Point from Dr. Xiao Feng: Ten Rules of Metaverse Economics
This is the preface written by Xiao Feng, Chairman and CEO of Wanxiang Blockchain, for the book Metaverse Economics authored by Huang Leping, Chief Analyst of Technology and Electronics Industry at Huatai Securities Research Institute and Zou Chuanwei, Chief Economist of Wanxiang Blockchain.
What is Metaverse? From my point of view, it is an architecture with three layers: distributed network technology, distributed ledger and distributed society and business. Metaverse is not only a digital space built upon a series of digital technologies but also a digital world where we will create a universe parallel to the real universe. The economic rules of Metaverse is definitely different from those of the Internet, as the economic rules of the Internet are starkly different from those of the manufacturing industry. I think there are ten rules of Metaverse economics.
№1 Economic System
The current economy model can be roughly divided into three types from the perspective of property right system and capital income distribution system.
Industrial economic model or manufacturing economic model is named as “Main Street Model”. Wall Street represents the financial capital while “Main Street” represents the industrial capital. The propriety right of the “Main Street Model” is centralized while its capital income is also enjoyed by one party. That’s why it gave birth to a great number of capitalists like Ford, Carnegie and Rockefeller. When it comes to the information economy model, i.e. the “Silicon Valley Model”, the propriety right became decentralized as the scope of capital has been expanded. Not only money but also knowledge has become part of capital. Anyone can capitalize on knowledge by writing a business plan and attracting venture capital investment. The “Silicon Valley Model” has in a large degree socialized shares where knowledge, instead of capital, can be exchanged for shared as it is a new type of capital. The founders will hold part of the shares while other shares are decentralized via several rounds of financing or distributed to employees as share options. Therefore, professional managers rather than capitalists emerged because of the “Silicon Valley Model”. The capital income was also shared among different parties. In the Metaverse economic model, there may not be any stock equity system. If there is any, its value will probably be largely reduced. All contributors and participants are stakeholders. They collaborate via smart contracts and share the value created in Metaverse. That’s why we say the capital income is shared. Moreover, founders have been replaced by initiators. In the “Silicon Valley Model”, we may introduce ourselves as the founders of a certain company to indicate that we are the persons who own this company. But in the Metaverse model, neither networks nor DAOs are owned by anyone. The initiators only have a large influence over the organization. This is what we call the stakeholder capitalism that tries to maximize the common interest or the interest of the organizations.
№2 Economic Organization
Centralized companies will gradually turn into DAOs. In accordance with the new system economics, companies were born by embedding the functions of external markets into business organizations so as to reduce transaction costs that consist of search cost, matching cost, logistics cost and payment cost. In the era of the workshop economy, workshops suffered from a high transaction cost as they totally relied on exchanges in external markets. When companies emerged, they took a U structure, which means the decisions were made from top to the bottom. As the business of companies verified, there came business units. Then headquarters in different regions were born with the trend of globalization. The power of group headquarters were gradually diluted by business units and regional headquarters, which gave birth to the M structure. DAOs in Metaverse, by nature, follow the trend of shifting from the centralized U structure to the decentralized M structure. Taking advantage of the programmability of smart contracts, DAOs are able to imbed currency and payment systems as well as asset transaction, clearing and settlement systems. In a nutshell, the differences of the basic economic systems will lead to the differences of economic organizations. In the shareholder capitalism, companies were the major form of business organizations where the rights were divided into shares. However, when it comes to the stakeholder capitalism, companies are being replaced by DAOs and the rights and interests are divided by tokenization.
№3 Financial System
The capital market in Metaverse is different from the one we are familiar with in the following ways. Firstly, the shareholder capitalism, built upon the stock ownership system and the capital income distribution system of the industrial economy and the Internet economy, capitalized on stocks and encouraged others to establish new companies and create new business, which led to intense competition and benefited consumers with newer and better services. Secondly, in the stakeholder capitalism of Metaverse, the programmable currencies and assets based on smart contracts will play an important role in enabling stakeholders to share the capital income. Token, used for transactions in the market, no longer represent ownership but the right of use. Therefore, the ownership market will also be replaced by the right of use market. Stakeholder capitalism in combination of DAO, the new business organization form, and the new token market, will hopefully build a brand new financial market that can be called as DeFi.
№4 Value Creation Rules
The value creation rules of the manufacturing economy are to maximize the companies’ equity value. In the Internet era, what is important is not only to maximize companies’ equity value but also to make the best of the network value. We talked about the “Fax Effect” by Kevin Kelly before. It may take you 200 dollars to buy a fax. But you can fax others when you join the fax network and enjoy a value way larger than the cost. Moreover, as more and more people are joining the fax network, they will create more value for you. This “Fax Effect” vividly explains the concept of network value. Metaverse, as a space concept, is composed of different layers, including the digital space, virtual world, parallel universe, etc. While maximizing the network value, Metaverse also tries to make the best of the space value. Besides, the virtual space is free of physical restriction and able to reach a larger development and create more value.
