If you scan the media, you would think that thousands of companies are building their own products and services for the metaverse, from large-scale development like Meta to bite-sized services from smaller start-ups. A typhoon of business ideas whizz through Twitter, and VCs are seeing an influx of companies taping in the word ‘metaverse’ in their marketing materials. Some of these are legitimate, but most are jumping on the hype train and hoping for the best. The situation reminds me of the blockchain hype of 2017; companies shoved blockchain into their services in the hopes of raising more capital for their business, buoyed by the emerging tech trends. Inevitably, most start-ups failed to live up to their own promises.
We will see the same with the metaverse, but perhaps to a more severe degree. The blockchain has tangible benefits and had already been created, with self-evident benefits that people can see and – for the affluent few – able to engage with. But the metaverse doesn’t even exist yet, with a myriad of differing definitions and companies who are working within their own versions of the metaverse. The mish-mash of approaches is leading to confusion, particularly in the public eye where they are only just learning about the topic. So when we consider how NFTs and the metaverse can work together – two of the most emergent trends of 2021 – then we enter a collective mess of opinions and speculation. Some, like Alan Smithson who runs MetaVRse, are particularly buoyant: “The ability for creators to get paid for subsequent resales of their art is too attractive… [and] will effectively shape how we transact in the metaverse.”
Predicting its trajectory and form is like wondering what the next ten years will look like; fuzzy and ill-defined, with a lot of guesses along the way. But what is reasonably clear is that, while the underpinning technology is strong, we still have a long way to go before it is viable and trustworthy enough for wider use. Rampant cases of fraud, lack of environmental credentials, and overvaluation of items have led to a bloated NFT space that is surfing up the Gartner Hype Curve before potentially tumbling into the Trough of Disillusionment. But once solved, NFTs provide a firm bedrock for how financial transactions can happen in a potential metaverse.
Using NFTs in the metaverse
NFTs may well have some utility in a potential metaverse because it conveys value to virtual objects and land. Decentraland has proven that it is possible to have a persistent virtual world and be able to convey the value of the location via tokens, which can then be bought and sold in a secondary market. The same is true for physical items; having unique ones which can be produced and sold, adding additional value, and bringing life to a secondary market as people buy and sell their wares. In a virtual location where item production can be limitless, NFTs add the necessary supply constraints to grant value.
NFTs will likely act as virtual objects or assets, rather than the images they act like today. Instead of an image that is owned by a user, the object can be used however they wish in the metaverse; a table here, or an ornament there. Even property could be bought, and the token acts as the ownership rights of the location. Here is the biggest difference with an NFT in the metaverse; the object will have an impact on a virtual world, instead of granting access or prestige as part of an insular community. Doug Thomson argued that they are not artificial scarcity, and it is more a way for communities to self-organise. I disagree as they would have limited numbers in a potential metaverse, but understand the point that they can also be used as a way for communities to rally together.
With such a wide market, it is more important than ever to consider interoperability as a potential portion of its market size. If an NFT can be used across the internet, then its value can expand as well as its utility. If a mobile phone can be used across the UK and US, without walls, then its value is increased for people who like to explore outer reaches. (The approach then raises the question of fees; would NFTs face fees for their use in different parts of the metaverse?)
These same thoughts are corroborated by Nicole Lazzaro, President of XEODesign: “A walled garden metaverse delivers less value than a free and open one. For example, consider how hard it is to remember what platform someone messaged you on. Think about how much time humanity saves if they could consolidate all their contacts and communication in one space without a pricey CRM subscription.”
Such a walled garden may be possible; a solo location where all activities take place, which cannot pass into other realms. The barriers are common and even desirable, to protect the users within the wall from harmful content or accessing less than desirable areas of a particular world. But the discussions on the area come down to the individual rights of users within virtual worlds, and how much the governing companies are willing – or even allowed – to give over time.
Are NFTs even necessary in the metaverse?
In the end, what will work best for the metaverse is what works for its users. We are at such an early stage of its development that its shape and form are not yet defined, with basic elements not decided upon. Matthew Ball, a venture capitalist with extensive expertise in the space, points out that blockchains might not be the right answer: “The metaverse has very few, if any, required technologies or models. The Internet did not need to use TCP/IP, it could have used other protocols and standards. The question is which is best for the metaverse economy, for individual users, and for developers.
“The enthusiasm for blockchain stems, in part, from the belief it is less subject to gatekeeping and shifts more profits to the developer and rights to the user, rather than intermediaries and platforms. That sort of model is likely to be healthiest for the metaverse economy and individuals within it – but it isn’t yet clear that blockchain is the best specific answer.”
The topic comes back to a core point – are NFTs even necessary? Surely an agreement on the value of virtual objects, without it being linked to the blockchain, will suffice for a functioning economy? NFTs add the scarcity needed to add value, but does the enforced dearth need to be linked to the blockchain? It certainly means that every purchase can be verified, but the ledger itself may not necessarily need to be part of a decentralised network.
Then again, the value of decentralised finances stems from its lack of central control, and how its value can ebb and flow without the direct control of one organisation. That lack of centrality, the core of the metaverse, is enviable for some. Yet even then, the fine details of ownership are not defined. “Digital property rights which have not yet been solved,” said Matthew Scott Jones, co-founder of MetaFabrix. How can an NFT convey ownership when the very basis of ownership is not defined?
