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Rise of the MetaHeads

The Evolution of the Metaverse

I was in college when “The Matrix” released. It just blew my mind away, and soon became the subject of many an intense conversations with my friends. We debated endlessly on what is real and what is not, marveled at the immersive experience offered by the simulated reality; and relished the limitless possibilities that opened up once Neo and the gang started bending the physical laws in that virtual world shown in the movie. Little did we know the things that were to come, though the word Metaverse was coined by then.

The Matrix raises a thought-provoking question: would you rather covet the familiarity and comfort of an artificial world or face the harsh truths and the difficult domain of an unknown reality? Now those were the days before high-speed internet, snazzy mobile phones and  engaging social media, and hence while an artificial world had its appeal, it was still science fiction for us.

Years later, in 2009, we got Avatar. That movie showed the transfer of a human consciousness into another species. But more importantly, it explored virtual and augmented reality. The presentation was stunning but the premise this time was a lot more believable. By then, we have grown more familiar with the alternate/enhanced reality through Second Life.

Launched in 2003, Second Life’s annualized GDP exceeded $30 million by 2005, barely two years after its launch. By 2009, it exceeded half a billion dollars, with users cashing out $55 million into real-world currency that year.

The gaming industry kept the ball rolling and the 2010s saw the traction in Minecraft and Roblox. In addition to offering significant technical enhancements compared to their predecessors, Minecraft and Roblox also focused on a younger target audience and were therefore far easier to use while offering greater capabilities. By the end of 2021, more than 150 million people were using Minecraft each month—more than six times as many as in 2014, when Microsoft bought the platform. Despite this, Minecraft was far smaller than the new market leader, Roblox, which had grown from fewer than 5 million to 225 million monthly users over that same period. Then came Fortnite, which transformed from a gaming platform to a social one with non-game experiences. Live concerts were being hosted on Fortnite, and the world had started to take notice.

While all this was happening, Mark Zuckerberg went all in when he not just renamed Facebook to ‘Meta’ but also envisioned the metaverse as the successor to the mobile internet — a set of interconnected digital spaces that lets you do things you can’t do in the physical world.

Suddenly most of the science fiction movies that fantasized about an alternate reality now seem a distinct possibility in the future. Not just that, it seems that parts of it are already here, and billions of dollars are being invested to get the technology to reach the stage where a continuous, embedded, enriched experience is very possible.

This year, Merriam-Webster, The United States’ oldest dictionary publisher, has added “METAVERSE” to their lexicon. To quote Al Pacino’s signature exclamation that finally got him an academy award, “Hoo-ah!”

Defining the Metaverse

The word ‘Metaverse’ was first coined by Author Neal Stephenson, in his 1992 novel Snow Crash. In the novel, the protagonist scrapes by in a future dystopian Los Angeles while being a hero through a digital avatar in the virtual world called the Metaverse. Subsequently, Neal contributed as the inspiration and then, as an advisor, in Bezo’s Blue Origin, which is probably the second most valuable company of its kind, ranked only behind Elon Musk’s SpaceX.

Over time, many have tried their hand at giving a definition to the word Metaverse. One of the most compelling and comprehensive definitions comes from Matthew Ball, the CEO of  Epyllion and the former global head of strategy for Amazon Studios. Ball describes the metaverse as

A massively scaled and interoperable network of real-time rendered 3D virtual worlds that can be experienced synchronously and persistently by an effectively unlimited number of users with an individual sense of presence and with continuity of data, such as identity, history, entitlements, objects, communications, and payments

Let’s dig in for a better understanding and to see how the current infrastructure holds up.

