Way back in March 2005 at the Consult Hyperion Digital Money Forum (which Ian Grigg kindly called "an engaging show for financial cryptographers”) the computer games expert Richard Bartle gave a presentation on the emerging economies in virtual worlds (at a time when the science fiction massively multiplayer game EVE Online interested me because it had 200,000 players - it now has some 10 million) and memorably described those economies as being based on
People buying things that don’t exist from people who don’t own them.
Well, as it turned out, buying things that didn’t exist from people who didn’t own them was a big business and “exist” is in the eye of the beholder. As one of the first economists to study virtual worlds in detail, Edward Castronova wrote in his book Wildcat Currency (YUP: 2014), that it was 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 money is virtual, that doesn’t mean it is 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. But what exactly is the metaverse and how is it different to EVE Online, World of Warcraft or Second Life?
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. Herein lies the important distinction between the metaverse and virtual worlds.
Think about that digital assets point. Mark Zukerberg 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 send a Bitcoin from my wallet to your wallet, I’m not sending you a copy. The blockchain makes virtual reality more like, well… reality.
In the metaverse, there are objects that cannot be replicated. Remember how in Star Trek, where there are replicators, the only thing that cannot be replicated is gold-pressed latinum (which 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.
Now you can see why I refer back to Richard's memorable comment. 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. In other words, there is an economy of people buying things that don’t exist from people who do own them.
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:
Some of these ideas might sound bizarre, but virtual worlds adumbrate change beyond the world of financial services. The attraction 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 economics of sorts but in such environments the game owner can 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 economies. They did however, give other valuable insights into the future and one of those insights was about the very nature of work itself.
We are now at the point where “almost all contemporary games contain some mimetic elements of work and market exchange”. I am very curious about this perspective, which suggest that computer games no longer offer fantasy, the escape from the day-to-day (for which I personally have always found Dungeons & Dragons to be much better than anything in silicon) or what I think of as play. Sam Adler-Bell says in that article that such games are attractive because they offer rules, “a rationality otherwise missing from the contemporary wage labor process”. They have begun, in the words Vicky Osterweil, utopian work simulators.
The work, however, is real. As is the economy that provides context. Matthew Ball identifies a real economy - a space 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. He is correct. And this real economy 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 this basic maxim:
While property in some form is possible without liberty, the contrary is inconceivable.
Key Properties of Properties
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 usus, fructus and abusus which is why I 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."
Right now, the economies of these virtual worlds seem to be founded on people selling pointless JPGs of chimpanzees to each other, but I think it's wrong to dismiss them as worthless because of this. In a 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.
There are some observers who see the metaverse as the next "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. The transformation of these virtual prairie tracts into economic farmsteads is a locus for experiment, innovation and new financial services.