gets locked behind paywalls. Social pressure and just having fun drive players to make lots of small purchases, and the game industry has figured out that they can ensure that those people who really want to spend $10k in Fortnite have something to buy. It’s a bit like how music festivals work now, where the rich people get one experience at stupid prices in order to subsidize the experience folks with less money (or more sense) get cheaper. On balance, personally, I’m a fan. I played a ton of Fortnite with my son. I’ve played an embarrassing amount of League of Legends. It can, honestly, balance the capacity-vs-desire to pay balance that would otherwise shut a lot of gamers out.
Axie’s different. Axie lets you make the account and download the game for free, but without Axies — the monsters — you can’t play. So you have to buy Axies, which are, in fact, regular old NFTs like a JPG of a rock or a Bored Ape. They’re just NFTs in Sky Mavin’s Ronin blockchain.
To buy those Axies you use your WETH (ETH, the coin of Ethereum you would have bought somewhere else, and then transferred into the Ronin blockchain, using a bridging mechanism common in Crypto — but it’s easy right? It’s a game?) on the marketplace run by Sky Mavin, where, for reference, I dumped my worst Axie for 0.03 WETH last week, which, theoretically, I could transfer back to the Ethereum blockchain and then from there turn back into regular old dollars through a crypto exchange. About $150, to be more specific. So in a real sense, the Axie has dollar value, because it’s traded in Ronin WETH, which is structurally pegged to ETH, which trades quite liquidly against the dollar.
So you buy three of these Axies from the marketplace (currently, this costs about $500). You connect your (Ronin, Private) wallet to the game, and now your three Axies show up, and you play the game. Why would you play this game? Maybe because it’s fun, but most likely, because playing the game gets you rewards in the form of a cryptocurrency (on the private Ronin blockchain), called “Smooth Love Potions.” (Sigh). You need SLP, as it’s known, in order to take two of your Axies and breed them, which you do in order to sell them on the marketplace to people who want to join this little circus. You also need a whole other kind of token in order to breed your Axies, called AXS, which is a governance token for “the game” — although really just for the pieces of the game Sky Mavis wants people to poke at. So for example, having a lot of AXS would give you some say in whether more AXS from a “community treasury” gets distributed to players. But to be clear, you don’t “own the company” or anything — you own a token that Sky Mavis can essentially just decide what to do with.
Because it’s relatively easy to bridge and wrap digital objects in crypto land, of course both SLP and AXS trade directly against the dollar on various exchanges through various bridges.
So specie currency — dollars — enter into the system in a few ways; people buy ETH somewhere and go through the chain to get it onto Sky Mavin’s blockchain, at which point various fees for moving assets, buying axies, and so on get charged. Of course, Sky Mavin also just sells these tokens to you for currency (just, of course, not technically in the U.S., but nobody would ever try to get around a geolock, I’m sure!). And, of course, there’s now an entire ecosystem that’s blossomed around trading these two tokens, trading and breeding axies, managing rarity, and so on.
The problem is, someone has to play the game to keep the engine working, so like all good capitalists, those folks with more money than time in this ecosystem simply pay poor people to play for them.
Completely outside the official game environment, just out on websites, “Managers” (capitalists with big collections) calve off trios of axies into clone wallets and let people play them. And the manager then (hopefully! It’s the honor system!) splits the earned SLP with the player. The ecosystem (run by a company) has all the tools to enable this, and the economics of the environment are very much front and center. It’s in all the patch notes. So the “scholar” (read, “poor”) players here do work for the “Manager” (read, “rich”) players by playing the game for them, so that (depending on how you want to imagine it):
- The scrappy scholar saves up enough SLP to become a manager himself! Yay capitalism!
- Isn’t it great that these scholars get to play an expensive game for free?
- The 11-year-old kid in poverty figures out how to jump through all these hoops so that at the end of every two weeks they can cash out into specie to help pay for food.
Either way, as long as the pool of axies expands and the pool of players shows up to purchase them — for investment purposes, for a joke, to actually play the game, to just earn out bread money, or whatever — as long as the pool grows, the managers at the top of the pyramid (and the company, of course) can keep the party going. And of course, they have all the tools they need, because they control the entire economy of their ecosystem. The blockchain is publicly visible… but only the game-side folks get to actually DO anything on it. You can look, but you can’t touch.