  • Thanks to the movies and the games, we now understand Virtual Worlds as real-world reproduction, fictional reality, or a heady cocktail of both. But virtual worlds are not limited to entertainment alone. For example, a digital twin of the Hong Kong International Airport was created using the popular game engine Unity—the purpose of the twin was to simulate the flow of passengers, the implications of maintenance issues or runway backups, and other events that would impact airport design choices and operational decision-making. But more on the use cases later.
  • That the virtual worlds need to be 3D is a no-brainer as the next evolution from the 2D internet. 3D enables so much experience to be built beyond what the internet currently provides. Think about how effective online classes would have been if the students were able to sit in a virtual classroom and experience the company of their teacher and colleagues akin to a real-world setting. While the visualization is not a challenge for most of us, a stable realization is a different ball game altogether. But we are getting there.
  • Real-time rendering enables a virtual world to be alive and respond to the inputs of a user (or multiple users). An immersive 3D experience in high-fidelity needs immensely more computing power than 2D. Today much processing and rendering are shifted to industrial-grade data centers, or what we call the cloud. But for remote-rendered  experiences to be delivered, the bandwidth and latency need to be much above par.  Hence the focus is to improve the competency at the end-user level, or to explore decentralized computing through blockchains.
  • Interoperable Networks require common protocols and standards (e.g. standard language for communication and ownership). The establishment of TCP/IP, the Uniform Resource Location (or URL), HTML, file standards such as JPEG and MP3, and many more  contributed to the globally interoperable internet as we know it today. Contrast that with  almost all the most popular virtual worlds today using their own different rendering  engines, different file formats, and with no systems through which to even try to share  data with other virtual worlds. As a result, existing virtual worlds have no clear way to find and recognize one another, nor do they have a common language in which they can  communicate, let alone coherently, securely, and comprehensively. So, we have today multiple metaverses and not “The Metaverse”. A decentralized metaverse built on blockchain technology may be inherently more interoperative, but protocols and procedures still need to be defined and agreed upon.
  • Massively Scaled – eventually each company will have a virtual 3D presence on the metaverse, just like they have a website on the internet. The internet preceded the social media platforms and hence most companies felt the need for a website before they progressed to a Facebook page. However, the Metaverse is taking a completely different trajectory where brands are first setting themselves up in platforms such as Fortnite and Minecraft and may eventually set up a metaverse planet of their own. This will need huge storage space, very high bandwidth, and ultra-low latency
  • Persistence – Think of persistence as history or lineage. In a gaming world, resetting of    a user’s data may be an inconvenience and/or expense to the user, but the impact on others might be little. However, real-life use cases would require the robustness and enduring of the user’s data and the meaningful reflection of the real-life counterparts. Increasing persistence within individual virtual worlds will be essential to the growth of the Metaverse.
  • Synchronous – The internet was not designed for synchronous shared experiences and most stuff including OTT streaming are not exactly live feeds. The exception being videoconferencing software such as Zoom, which involves many people receiving and sending high-resolution video files, all at once, and participating in a shared experience. The Multiverse is Zoom ++ in a 3D context, where high bandwidth, low latency and continuous connection will be essential for all users for a synchronous shared  experience.
  • Unlimited users and Individual presence: Concurrency is one of the foundational problems for the Metaverse because it leads to exponential increases in how much data must be processed, rendered, and synchronized per unit of time. Today Roblox can manage about 100 concurrent users in a 5 km radius… imagine the scalability needed for a larger inclusion. The Metaverse will only become “the Metaverse” if it can support a large number of users experiencing the same event, at the same time, and in the same place, without making substantial concessions in user functionality, world interactivity, persistence, rendering quality, and so on.
  • Hardware: For many of us, Metaverse is synonymous with the development of new devices that we might use to access, render, and operate it. And while hardware has  improved considerably, both VR and AR devices are downright bulky and display issues that cause disorientation and nausea in users on prolonged usage. Also, currently, AR devices can only augment 10-20% of what a person can see. And increasing that will mean capturing more data sets that may contribute to bulkiness and other problems.

As we speak, the metaverse is being developed from various perspectives. The content and  experiences are what draw the eyeballs and generate the traffic, and are being created by  first-party developers and small creators. These experiences are being built on game engines (such as the Unity and Unreal Platforms) and accessed through gaming platforms, browsers and app stores. The underlying infrastructure is another key piece and this includes the devices, networks and all. And finally, there are the enablers that provide security, privacy, identity management and, of course, payments for monetization.

Use Cases in the Metaverse

While video games can drive users into a flow, the immersive nature of VR and AR makes it possible to create an alternative reality that is both more pleasurable and more meaningful than regular reality.

Now that we have discussed the concept of the Metaverse in some detail, it is time to look into the future and see how life, as we know it, is likely to change in the future.

