For many, the idea of the Metaverse is not just intertwined with blockchain; it fundamentally requires it. To others, this is absurd. A decentralized database isn’t needed to prove or manage asset ownership (if the NBA or Disney or Valve said who owned an image file or virtual currency, everyone would believe them). Nor is it needed to safely and quickly transfer money (Alipay and PayPal move billions per day via purely digital networks).
In addition, blockchains have many large shortcomings today, precisely because of their decentralization, such as costly “gas” fees, slowness, and energy use. These shortcomings are so significant that almost all NFT platforms store as much as they can (e.g. user accounts, credit card information, profile pictures) on centralized databases rather than the blockchain. And NFTs, for that matter, typically rely on fragile “pointers” that could go offline at any point. Given this, it’s understandable some see the blockchain as a backward step. Don’t forget, either, that the virtual economy today already generates over $50B per year and spans hundreds of billions of hours of use – all without crypto or the blockchain.
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.
First, let’s recap some of the lessons from this essay and primer. For example, an economy typically benefits when payment rails are fast, inexpensive, flexible, secure, and extensible. However, most payment rails today have significant trade-offs between each of these values. And in the virtual world, payment rails are optimized around and for closed platforms which, for the most part, disadvantage users and/or developers, and are generally expensive, cumbersome, and not economically maximizing. Open standards and interchange solutions help, but they’re usually far less powerful than closed platforms as they lack the revenues required to convert market leaders and/or overcome closed platform controls or strategic concerns.
With this in mind, I can address 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. This programming is also transparently baked into the network’s code (hence “trustless”), and no single entity or faction can ever “control” this code, nor determine who participates in the network (hence “permissionless”).
Later blockchains, most notably Ethereum, expanded upon this programming idea by establishing their own programming language (Ethereum’s is called Solidity). These languages enable developers to build applications (“dapps,” for decentralized apps) on top of an existing blockchain and its networks, and issue their own cryptocurrency-like tokens to compensate their network/contributors. Furthermore, these tokens can be issued for any purpose, rather than just mining or computing resources. In fact, 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.
The decentralized, permissionless, trustless, automatically compensating blockchain model has several benefits. Most important is the fact that developers and users can invest their time and capital with confidence that a blockchain’s policies, incentives, or economics won’t change arbitrarily over time, or in pursuit of rent seeking. 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.”)
It also becomes far more complex and costly for a developer to build on a public blockchain, then cut themselves and/or their experiences off from it once thriving (Note how Google’s “open Android” and commitment to the Open Handset Alliance changed over time). 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 will intervene in the United States and abroad, but we don’t want the Metaverse to just change our gatekeeper from Apple to Roblox. Note that while Tencent’s WeChat has low transaction fees, the company has used its control over digital payments and video games to charge 40–55% for all in-app downloads and virtual items — far beyond Apple’s 30%.
Blockchain’s permissionless, trustless and financial systems also enable their networks to be widely decentralized in operations and adoption. The former minimizes control, increases performance time and liquidity, while decreases gas fees, while the latter increases network effects and utility. Programmable tokens, meanwhile, enable developers to quickly issue governance rights to their users and reward contributions.