Introduction: What is the Metaverse

Billions of people interact in digital spaces daily, whether it’s checking social media, sending a work email, or playing video games. In fact, over 80% of the world’s population (6.5+ billion people) own a smartphone, which pushes access to digital experiences even deeper into our everyday lives. Thus, the “metaverse” is already here to some extent. Indeed, the metaverse can be thought of as an extension of the mobile internet, but its full fruition will result in even more pervasive, and much more immersive, digital experiences than we are used to today.

Many conflate the metaverse with contemporary AR/VR devices (e.g. Occulus), 3D worlds (e.g. Decentraland), or massive-multiplayer-online games (e.g. Fortnite); however, this is like saying the mobile internet is equivalent to the iPhone, or equivalent to a specific application like Instagram. The metaverse should not be thought of as being constrained to a single device, and will be made up of many different digital spaces and games.

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As Matthew Ball puts it: “The Metaverse is a massively scaled and interoperable network of real-time rendered 3D virtual worlds which 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.” His last point on “continuity” is important.

Problems with Web2 Metaverse

We experience continuity of data to some extent today. When I sign into Instagram I see my friends list and posts. The Google Chrome browser tracks my browsing and search history. Telegram stores my conversations. And the bank keeps record of my account balance, updating it based on incoming and outgoing transactions.

But this continuity is limited. Web2 data streams are siloed from one another. My digital conversations are split between Instagram, Telegram, iMessage, and Gmail (Google). My username and friends lists are spread across multiple social media platforms: Twitter, Instagram, and LinkedIn.

The negative implications of this are made especially clear when thinking about in-app purchases. For example, Fortnite skins are locked inside the game. Skins cannot be reused in other games or digital worlds. If Fortnite were to disappear, so would all in-app purchases associated with it. In-game currencies are similar. Fortnite, Roblox, Minecraft, and Call of Duty all have different currencies that can only be used within their respective game.

Furthermore, centralized companies that provide the services described above – Meta, Apple, Google, Telegram Group, Fidelity, Epic Games – have full control of user application data. At any point they could modify user data, or prevent a user from accessing it. These companies also must be trusted to keep user data secure and private; however, most reserve the right to sell user data to advertisers, which users must comply with lest they are willing to endure high switching costs and loss of the global user networks available on legacy platforms.

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Thus, the current metaverse is closed and permissioned in that data is siloed and users authenticate through centralized gatekeepers. Users do not own or control their identity, application data, and digital purchases. Fortunately, the blockchain solves these problems and enables an open metaverse.

Open Metaverse – The Full Web3 Vision

An open metaverse is one that is not owned by any single entity, and where users can own and trade their digital goods. This requires that metaverse content, economy, and payments are built on decentralized Web3 technologies. Cryptocurrencies and NFTs, instantiated on the blockchain, enable users to own scarce digital resources like in-game items and digital money, and permissionlessly trade them with one another.

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Outlier Ventures’ “Open Metaverse” thesis argues that such a metaverse requires the following Web3 primitives:

• Programmable internet money (e.g. BTC, ETH, other fungible tokens)
• Scarce digital goods (NFTs)
• Own/custody of digital goods and money (wallets)
• Decentralized web stack for application hosting (i.e. storage, compute, middleware, domains, network)
• User-controlled application data in personal data stores
• Self-sovereign identity and credentials (e.g. DIDs and VCs)
• Decentralized communities and governance (e.g. DAOs)

It makes sense to begin by discussing blockchain-based gaming. To be clear, the metaverse will certainly be much more than just gaming with potential activities ranging from recreation, work, creativity/design, and education; however, such a metaverse will likely start with billions of users playing Web3 games, which implies onboarding to crypto wallets and accumulating in-game NFTs.

The Evolution of Gaming

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Gaming has gone through several stages of evolution. Think back to arcade games – each session was paid for with change. Moving into computer and console games, gamers would make a one-time licensing payment instead of paying for every session. This was the “pay-to-play” era of gaming.

Next, smartphones were invented, which ushered in hyper-casual gaming. Mobile games were developed that attracted new players, and expanded the gaming category overall (e.g. Candy Crush with 271 million monthly active users). Also during this time there was a shift into the “free-to-play” (F2P) era of gaming where games were monetized through advertising and in-game purchases. F2P is not limited to just mobile. Some of the most popular F2P games today are cross-platform and include Roblox, Minecraft, and Fortnite.

