Analysis: Economic Rules for the Future Development of the Metaverse

From an economic perspective, the economic rules of the metaverse may differ from those of the internet, just as the economic rules of the internet differ from those of the manufacturing industry.

Today, let’s explore together what some of these differences might be.

Firstly, from the perspective of property rights systems and capital income distribution systems, we can roughly divide the past into three models.

The industrial economy model or the manufacturing economy model is called the “Main Street model.” Main Street was originally corresponding to Wall Street, where Wall Street represents financial capital, and “Main Street” represents industrial capital and industrial capital.

From the perspective of property rights and equity, the “Main Street model” is centralized, and the capital gains are exclusive. During that period, there were many large capitalists, such as Ford, Carnegie, Rockefeller, and other major capitalists on Main Street.

However, in the Silicon Valley model, also known as the information economy model, property rights are decentralized. Founders, A, B, C rounds of financing, and many equity shares are allocated to employees in the form of stock options. Because of its decentralized equity structure, there are no major capitalists under the Silicon Valley model. Most are professional managers, with founders plus professional managers, making it difficult to see major capitalists like Carnegie and Rockefeller.

From the perspective of capital gains, it has also shifted from being exclusive to being shared. This is a decentralized capital structure and shared capital gains.

01 Property rights and knowledge distribution

In the metaverse economic system, the so-called equity system is dissipated, may not exist, or even if it exists, its value is greatly reduced.

From the perspective of capital gains, it is a shared model. All contributors and participants organize as stakeholders, achieve large-scale collaboration through smart contracts, and thus share the value realized by the metaverse, so it may be different from the capital system.

Secondly, from the perspective of the laws of value creation, the economies of manufacturing, the internet, and the metaverse are also different.

Manufacturing economy, the law of value creation is to maximize the company’s value. In the era of the internet, it is no longer the pursuit of maximizing the company’s value, but the pursuit of maximizing the value of the network.

Kevin Kelly gave an example called the “fax machine effect.” The cost of buying a fax machine for $200, but when you join the fax machine network, you can send faxes to others, and others can also send faxes to you. The value of the network you enjoy may be worth tens of billions of dollars, far greater than the cost of buying the fax machine.

The internet first pursues ‘maximizing network value’, thereby achieving the maximization of your own value.

Additionally, you bought a fax machine in the morning, and in the afternoon, another group of people bought a fax machine. The fax machines purchased by that group in the afternoon also increase your value because you have more options for sending faxes. The fax machine effect very well explains the internet, where everyone is pursuing the maximization of network value.

In the metaverse, the metaverse is a spatial concept, encompassing digital space, virtual worlds, and parallel universes. On the basis of pursuing the maximization of network value, it further seeks to maximize the value of the entire space. Especially in the virtual space, which is not subject to many physical rules, there is greater room for development. People should try every means to create value in the virtual world, digital space, and parallel universe, and pursue the maximization of its value.

02 Law of value creation

Thirdly, from the perspective of value distribution. The manufacturing industry has the characteristics of high fixed costs and increasing marginal costs. The marginal cost increases with each additional unit produced, whether it’s one car or one hundred cars.

Therefore, the pricing model for the manufacturing economy is basically based on cost-plus pricing, adding a profit margin to determine the price of the product, which can be referred to as the “charging model” or a model centered around the charging model.

In the internet era, the main model is the “free model” because the internet economy has high fixed costs, but its marginal costs are essentially zero.

Is the metaverse such a model? No. The metaverse, due to the dissipation of capital and the sharing of capital gains, is shared by all participants. Therefore, the metaverse is a combination of producers and consumers.

So, I borrow a popular term in the current metaverse business, “X to Earn,” which means earning while playing, earning while exercising, etc., and transform it into “Player to Earn,” where players, participants, or stakeholders earn returns and share the value of the metaverse together.

Fourthly, from the perspective of “player” and “earn” in Player to earn, the player is a stakeholder in the metaverse economy, including developers, creators, contributors, consumers, investors, and all participants are players in the metaverse.

NFT is the symbol of all assets in the metaverse, a general equivalent. When creating, issuing, operating, using, and trading NFTs in the metaverse, it is actually the Player operating this asset in the metaverse. Operating the assets of the metaverse is what the Player does in the metaverse, operating NFT assets to make money.

How is “earn” defined? Players create, operate, and utilize metaverse assets to earn returns, and the earned returns are represented in the format of Tokens, so what is earned is Tokens.

The basic business logic of the entire metaverse is “Player NFT”, and then earn (earn) Tokens. The blockchain serves as a distributed ledger, which is used for accounting in this Play to Earn model.

