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Magic Swords And Magic Money

Don’t think that the metaverse is a game.

Way back in March 2005 at the Consult Hyperion Digital Money Forum in London the computer game expert Richard Bartle gave a presentation on the emerging economies in virtual worlds and memorably described those economies as being based on people buying things that don’t exist from people who don’t own them.

A very accurate description of the nascent trade in virtual items that was then emerging in cyberspace! He was speaking at a time when the science fiction massively multiplayer game EVE Online, which many people regard as the principal case study in the field, interested me because it had 200,000 players. It now has some 10 million. World of Warcraft, the game that I used to teach my kids economics, had a couple of hundred thousand time rich, resource poor players in China who made a living finding virtual objects (magic swords, crystals and so on) and selling them to time poor, resource rich Western players. Even now it still has 4.5 million players and there are many more such “massively multiplayer online roleplaying games” (or MMORGs).

As it turned out then, buying things that didn’t exist from people who didn’t own them was a big business and the distinction between play and work, real and virtual was turning fractal. As Edward Castronova wrote in his book Wildcat Currency (YUP: 2014), it is a mistake to think of some money as ‘real’ and other money as ‘fake’, ‘play’ or ‘virtual’ because “the value of money and has always depended on what people think”.

Indeed. Just because things are virtual, that doesn’t mean they are not useful and desirable. The noted venture capitalists Andreessen Horowitz say that last year alone consumers spent more than 50 billion dollars on in-game purchases for virtual livestock in FarmVille, skins in Fortnite and extra lives in Candy Crush. They say this just the beginning of what will be possible in “the metaverse”, and for what it’s worth I agree with them.

There are some observers who see the metaverse as the next technology “epoch”, following on from the PC epoch, the internet epoch and the current mobile epoch. John Naughton, whose opinions on just about everything I take very seriously, called this wishful thinking for psychotics (!) but I am not so sure. 

Logical, Captain

The metaverse was defined by the The Financial Times as a collection of shared virtual worlds which are interoperable, in the sense that people can navigate them while taking with them their digital identity and their digital assets. Interesting, but how is it different from the Dungeons and Dragons in cyberspace that we have enjoyed for a generation? 

Well, think about that digital assets point. Mark Zuckerberg famously said that he wants to make sending money over the internet as easy as sending pictures of cats over the internet. But when you send a picture of a cat you are not really sending the picture: you are sending a copy. Someone gets a picture of your cat, but you still have the picture. That’s great for sending pictures of cats but not very good for sending anything of value, such as money.

The blockchain doesn’t work that way. It transfers tokens from place to place without “double spending”. If I give you a dollar bill, it’s now yours and not mine: I don’t keep a copy of it. Similarly, if I send a Bitcoin from my wallet to your wallet, I’m not sending you a copy: the value is now yours and no longer mine. The blockchain makes virtual reality more like, well… reality.

Unlike a virtual world built on “traditional” software, in a metaverse there are objects that are property that cannot be copied. Remember how in Star Trek, where there are replicators, the only thing that cannot be replicated is gold-pressed latinum? This is why the Ferengi use it as money. Setting aside the hippy nonsense about post-scarcity and the end of economics, the metaverse is the Star Trek version of the universe: almost everything can be copied, but the things that cannot are the things with value.

Interesting Properties

I have long been fascinated by the economics of virtual worlds and the addition of tokens serves only to add to that fascination. Many years ago I wrote a column called “Opening a Branch in Narnia” in Financial World magazine in which I said that the attractions the virtual sphere of interaction, to communicating and earning a living in the virtual world, are obvious “once the virtual personae become economic agents”.

These early virtual worlds did into evolve economies of sorts but in such environments the game owner could create and destroy value at will by adding or subtracting the number of magic swords or gold mines or asteroids in the game. They were play markets, and while some people certainly did earn real money from them, they did not evolve into real economies, defined by Matthew Ball as spaces where economic agents (ie, individuals and businesses) are able to create, own, invest, sell, and be rewarded for their “work” – as a defining characteristic of a metaverse. Such economies depends on property rights.

If everything belongs to the State (or Blizzard or Electronic Arts

or Sony or whoever) then you don’t have an economy: you have serfs tilling the fields for the Dear Leader. But once you have secure property rights, you have a modern society. Richard Pipes wrote about this in one of my favourite books, his superb Property and Freedom (Vintage, New York: 2000). This interestingly contrasts the evolution of property rights in England and in Russia and sets out the fundamental maxim that while property in some form is possible without liberty, the contrary is inconceivable.

As The Economist summarised nicely, property rights classically entail three elements: usus, fructus, abusus. These are the rights to use, profit from and dispose of property and the reason why many people are getting excited about the metaverse is precisely because these rights are delivered into virtual worlds by digital assets exchanged through shared ledger technologies such as the blockchain.

In virtual worlds you have a command economy run by dictators who can take your stuff away at the press of a button. The metaverse, however, delivers practical property rights protected by everyone rather than someone. This is why I so strongly agree with Kayvon Tehranian, a founder of NFT marketplace Foundation who said in the New York Times

 that “Property ownership is a tool. It works. It brings financial incentives”.

(We are all familiar with the case study of the Wild West. The ability to protect property rights through the use of barbed wire, one of the most important inventions in American history, transformed open prairie into productive ranches.)

Virtual Property, Real Business

Right now, the economy of the proto-metaverse seems to be centred on people selling JPGs of chimpanzees to each other, but I think it’s wrong to dismiss the space as worthless because of this. In the metaverse, where tokens of all kinds are bought and sold in transparent marketplaces, the laws of supply and demand can operate under the sunshine of privacy-enhancing digital identity services to deliver new ways of creating value. The transformation of these virtual prairie tracts into economic farmsteads is a locus for experiment, innovation and new financial services.

Now you can see why I started with Richard’s insightful comment from 2005! When you bring tokens into virtual worlds, you now have the means to implement digital assets that work like physical assets. And these objects can be linked to digital identities. People buying things that don’t exist from people who do own them is the new economy.

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