№5 Value Distribution Rules
The manufacturing industry features a high fixed cost and an incremental marginal cost. In the automobile industry, a typical example of the manufacturing industry, the R&D cost of a new car may reach 1 to 2 billion dollars and it takes a long time to go through the processes like making samples, modifying designs and optimizing the samples. Manufacturing a new car will also generate new cost. So the pricing model of the manufacturing economy is the cost plus other fees. No products or services are free of charge. However, the Internet era is featured with free products and services. Though the fixed cost of the Internet economy is relatively high, its marginal cost decreases. That’s why it can provide free products and services. Once a software is developed, the cost of using it remains unchanged no matter how many users it has. So it can use free products and services to attract more user to join the network in a way to drive more traffic to the ecosystem. That is why the Internet economy is also called the Traffic economy. Though some Internet services seem to be gratuitous, they are actually more expensive than the manufacturing goods that are valued because of their rarity. The market value of a manufacturing enterprise can be as high as hundreds of billions of US dollars while that of an Internet enterprise can reach thousands of billions of US dollars. Does Metaverse follow the same pattern? I do not think so. Anyone can join the Metaverse economy as a stakeholder and share the value created by all in accordance with an equitable, fair and open attribution system. In this model, producers are also consumers. X to Earn is a hot business model in Metaverse. I would like to propose Player to Earn in which stakeholder can make profits and share the value created in Metaverse together.
№6 About “Player” in “Player to Earn” Model
Player refers to the stakeholders of the Metaverse economy, including developers, creators, contributors, consumers, investors etc. Anyone who participate in Metaverse will become players. There will be no independent sharers like shareholders. What do they “play”? As long as they contribute to the community, no matter it is their wisdom, ability or reputation, they can get an NFT as a certificate. NFT, as a certificate issued on blockchain, is used to prove the contribution made by players.
№7 About “Earn” in “Player to Earn”
After getting the NFT certificate of their contribution to Metaverse, players will achieve standardized tokens via Tokenomics. So the basic business model in Metaverse is to play NFT and then earn tokens. As a distributed ledger, blockchain is used to records the transactions of the “Player to Earn” model. There have already been some application scenarios for the “Player to Earn” model. But they are still in their infancy and will hopefully achieve greater development in the future.
№8 Distributed Decision Making Mechanism
The decision making mechanism of the Metaverse economy is decentralized. Many people have misunderstood decentralization as censorship resistance or refusing to comply or to be regulated. That is not what decentralization is really about. Efficiency and fairness have been repetitively talked about in economics. Centralization and decentralization are at the opposite side of the efficiency and fairness of business decision making from the perspective of economics. If efficiency is prioritized, the centralized decision making mechanism should be taken. However, if fairness is put high on the agenda, more people should be engaged to share their opinions and participate in the decision making process. We should reach a consensus among all participants and then take actions accordingly. The decentralization in Metaverse aims to build a relatively fair decision making mechanism with digital technologies. Business scenarios in Metaverse should keep a balance between efficiency and fairness. Infrastructure should give more priority to fairness while applications should pay more attention to efficiency. I believe if we can remove the misunderstanding of decentralization, blockchain and Metaverse will become more popular.
№9 Capture Business Value of Metaverse
The products and services of Metaverse and those of Internet are starkly different. Many people may wonder what the killer application of blockchain is. Admittedly, there seems to be no killer application in blockchain in comparison with Internet applications. This is because that the protocol layer and application layer of blockchain and Internet play different roles in capturing the business value. Internet can be regarded as a protocol stack built with TCP/IP. It allocates IP address and enables communication between IP addresses in accordance with IP protocol. The application layer of Internet is pretty valuable. Some large Internet platforms may be valued as thousands of billions of US dollars. But protocols like TCP/IP, HTTP, SMTP and so on are open source and permissionless without tokens. So the value cannot be captured. That’s why Internet tries to make the application layer larger and the protocol layer simpler. It is difficult for protocol developers to make money in the Internet economy but many enterprises focusing on applications have grown into large companies. Blockchain can also be taken as a protocol stack, just like the Internet. For example, bitcoin can be understood as the currency protocol of blockchain while Ethereum is the settlement protocol. But the currency and value systems are imbedded in the protocol stack of blockchain，enabling the protocol layer itself to capture value. That is the most important difference between blockchain and the Internet. The infrastructure layer of Metaverse is also equipped with currency and value systems. Metaverse can create value in the protocol layer and will involve many digital technologies in its application layer that will create a value no less than the Internet.
№10 Metaverse Subverts Manufacturing Industry
As mentioned before, the manufacturing industry features a high fixed cost and a decreasing marginal cost. But things are different in Metaverse. For instance, BMW is taking Omniverse by NVIDIA to digitalize its automobile manufacturing process. In the pre-Internet era, the fixed cost to make a new car is very high as all work, including design, production, modification, iteration needed to be carried out on physical objects. When making a car on the Omniverse software platform, BMW can digitalize all processes like design, simulation testing, modeling, etc. which helps to largely reduce the cost of R&D, testing, productization and scale production. The manufacturing industry has been taking the waterfall development model where no products will be launched until they have been made perfect. However, though the products are considered perfect by the manufacturers, the consumers may not think so. That’s why a lot of products may cause a great production cost but cannot meet the consumers’ demand. The manufacturers have to sell a great number of products (at least 1 million) to cover the R&D cost. If digital platforms are introduced to the R&D and productions processes, the fixed cost will be largely reduced as the products can be rapidly updated in the software. The manufacturers may only need to sell 10 thousand products to cover the cost. In this way, manufacturers will able to make profits in a quicker manner while consumers will be more satisfied. No only hardware but also software can be rapidly updated. Take the Intelligent Connected Vehicle for an example. We often say that the value of an automobile depreciates once it is bought. But if automobiles can be connected into a network with intelligent technologies, it can form the “Fax Effect” as more and more vehicles join the network and share more information. This will enable the manufacturing industry to achieve a decreasing scale cost and an increasing scale income, which will subvert its traditional value distribution rules.
That is all of my understanding of the ten rules of Metaverse economy. What will happen in Metaverse may not be the same with my understandings. But I would like to emphasize that the economic rules of Metaverse are definitely different with those of the Internet as the Internet economic rules are different with those of the manufacturing industry.