Web3 is ushering in a new era of gaming that enables players to earn, and own, valuable in-game assets. This marks the shift into the “play-to-earn” (P2E) era of gaming. Web3 gamers will benefit from:

• Digital property rights – users own their in-game items as NFTs, and even if the game stops operation, the items will still exist in user wallets, and other developers can still honor the utility of
• Open, secondary markets increase liquidity of in-game items
• Provenance of in-game items – gamers will be willing to pay premiums on items owned, and used, but their favorite professional gamers
• On-chain, cross-game reputation
• Web3 native payments for tournaments and prize pools

And Web3 developers benefit as well from:

• More options for monetization (NFT drops, royalties on P2P trading)
• Potential to capture more value and avoid platforms costs through direct monetization with player communities (e.g. avoid Apple’s 30% App Store commission)
• Better funding mechanisms (fund via community) and bootstrap player adoption with crypto incentives
• Game-to-game interoperability and leverage open, user-generated content

Play-To-Earn (Web3) Gaming

Earning happens in one of two ways – either during gameplay through the accumulation of fungible in-game tokens (e.g. GODS, AXS, GHST, MANA, ILV), or by collecting, and potentially leveling up, in-game NFTs that appreciate in value (e.g. Axie creature NFTs).

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Axie Infinity is the most popular P2E game to date, is similar to Pokemon with its turn-based gameplay dynamics, and is hosted on the Ronin blockchain, which was purpose-built by parent company Sky Mavis. Axies are cartoonish creatures that are collectible as NFTs and that have attributes (health, morale, skill, speed) that are leveled up through combat.

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Players earn Smooth Love Potion (SLP) for winning battles, and new Axies can be bred from existing Axies and sold as NFTs on secondary markets. Axies also belong to a class and exhibit traits of varying levels of rarity. These genetics influence the resulting genetics, and rarity, of offspring.

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Axie Infinity became popular in some parts of the developing world because players could earn significant sums of money through gameplay. The Philippines became known for its adoption of Axie Infinity, and spurred the emergence of Web3 gaming guilds (e.g. YGG) that lend Axie NFTs to professional players. Upfront costs can be prohibitively expensive because players need three Axie NFTs to begin playing, and a competitive line-up can cost several hundred dollars.

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Card games are also a popular P2E genre. Some popular card games include Gods Unchained (on Immutable), Splinterlands (on Hive and WAX), and Alien Worlds (on WAX and BNB Chain). Often gamers can start playing for free with a starter pack of cards, but often don’t start earning until they purchase more advanced card NFTs, or join ranked tournaments. Cards are collectible as NFTs as you might expect.

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Arcade-style games are also popular, especially on mobile, which include Benji Bananas (on Ethereum & Polygon) by Animoca Brands, and Trickshot Blitz (Flow) and Solitaire Blitz (Flow) by Joyride Studios. STEP’N (on Solana) is a mobile game where players purchase sneaker NFTs, and earn by exercising. It’s considered a “move-to-earn” as movement is metered and rewarded based on GPS tracking.

Problems with P2E Games

P2E games are often criticized for their basic turn-based gameplay and for placing too much emphasis on the “earn” component of the game. Some believe P2E games are over-financialized and too much like work.

Also, players are typically required to purchase NFTs in order to start playing as this has been the primary monetization method for blockchain game developers. Needless to say this creates friction when onboarding to P2E games, and has made some P2E games inaccessible to some gamers who either can’t afford the upfront cost, or who are not willing to install a Web3 wallet and purchase crypto.

Some believe the economics of P2E games are not sustainable, and that earning is only feasible when the game is growing and speculators are pushing up the price of the in-game cryptocurrencies.

Finally, sometimes success in P2E games is dictated more by the NFT a player can afford rather than his merit or skill. This has been termed “pay-to-win”, which some argue cheapens the game, and makes it not fun to play.

Next-Gen Web3 Gaming

All of these criticisms are being addressed in real-time. Billions in VC funding is being used to build the next-generation of Web3 gaming infrastructure and content.

AAA Gaming Studios

Major game studios are investing in the next wave of blockchain gaming and are expected to focus on engaging gameplay dynamics and compelling storylines. All of the following are games built with Unreal Engine 5 by AAA game studios. Unreal Engine will bring a whole new level of immersiveness to blockchain games as in-game NFTs will display as beautiful 3D renders.

Off the Grid is a next-gen cyberpunk battle royale game that integrates storyline and character progression. Personalized weapons, outfits, and accessories are in-game items that players can trade, but players will not be required to purchase in-game items in order to play, and the maker, Gunzilla Games, has already said that it will never sell NFTs directly to its player community. Off the Grid will launch on PlayStation 5, Xbox Series X/S and PC.

Shrapnel is a first-person shooter built on top of its own Avalanche subnet. Neon Machine, the game maker, has taken a unique approach with its emphasis on user-generated content in Shrapnel. Players create maps that others can use and vanity items that are traded on Shrapnel’s marketplace. This is an incentive for creators to populate Shrapnel and enhance the gaming experience for the entire community, all without involvement from Neon Machine.