A customer-focused approach, not a forced technology
All of the above draws from a central idea that we have no idea what the metaverse will look like. The suppositions and suggestions are mere thoughts thrown into the churning bucket of online discourse, while the engineers and developers in the background are building the future. But of the items explored and pondered upon, one area I am confident on is that the metaverse with become customer-focused, with no ‘forced’ technologies on them. If NFTs are forced, and not easy for people to use or buy, then they will deflate and die.
The most successful metaverse will be a frictionless experience while will be seamless for its users to enter, where they can do as they wish and pay as they please. The customer-first approach helped giants like Amazon thrive, crafting user journeys that made it as easy as possible for packages to appear by their door, no matter what happens. The same goes for Netflix, which created Open Connect so that its content can be delivered anywhere in the world seamlessly, without buffering or glitches. The metaverse will be the same, using a matrix of underpinning technologies that will be almost invisible as users dance the night away.
The exceptions are aspects that are linked to the safety of spaces and individuals. Security systems are in place to protect people, raising necessary barriers to ensure that they are not harmed. But when it comes to facilitating trade and granting people to do what they wish, then the most seamless options will always win. Currently, NFTs are not a good fit for the metaverse because of the sheer range of issues linked to them. Changes will need to be made, but NFTs are not ready for use.
Why today’s NFTs are not a right fit for the metaverse
A range of issues come bundled with NFTs today, but the core three that I want to touch on are gas fees, severe value volatility, and fraud. In short, gas fees are so severe that they impinge on the value transactions that make them seamless purchases. Value volatility distils a sense of mistrust on recently-purchase assets. And fraud impinges on the system as a whole, and NFTs will become less trusted as an item to purchase.
Let’s start with gas fees. The best equivalent for them is an added tax where a vendor adds an additional fee to facilitate the purchase. The rate is normally a percentage, linked to the value of the item itself, or a set amount no matter what the purchase. A good equivalent is Paypal, which have a set minimum to pay for the transaction cost up to £25 (£0.50), then percentages from a certain amount upwards. The simplicity and transparency help facilitates trade; a wildly fluctuating fee hinders the purchasing process as people are unaware of how much they have to pay. By comparison, the Ethereum blockchain can fluctuate so severely, between values of £100 or £200 and spiking beyond, that it halts the purchasing process. For payments to occur for the vast majority of consumers, the fee should be countable in pennies.
Even after the purchase, the value can fluctuate drastically. A purchased NFT could be sold for £1.50, sold for £100, sold again for £1,000, then rest at £500 for in perpetuity. A simple example, and minor when compared to the larger projects in the market. If NFTs are to link to the metaverse, the value must not fluctuate so much; a sense of value stability is required for assets to be seen as safer purchases, with potentially incremental increases in value over time. Property prices come to mind, as a safe purchase with minimal market fluctuations. Volatility breeds mistrust.
Fraud contributes to the lack of trust as well. Projects crop up all the time promising the world, before pulling the rug and seeing the value of items collapsing to the ground. Established projects soar in value once they built trust, and they become hallmarks for good NFTs. But the vast majority of items are smaller purchases with a risk factor, where users shuffle money between accounts to artificially increase the value of items.
The negative environmental impact is another reason for skepticism, and one reason why companies like Discord are stepping back from NFTs. I mention it here as a sub-point, as the overall trend is that users are more conscious of the environment and are actively working to minimise the impact on the planet. If the trend changes, then it is worth exploring further.
The crux of the issue was summarised by Ricardo Tucker, AR Engineer at TikTok and independent game developer: “NFT technologies are, at best, a proof of concept for how digital ownership could work in the future, but what’s on the table right now isn’t offering a complete solution to that problem.”
How NFTs need to change to fit the metaverse
With the above in mind, here are my own suggestions for how NFTs need to morph themselves to be a better fit for the metaverse:
- Lower gas fees to set amounts. No asset can have stability when the costs of transactions, though necessary, can fluctuate to severe degrees. For the majority of shoppers who want to buy virtual items, the fees must be measured in pennies.
- Lower value volatility. The process may naturally happen over time, as the market’s bubble pops and the objects have a tangible use case in a virtual world. A virtual table does not need to vary in value so much, for example. But if it does not, then fewer people will buy an NFT as they suspect its value will fluctuate so severely.
- Combat fraud. No project can ever have trust if the high levels of fraud continue. The process may become self-corrective as objects in the metaverse are viewable, and assets can be purchased when necessary. But the point is that the levels need to ebb downwards to instill more trust.
Plenty of potential for the future
The above implies that I am cynical about the future of NFTs. Not so. The underpinning value of the technology is sound, as it will be important to keep track of object ownership within the metaverse. If the metaverse avoids having a singular governing body, then it may benefit from a decentralised version of tracking the purchase of items. If it works well, as consumers can seamlessly shop for what they need, then they can buy what they need where necessary.
The community is thriving, with many people that say “gm” and bounce ideas together, collaborating and making friends. Like any group of people, there are bad actors that profit from the misdirection of others – but otherwise, the impression I had is that the people are ready to defend NFTs and their potential.
But as of yet the details need to be ironed out, at least for the metaverse. Complexities on ownership and the facilitation of trade are necessary to combat before NFTs can be trusted enough for wider use. But once resolved, I look forward to a future I may lean back in my NFT armchair while browsing the paper, reading about how the Bored Ape Yacht Club continues to have parties on top of virtual skyscrapers.