  • Work-life: Virtual reality office would allow employee avatars to meet and work together in a shared, simulated environment. You’ll find virtual desk spaces, walk by avatars engaging in conversation by the virtual water cooler, and attend meetings in a virtual conference room, for example. Unlike video calls, this total immersion in a  shared virtual environment helps employees become fully present in their work and with their colleagues. Not only does this address the WFH isolation, but now company retreats can take place on the Moon or on a virtual beach. This will present unlimited opportunities for Virtual Team Retreats, Remote Team-Building, and Social Bonding. Remote working and distributed work teams are already picking up; and in the future, physical co-location will actually be a thing of the past. Imagine the plight of  commercial real estate.
  • Education and Learning: The metaverse promises to make learning more active. We will be able to learn by doing and not just passively absorbing information. Our learning  environments would be distributed, customized and accelerated. We’ll be able to learn in 3D — bringing the study of architecture, or history, or even basic geometry to life in  ways whiteboards and flat screens never could. Flight simulators have been used in pilot  training since long; but they were either not realistic or too expensive. However, now the industry is changing and is infusing itself with immersive technology. In 2019, the US  Airforce started the VR pilot training; while the normal training takes 12 long months to train and certify a batch of pilots the VR headsets and advanced AI biometrics allowed 13 pilots to be trained and certified in a period of 4 months.
  • Healthcare: There are endless possibilities for training healthcare professionals — from practicing surgeries without risk to patients or training first responders without putting them in dangerous situations, to making med school more accessible by removing geographical and other barriers. In fact, Augmented Reality is already a big thing in the healthcare industry. From helping nurses locate veins in patients easily for drawing blood to allowing patients to see how the drug works in 3D in front of their eyes instead of reading descriptions of a bottle, this is an industry that is transforming very fast. AR has found its way into the operation theater, helping surgeons become more precise and  efficient at surgeries.
  • Entertainment: Virtual Reality, augmented by haptics, makes for a multi-sensory experience. Remember when we got excited to see emojis on social media? Well, now the interaction is not just consuming text on a screen. And this can play out in more ways than one. Opportunity to personally experience the filmed world of Avatar, for  example… or join the Marvel superheroes in a quest. Sports events can be relived and re-experienced. Entertainment really has a field day in the Metaverse.
  • Digital Commerce: Imagine an immersive digital experience on top of plain, vanilla digital shopping. Instead of scrolling down your phone with your finger, your digital avatar walks into a digital store & picks out your items. Especially true in fashion and lifestyle as people would want their virtual properties and avatars to look good. The number of brands entering the space is only growing. Mike Kondoudis, a licensed  trademark attorney claims that as of Oct 5, 2022, there have been 4618 US trademarks filed this year for Metaverse in and virtual goods/services. The 2021 total was 1890.
  • Travel: It seems that Metaverse has been born to cater to the travel enthusiasts. In fact, scratch that. Think about aged and disabled people who are unable to travel with the  same freedom as the rest of us. Think about all of us in 2020, stuck in our own cocoons, wishing the last of the pandemic, yearning to venture out. Think about all those places where it is yet physically impossible to go.. like say, space. The Metaverse will allow users to travel to fantasy lands and recreated destinations alike. The world will literally be in your drawing room.

Investments in the Metaverse

The metaverse is still being defined, both literally and figuratively. Yet its potential to unleash the next wave of digital disruption seems increasingly clear, with real-life benefits already emerging for early adopting users and companies.

McKinsey estimates the  economic value of the  Metaverse to hit $5 trillion in impact by 2030 – equivalent to the size of the world’s third-largest economy today, Japan. 50% of that is expected to come  from e-commerce.

Source: McKinsey Analysis

And companies are increasingly investing in this opportunity. The first 5 months of 2022 saw an investment in the metaverse space to the tune of $120 billion+, which is more than double of what got invested in the whole of 2021.

The broader investment landscape is dominated by three categories of investors:

  • Large technology companies, including for example Meta, Microsoft, Nvidia, Apple, and Alphabet, among others, are taking deliberate actions toward shaping the metaverse. Meta has solidified its intent to become a leader in the space, Microsoft has been aggressive with the acquisition of Minecraft and Activision Blizzard, Nvidia has the Omniverse, Sony is all set to launch the PlayStation VR2 headset early next year, and Apple well positioned to bring in AR, VR and integrate with iPhone.
  • Venture capital is investing heavily in the space. Examples include NFT marketplace OpenSea raising $300 million at a $13.3 billion valuation in a Series-C funding round led by Paradigm and Coatue, metaverse technology company Improbable raising $150 million led by Andreessen Horowitz and SoftBank, Yuga Labs (creator of the Bored Ape Yacht Club) raising $450 million at a $4 billion valuation to build a virtual world, The Sandbox receiving $93 million from SoftBank, and Niantic receiving $300 million from Coatue.
  • Corporations and brands outside of tech are putting resources behind efforts to get ahead. Disney appointed a senior executive to oversee its metaverse strategy, for instance, while LEGO invested in Epic Games (makers of Fortnite). Epic Games also collaborated with luxury brand Balenciaga, which has created a dedicated metaverse division and launched its latest collection inside a virtual space.

Payments in the Metaverse

In 2021, consumers spent more than $50 billion on digital-only video games (in contrast to physical discs), and nearly $100 billion more on in-game goods, outfits, and extra lives. As a point of comparison, $40 billion was spent at the theatrical film box office in 2019, the last year before the COVID-19 pandemic, and $30 billion on recorded music.

The monetization in the virtual economy primarily involves goods that only exist virtually, and that are bought via purely digital (and thus low marginal cost) transactions. However, the leverage squarely lies with the platform owners who charge a transaction fee of, believe it or not, 30%.

‘It’s going to be important to create a truly creator-focused economy in the open metaverse, where creators can realize the value of their creations and not just be at the mercy of a gatekeeper that takes all the profit off the top because they are at the gate and they can do it.’