Star Atlas is a space adventure and MMO strategy game built on top of Solana to support its “galactic economy”. Players choose between three factions (MUD, ONI, USTUR) and Star Atlas’ marketplace features a variety of ownable in-game assets like ships, access badges, resources, and more. Star Atlas will be released on PC.

Illuvium is an open-world exploration, monster collector and autobattler game built on the Immutable blockchain for PC/Mac. The monsters are called Illuvials and can be discovered and leveled up just like in Pokemon.

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Other blockchain games are being built for more casual gamers. Mythical Games says it wants to “invite players to become stakeholders in the game’s economy by giving them ownership of their digital collections”, and “open new doors of revenue for game developers”. The studio’s blockchain game titles include Blankos Block Party (open-world multiplayer party game), Rivals (arcade-style football game where you collect players and level them up), Nitro Nation (race cars for a chance to win your rival’s cars), Magic Fight (sorcery battle card game).

Also, Sorare and Dapper Labs are in the blockchain sports category. Sorare allows players to collect sports cards (soccer, NBA, MBA), build lineups and enter contents, and compete to win prizes. Dapper Labs is best known for Cryptokities and NBA Topshot, and has expanded its sport highlight NFTs into UFC and NFL.

Below is a thorough list of blockchain gaming studios, originally provided in Naavik’s Blockchain Gaming Q3 2022 Report.

Small budget, big ambition developers: Rooniverse, Playmint, First Light Games, Blockstars, Village Studio, Genopets, Galaxy Fight Club, Crypto Raiders, Gallium Studios, Heroes of Mavia, Horizon Blockchain Games, Lucky Kat Studios, etc.

Double A developers: Laguna Games, Xterio, Big Time Studios, Faraway, Azra Games, Metatheory, LavaLabs, Upland, Sipher, Illuvium, Gunzilla Games, Klang Games, Playful Studios, Iskra, Joyride Games, Gameplay Galaxy, etc.

Triple A developers: Mythical Games, Star Atlas, Immutable, Sky Mavis, Sorare, Yuga Labs, Dapper Labs, The Sandbox, Animoca Brands, Limit Break, Neon Machine, etc.

New Business Models (Free-to-Own)

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Blockchain game developers are experimenting with new business models. To date, the primary revenue channel for blockchain games has been NFT drops, where an NFT purchase is required to access the game itself. “Free to own” is an emerging blockchain gaming trend, which removes this upfront purchase for players. Game studios absorb the cost of developing valuable game IP (characters, assets, storyline) and give it away to players for free. Gabriel Leydon is pioneering the F2O space with the free mint of 2,022 DigiDaigaku NFTs in a lead up to his much anticipated game, Limit Break.

Game developers can still monetize by up-selling premium NFTs (e.g. vanity rather than utility), configuring royalties on P2P trades, and through advertising. Also, owning in-game NFTs essentially gives players partial ownership of the game, which may be an effective mechanism for bootstrapping user adoption. 

This financially aligns game developers and their player communities – both benefit from the game becoming more popular. The price of in-game tokens will increase, which generates capital gains, especially for early-adopters. And also increasing popularity will result in more secondary sales, and more royalty revenue, for game developers. Thus, the player community is incentivized to promote and evangelize the game, creating a free, decentralized marketing network for the game developer.

Web3 Game Infrastructure

Blockchain games are currently difficult to develop – they require blockchain expertise to build, and suffer from hurdles such as the UX of network fees, wallets, and compliance with government regulation.

The next-generation of blockchain games will be enabled by Web3 infrastructure that make blockchain game development more seamless. Web3 game developer platforms make it so that game developers can quickly integrate token economies into games with a few lines of code and without custom blockchain development. This reduces cost and time-to-market for Web3 game development. Also, they improve the Web3 game onboarding experience with native wallet solutions. 

Such platforms include Sequence, Stardust, Joyride, Mythical, and Faraway. These platforms provide SDKs for integrating tokens into web dApps, or Unity and Unreal Engine games. Some also provide dashboards for game analytics and to manage a game’s token economy.

First and foremost, Web3 game platforms support the ability to mint, burn, and transfer NFTs (and fungible tokens) using HTTP APIs. Going further, Sequence provides a token indexing API, which allows game developers to query a player’s token balance and transfer history, as well quickly render token metadata (i.e. image and attributes) on the app/game’s frontend.

Next, these platforms help developers standup custom NFT marketplaces that support direct NFT sales to player communities and player-to-player trading of in-game assets. Stardust’s Marketplace (i.e. dashboard and API) allows game developers to set item permissions (e.g. enable/disable P2P trading) and configure royalties.

These platforms also offer wallet solutions with email/social login that provides Web2 users with a familiar sign-up, and recurring authentication, experience. Such solutions prevent users from having to download a third-party wallet application, and manually backup seed phrases. Sequence provides a non-custodial smart contract wallet called Sequence Wallet, Stardust provides a custodial wallet called Stardust Vault, and Joyride also offers a “wallet-as-a-service”. 