The Point About Axie
The reason it’s (maybe) worth understanding all of that is because this is the current best idea I keep hearing. And there’s some cool stuff going on here. What they’ve really done is appointed themselves the central bank of a non-state economy, and issued (at present) two Central Bank Digital Currencies. Just like China’s CBDC, they control the wallets and all the levers. (Sidebar: Folks are already analyzing the supply/demand imbalances in the same way, but with way better data and much cooler names). They choose who’s allowed to make any state change to the economy — every transaction, every bridge, every auction has to go through their validators. At the moment, they’ve “pegged” part of the economy to ETH, but they could change that tomorrow. They can change what work in the economy is valued (playing this game) with anything else they think they can get people motivated for (Play this other game! Watch this video!). It’s brilliant and somewhat scary.
I’m all about weird game ecosystems and what their interactions tell us about the real world. I mean, we advanced our understanding of epidemiology from a WoW bug. I once spent months down the rabbit hole of what Eve Online was teaching us about capital preservation and insurance. The concept of taking a game company from a closed-server monolith to a kind of consortium where different participants handle different parts of the ecosystem, using a private blockchain to preserve and broadcast the game state? Brilliant.
But, there are reasons you can’t buy AXS with U.S. Dollars right now. And the reasons are legit. Right now, it’s mostly young Asian kids who are "scholars" — laborers — in this economy. Now it’s a game, nobody’s in a coal mine here. But the “play to earn!” hype around this and similar models strikes me as problematic. Where do you draw the line between opportunity and exploitation? Or, perhaps more importantly, who draws the line? If some kid in the Philippines gets shafted out of two weeks’ “earnings,” who does he get to complain to? Who does he sue? Or when some guy in Atlanta who has a million-dollar Axie collection gets taken out by a hacker or loses his wallet key, what’s his recourse? The fact that there’s a “game” in the center of the ecosystem is a distraction. It’s a complete private blockchain economy that targets kids and capitalists.
I’m not a politician or a regulator. I point this out primarily to highlight this as an investment risk. The legal and regulatory framework of the actual physical world, the one where you still buy cheeseburgers with fiat currency, is deeply, deeply unprepared for the MetaVerse — the big Web 3.0 version. Most of us are still trying to get over the idea that we don’t actually “own” our books, music, and media anymore. We’re still trying to figure out how to let farmers fix the tractors they genuinely do own.
I am not so much of an optimist to think that we will get a slate of Congress-dwellers anytime soon who will solve these problems. As such, as investors, it’s sort of on us to be aware of the big issues going on in these exciting new technologies. Not only can they be a PR issue when things go badly, but they also can have really weird permutations. While I’m not personally casting aspersions, there are more than a few folks questioning whether Axie currently meets the definition of a Ponzi scheme. It’s not random — there’s a real game, and good Axies with good players earn more than randos like me. So it’s not technically gambling. But it’s not not gambling either, and while it’s not set up to be exploitive, its not not exploitive either.
So that’s the Metaverse. Exciting? Sure. But the unrelenting focus on capitalism as the energetic driving force for what is likely to be the cultural evolution of ownership and connection should give us pause enough to take a second look at the risks. I mean, nobody thought countries would start banning loot boxes in kids’ games, but here we are.
Look, if you already knew all that, you’re ahead of me, and you’re already day trading alt-coins, and hey, that’s great. Have fun. Be careful. But the “MetaVerse” is going to drive a lot of investing conversations. As Michael Batnick put it on Compound with Friends, “They have 3 billion users, an $800 billion market cap, and they’re going all in on the Metaverse? We can talk all the S*&T we want, its a big deal.” $30 billion in Capex. It’s going to be in the conversation.
And of course, there’s an ETF for it. In June, RoundHill launched the RoundHill Ball Metaverse ETF with the now incredible win of a ticker (META ). The “Ball” in the name signals that Matthew Ball (the guy I said y’all should go read) is the guy behind the actual index the ETF tracks. And hey, I wouldn’t bet against him (or Will Hershey, RoundHill’s CEO, who’s super sharp.) But while I am generally a fan of “themes” that cross between, in this case, gaming and social media and computing and finance, I think its important to keep an eye on the second order effects. Because regulators are going to be behind on this stuff. Badly. And unregulated economic systems have a funny way of getting regulated (or just demolished) pretty quickly. The companies in the index will assuredly be important to developments here. But that doesn’t necessarily mean “they’re all going up.” We’re in week one of the hype train. Time to pay attention.
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