–Marc Petit, VP of Epic Games’ Unreal Engine Ecosystem

Traditionally, the gaming console makers such as Sony, Microsoft and Nintendo have subsidized their hardware consoles for the end-users, only to have them tied up to their ecosystem. All content providers have to mandatorily release their titles across all platforms, as not doing so for any one platform will make them lose the customers who are tied to the said platform. And aligning their titles to each platform means working with each set of SDKs to talk to the platform’s GPU, thus increasing the cost for the content creator. The end-users do not fare any better either, because if they decide to switch platforms, say from a  Microsoft (Xbox) to a Sony (PlayStation), none of the game titles (or the game progression thereof) that they have had bought for Xbox can be ported to PlayStation. In other words, they need to buy the same game twice, this time for PlayStation, and then start playing from scratch. Switching costs, exit barriers, unfair leverage.. take your pick.

In the mobile ecosystem, the gatekeepers are Apple and Google. And they conveniently charge 30% as well for in-app purchases for interactive apps, essentially the entirety of the metaverse.

In the “real world,” payment processing costs as little as 0% (cash), typically maxes out at 2.5% (standard credit card purchases), and sometimes reaches 5% (in the case of low-dollar- value transactions with high minimum fees). In the metaverse, everything costs 30%.

In the real world, the Visas and the Mastercards offer value-added services, but they come as unbundled offerings that end customers/merchants can choose to pay for. In smartphones and tablets, all services are bundled for an ecosystem; and the charges are 30%. Imagine the profits being made by Apple and Google at the cost of independent content creators. The Windows platform does not charge any fees, but its users are a fraction of what exists on the Apple and Android ecosystems. Even Roblox is bleeding from this onslaught.

There are confusing restrictions imposed on blockchain-based games and transactions through cryptocurrencies as well, and all can be linked to defending the revenue models. For example, Apple does not allow NFC-based ‘tap and go’ payments apart from Apple Pay, citing security reasons. However, they allow the NFC technology to be leveraged in opening of hotel and car doors, negating the security argument.

Furthermore, Apple does not allow applications used for crypto mining or decentralized data processing, citing heating issues. Neither Apple nor Google allow games that accept cryptocurrencies as a form of payment, or that use cryptocurrency-based virtual goods (that is, non-fungible tokens, or NFTs).

For the Metaverse to emerge, it’s likely that developers and creators will need to find ways around the gatekeepers.

Behind the scenes of the metaverse will be a demand to deliver permissionless identity, financial services and high-speed exchange. Data will have to be stored and served to millions if not billions of people. The answer to these problems may lie in the technology of cryptocurrency and blockchains.

Companies like Decentraland and The Sandbox have developed virtual worlds that integrate cryptocurrencies so gamers can create structures like virtual casinos and theme parks, and monetize them. In Decentraland, the currency used is called MANA, and is available to purchase on exchanges like Coinbase. There are even casinos in Decentraland where you can gamble in MANA, with dealers paid in MANA to show up for work.

NFTs will also play a foundational role in the metaverse, giving people complete ownership of their characters, accrued in-game items and even virtual land. An NFT of a virtual estate in Decentraland recently sold for more than $900,000, the largest sale to date.

Eventually, it will be possible to buy and sell virtual goods from different games and universes on interoperable marketplaces. So, someone might be able to sell their virtual plot of land in the Decentraland world and use the funds to purchase Fortnite skins, for example. Cryptocurrencies could become the sole legal tender used in the metaverse, with all virtual objects and intangible items being expressed as NFTs.

Closing Words

The Metaverse is taking baby steps, but there is no doubt that it is already here, and it is picking up steam. In its infancy, no one could have imagined the overwhelming impact the internet would have on commerce. And it is the same right now with the metaverse. Today there is little doubt about the size of the opportunity, and the investments made are there for all to see. Within a decade, the metaverse has the potential to drive a very different world.

The metaverse is coming, one way or another. The future of the internet will be more human than the way we experience it today — more physical, interactive, and speech-based than flat screens filled with text and images. Recently, Somnium Space, the VR metaverse world, is launching a feature called “Live Forever”, which allows users to create AI duplicates of themselves so loved ones can visit their eternal digital avatars and touch them via haptic suits.

In the movie Matrix, Morpheus explains to Neo, “What is real? How do you define real? If you’re talking about what you can feel, what you can smell, what you can taste and see, then  real is simply electrical signals interpreted by your brain.” Think about it. We already spend most of our days in the digital world. And one day, our life, as we know it, will be in the metaverse. And for the generation that is growing up on Roblox and Fortnite, they will simply know the simulated reality as their normal, regular life.

“Red Pill or Blue Pill”? That scene aged well, didn’t it?

Something Big is happening!!! Our lives will never be the same.

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