There are a couple other interesting features related to wallets. Sequence offers a Relayer service that makes it so that players can submit gasless transactions (that are sponsored by the game developers). Thus, players don’t need cryptocurrency in order to play. Also, these wallet solutions were built with compliance in mind (i.e. anti-money laundering and money transfer regulation).

Finally, game development platforms offer dashboards for managing the game and its token economy. These dashboards provide metrics and control over:

• Player inventories and accounts (e.g. which NFTs they own)
• Player metrics (e.g. active player count and new player count)
• Game NFT metrics (e.g. # of NFTs minted, tokens traded)
• Marketplaces (e.g. NFT floor price, floor price, highest price)

Metaverse Games

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Virtual world builders are another popular category in Web3 gaming. Currently, the most popular titles include Decentraland, Sandbox, and Cryptovoxels. Users explore virtual worlds with customizable avatars, and can also purchase, and own, land in these worlds. Land plots are represented as NFTs, and players holding these NFTs can build on their land plots. Such games have creator tools for building on the land, either with pre-designed 3D objects, or by importing custom assets rendered in Blender, for example. 

Land plots, and other objects like wearables, are bought and sold in NFT marketplaces. Meanwhile luxury fashion labels (Gucci and Louis Vuitton) have released 3D NFT wearables, and digital fashion marketplaces are appearing like The Dematerialized and UNXD. Indeed, wearables will be important as users are represented by their metaverse avatars and, just like in real life, how the avatar looks, and what the avatar wears will be important for customizing an identity.

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Other projects like OnCyber and Microverse are centered around the social aspect of NFTs. OnCyber allows users to customize a virtual art gallery that displays their NFT art. And the microverse was built to provide NFT communities with new virtual experiences. Instead of solely communicating on Discord, the microverse allows community members to interact with each other, using their NFTs as avatars, in token-gated game-like environments. These environments can be customized with NFT minting machines, AI characters, and NFT collectibles/wearables.

You can think of these as the first-wave of metaverse projects; however, more sophisticated metaverses are emerging at this time.

Community-Led Metaverses

All metaverse projects have some aspect of user-generated content, or community-led development. Virtual worlds are about letting users modify their surroundings, and develop land as they see fit; however, some metaverses go even deeper when it comes to community participation. Everything happens from the ground-up, and the storylines are built out by the collective.

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Yuga Labs’ Otherside metaverse is perhaps the best example of a highly anticipated, community-led metaverse project. Yuga Labs started by either generating or acquiring some of the most viral and well-known NFTs in all of Web3. These NFTs include:

• Bored Ape Yacht Club (BAYC)
• Bored Ape Kennel Club (BAKC)
• Mutant Ape Yacht Club (MAYC)
• CryptoPunks
• MeeBits
• NounsNFT
• CoolCats

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Think of these NFTs as the company’s intellectual property around which Yuga Labs is building Otherside content. Yuga Labs next released land plot NFTs called Otherdeeds. Finally, Yuga Labs launched ApeCoin, which is a fungible token that is said to power the Otherside metaverse. Holders of NFTs from the top three collections above were airdropped both Otherdeed NFTs and ApeCoin.

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Yuga Labs is building a rich narrative around these assets, and the Otherside metaverse as a whole. There are several types of Otherdeeds each containing different resources, and some Otherdeeds are inhabited by rare Kodas, which are dangerous creatures that are central to the Otherside storyline. This storyline and recognizable IP is what differentiates Otherside from the virtual world builders described in the previous section.

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And Yuga Labs is just providing the seed. The Otherside metaverse will expand and evolve based on decisions and content contributed by its community. Creators, and the community at large, will be able to manufacture objects (avatars, environments, and games) using Otherside’s Open Data Kits, or ODKs. Also, important decisions such as project selection, funds allocation, setting rules, and electing a 5-member board are being made in decentralized fashion. The ApeCoin DAO votes on these proposals, thus the community of ApeCoin holders collectively decide on the direction and development of the Otherside metaverse.

Loot is another metaverse project that has this same bottom-up, community-led dynamic. Loot NFTs were originally free to mint. They are essentially text files containing the names of adventure game items in a bulleted list format. Game content and storylines are typically dictated from the top down; however, the Lootverse is being built from the bottom-up through open-source contributions from the community. The community has many active projects, and some notable contributions include:

• Adventure Gold (each Loot NFT gets 10,000 AGLD)
• Role (create your character and change traits like strength, gender, etc.)
• Realms (a unique map is generated for each Loot NFT)
• Loot: Explorers (visualize your Loot items on characters, creates PFPs out of Loot NFTs)