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🖥🏛💪Blockchains Are Essential For Strong Virtual World Economies
In the movie (or book, highly recommend both!) Ready Player One, the “Oasis” is a virtual world where billions of people live, work and play. However, the Oasis is the target for a nefarious corporation, Innovative Online Industries, trying to take total control. The fear is that this centralized corporation is going to take control and place massive restrictions on the previously free Oasis.
All virtual environments today, including games like Fortnite and Second Life, are centrally controlled. Luckily, the vast majority of the corporations that control these virtual worlds are forces for good. However, if we hope to achieve a Metaverse on par with the Oasis, we must push for stronger rights. In order for digital world economies to reach Oasis scale, or even surpass physical economies, we need stronger laws or guarantees around digital assets. Blockchains, specifically non-fungible tokens (NFTs), fulfill these guarantees by baking irrevocable property laws directly into the code of digital assets. Just as strong private property rights correlate with strong economies in the physical world, the usage of blockchains and non-fungible tokens will correlate with strong virtual world economies.
The Value of Property Rights
Many of us that live in countries like the United States take our favorable property rights for granted. The local government office usually knows who owns each piece of land in their community and people are unable to build on an unused piece of land: they must first buy it and sign all necessary documentation. If possessions are stolen, people can call the police to get them returned and the thieves will suffer the consequences. This system makes us confident.
It's our shared belief in property rights, and their enforcement by our legal system, that allows us to confidently trade goods and participate in the market economy. When confidence in an economic system breaks down, the entire system can be negatively impacted. Strong laws surrounding economic rights generally lead to more prosperous nations.
Rule of Law vs GDP per capita
Secure Ownership Breeds Confidence
Home renters likely take good care of their personal unit, but they do not necessarily spend extra resources to improve the exterior or interior of the building. Why should they? They have little incentive since someone else owns the building. Now, imagine living in a society where there are zero, or very weak, property rights: there is no incentive for property owners to improve or invest in their property. Now expand that concept to your entire city or country. If the state has the ability to seize your assets for any arbitrary reason, you have little to no incentive to work hard, earn money, and improve your situation. According to a study by researchers at the Royal Melbourne Institute of Technology and Victoria University, there is a direct correlation between how authoritarian a leader is and having a negative or inconsequential impact on their economy. The study points out that even the revered authoritarian leaders, like Singapore’s Lee Kuan Yew, were essentially in the right place at the right time and the economy would have performed well regardless of their leadership. The study continues to explain that democratic countries are far better off economically in both short-term and long-term growth. The study does not specifically look into the stronger property rights of democracies, but we can clearly see democratic countries have a stronger rule of law by examining real-world examples.
Why do we see many high-net-worth individuals from countries in South America, Africa, Asia, and the Middle East invest in properties in the U.S., E.U., and Australia? Instead of investing in businesses or properties in their home countries, high-net-worth individuals from these emergent economies are opting to add value to countries with strong property rights. China is a great example: in recent years Chinese citizens have been investing in U.S. real estate at a frenetic pace.
In 2018, Chinese citizens accounted for 25% of total foreign investment in the U.S. Why would citizens of China, the 2nd largest economy in the world and the fastest growing economy in the past 20 years, be investing billions in Canada, Australia, and the U.S.? It all comes down to confidence. Chinese citizens are confident these countries will not arbitrarily seize their property. Centralized autocratic rule and weak property rights do not automatically indicate a country will deteriorate. The Chinese economy has performed very well despite their lack of strong property rights, but if they did such rights the capital that was invested overseas could have greatly benefited China.
This is how I view today’s virtual worlds and games. Right now, Fortnite, World of Warcraft, Roblox, etc. are all like China. They are economically performing very well, their rule of law works most of the time, and the majority of their citizens are happy with the current situation. But if you asked users, “Would you like to keep playing a game exactly like this but the assets you own and build are truly yours?” I believe 99.99% of users would take that option. Even if companies started to make small steps in the direction of stronger user rights, it would have a massive positive impact on user numbers, user retention, and the industry as a whole.
Roblox is a great example of a platform that is slowly heading towards less autocratic rule and enabling freer markets. They allow users to build games and content and earn money from their own creations. Of course, Roblox takes a significant fee from the content creators, but this is still a step in the right direction. This less autocratic approach has made Roblox explode in user numbers (they recently hit 100m monthly active users) and has created immense value for users. In 2017, $30m was paid out to Roblox users who have built games on top of the platform (this $30m payout was likely much higher in 2019) and two developers each earned an astonishing $2m. The ability for users to create value leads to more users, greater engagement, and higher retention. The best method to provide stronger property rights and allow users to monetize their creations is to utilize a blockchain.
Games As Autocracies
There is a long list of gaming companies that release assets or updates in their worlds only to have them negatively impact gameplay. Users become frustrated when game developers change the rarity, characteristics, or ability of items. The gaming community has always been under the yoke of a central authority that can do as they please, but despite this, the massive global gaming market is expanding at an increasing rate.
I am quite shocked that the community of gamers/users have been able to build these large economies. It’s likely because there has not been another option: you must opt-in or not be able to enter their system at all. Minimal control was the only choice for gamers — that is until blockchains were created. Vitalik Buterin, the Founder of Ethereum, the second most widely used blockchain, famously said:
“I happily played World of Warcraft during 2007-2010, but one day Blizzard removed the damage component from my beloved warlock's Siphon Life spell. I cried myself to sleep, and on that day I realized what horrors centralized services can bring. I soon decided to quit. In 2011, searching for a new purpose in life, I discovered Bitcoin”
We can only hope that more people will be inspired to give players more control and create better systems for virtual economies.
Blockchains Enable Stronger Rights
Currently, putting an entire game on a blockchain does not make sense because of how slow and expensive they are, however it does make sense to put just the in-game assets on a blockchain. Having in-game assets on a blockchain is like plugging a pre-built financial system directly in the game. It instantly allows the user to trade with one another and have secure “bank accounts” (wallets) that contain their assets. There is no need to worry about overbearing KYC (know-your-customer) laws, and game developers can sleep well knowing the assets can be traded in a secure fashion from the start. Not only that, but there is also a pre-built virtual currency (Ether) that you can utilize in your game. However, if developers need greater control of their game economy or other monetization methods, they can easily create their own game-specific virtual currency. The entire financial stack and infrastructure is essentially ready-made when implementing blockchain into a game economy, benefitting developers greatly. The actual users also benefit from having assets that cannot be seized, deleted, or controlled by the game developers. There are still issues surrounding user experience, such as downloading web3 (blockchain) wallets and purchasing cryptocurrency, but once these processes are streamlined the pros will heavily outweigh the cons.
Virtual Worlds Using Blockchains
There is already a swiftly growing number of games utilizing blockchains within their ecosystems. There are three virtual worlds that have already taken strong virtual property rights to the next level by putting property ownership on a blockchain, Decentraland, Cryptovoxels and Somnium Space. These three projects already have robust economies and thriving communities even though they have been around for a short period of time. Unlike typical games, these virtual worlds have no direct objectives and a completely open environment for users to do and build whatever they please. Because they use a blockchain, users can monetize assets in a multitude of ways. They can buy and sell pieces of land, clothing, or basically any item imaginable. They can also create their own blockchain-based assets to sell or trade. This open economy is possible and easy to implement because of Ethereum. If virtual world developers had to build the entire economic and trading infrastructure themselves, it would take significantly longer and be more expensive. With all the assets being “tokenized” (putting a digital asset on a blockchain), it makes the infrastructure seamless. The users of these virtual worlds are confident in the fact that no one, not even the game developers, can seize the land or items they have purchased.
NFTs Alone Do Not Solve Everything
Blockchains can bake strong laws directly into a digital item’s code, but in most cases, game developers can still control the issuance of assets. For example, after a user works hard to obtain an exceptionally rare NFT, developers can simply issue more. In terms of asset issuance, developers do have the ability to hardcode a limited number of specific items. They can decide there will only 1 of a specific item, however they could simply create a new item with similar attributes. This is not ideal for the original item holder as it would devalue their item. So, even though the asset cannot be seized by the developers, users still have to make good judgment calls on teams and projects that will not interfere negatively with the in-world economy. Users should research past promises from the game developers to ensure the team generally acts in ways advantageous to users. The crypto industry is rife with teams promising the moon to only blow up on the launchpad.
While property rights are stronger within blockchain-based projects, much of the virtual worlds/games overall economic health, especially at early stages, relies on faith and trust in game developers. You can think of each project like the United States. The state is unable to arbitrarily seize your property, but the Federal Reserve can print excess money and raise taxes to 90%: the entire economy is in trouble if the greater ruling powers misbehave.
Credit Rating Agencies for Virtual Economies?
I can foresee a future where non-fungible token (NFT) projects and virtual worlds are given a type of credit rating based on their responsibility in issuing assets. Here’s a hypothetical example: Project X is a new blockchain-based virtual world that does a presale of 5,000 in-game assets to raise operational funds. After the sale goes well, they decide to raise extra funds with another “presale” of an additional 5,000 newly minted assets. This would damage the reputation and credit rating of Project X since they originally stated only 5,000 assets would be sold.
A third party credit rating agencies for the virtual economies would give users greater confidence. The users would have assets that cannot be seized thanks to the blockchain and have confidence that the in-game economies of highly-rated projects will not be abused by the developers. This system's confidence would lead to healthier economies.
If we imagine that each NFT gaming company was a country, we could have a system similar to Standard and Poor’s creditworthiness ratings. If an NFT project repeatedly goes against their word or is not transparent about asset issuance, their rating would suffer.
A list showing different bond ratings.
This type of rating agency for virtual worlds is probably years away because the ecosystem is still so young, but it’s beneficial to begin thinking about this scenario now so we can begin to design a simple rating mechanism and hold those in power accountable.
Blockchains add immense value to virtual economies by creating strongly embedded property rights. The projects and developers that use them will enable the creation of great wealth for users and developers alike. Eventually, the benefits of using blockchains within virtual worlds and games will be so obvious that the majority will use them. This process will take many years to actually play out, but once it does the fantasy of a real Oasis, in which people live and earn, will become a reality.