03 Value distribution

We have now seen some “Player to Earn” application scenarios emerging, but it’s just the tip of the iceberg. Perhaps the core business logic of the metaverse will be like this in the future.

Fifthly, from the perspective of the metaverse capital market, the capital market of the metaverse is completely different from the capital market we are familiar with today. In the future, there will be two sets of capital market systems in this world.

One is the shareholder capitalism based on the equity system and capital income distribution mechanism of the industrial economy and Internet economy. Based on shareholder capitalism, equity is allocated through the shareholding system, and as a result, we have established a good stock market.

In the future, under the metaverse stakeholder capital system, it is necessary to share these property rights and share these capital gains. Based on blockchain distributed ledger, digital wallets, smart contracts, NFT, Token, in the form of programmable currency, programmable assets, to establish another capital market that can adapt to the metaverse, that capital market is called “DeFi”.

04 Income Perspective

Sixthly, in terms of the company’s organizational structure, the company’s organizational structure is gradually moving towards a metaverse Decentralized Autonomous Organization (DAO).

The decentralization of corporate organizations is a trend, which is to internalize external market functions into business institutions to reduce transaction costs. Transaction costs include search costs, matching costs, logistics costs, payment costs, and so on. In the workshop era, it completely relied on the external market for exchange. Therefore, its transaction costs were very high.

Finally, with the establishment of companies, the most important function of the company is to internalize many market functions into the enterprise. Later, we found that the company’s structure is also continuously moving towards a distributed model.

The company initially had a U-shaped structure with top-down centralized decision-making. However, as the company diversified, business units emerged. Additionally, due to globalization, regional headquarters were established. Business units and regional headquarters gradually decentralized, dispersing many of the group’s powers, thus creating an M-type corporate organization.

“DAO” (Decentralized Autonomous Organization) establishes a business entity through smart contracts to engage in commercial activities. It actually inherits the trend of companies evolving from a centralized U-shaped structure to a distributed M-type structure, and ultimately towards a decentralized structure. The goal is to internalize external market functions.

The biggest advantage of “DAO” is that, in addition to the function of market commodity exchange being built into the DAO, it incorporates a monetary system, financial transactions, value settlement, and clearing system through digital currency and digital assets. As a result, its coefficient of friction is smaller, which is viewed from the perspective of commercial organizations.

Seventhly, from the perspective of decision-making mechanisms, people often talk about blockchain and the metaverse as having decentralized decision-making mechanisms.

In the future, it may be a combination of centralized and decentralized. Centralized decision-making mechanisms are efficient decision-making mechanisms, with decisions made top-down or by a central authority, which is very efficient.

So, when efficiency is needed, centralized decision-making mechanisms are useful. Decentralized decision-making mechanisms emphasize democracy and fairness, emphasizing consensus decision-making.

05 yuan universe capital market

In the future, more business scenarios in the metaverse should be in the middle ground between extreme efficiency and extreme democracy and fairness, finding a balance between centralization and decentralization to adapt to specific business scenarios. In the metaverse economy, there will also be a good combination of centralization and decentralization.

Eighth, from the perspective of products and services, the metaverse is also different from the internet.

When commenting on blockchain, people always asked: What is the killer application of blockchain? Indeed, compared with internet applications, it seems that blockchain does not have any killer applications.

The internet is a protocol stack, the so-called TCP/IP model is a stack of several layers of protocols, all the internet is open source and open, and there is no way to capture value, so some people say that the internet is ‘thin protocol, fat application’.

The so-called “fat applications” refer to the emergence of trillion-dollar large-scale internet platforms that are highly valuable at the application layer. However, protocols such as TCP, IP, HTTP, and SMTP are all open-source, open, and permissionless. The internet has created many “fat applications” based on “thin protocols”.

Blockchain, like the internet, is also a protocol stack, but the blockchain protocol stack has a built-in currency system and value system, turning it into a “fat protocol, thin application”.

The Bitcoin protocol is a case in point, a blockchain protocol that is worth trillions of dollars. A blockchain protocol with a built-in currency system and value system is a “fat protocol”, the protocol layer itself can capture value, which is the biggest difference between the blockchain and the internet.

06 Company organizational structure

The reason why blockchain protocols are valuable is that they are built with a monetary system and a value system, meaning that finance itself is integrated into the protocol.

On the other hand, internet protocols, whether they are IP, HTTP, or SMTP, do not have a built-in monetary system and are unable to capture value.

In the context of the metaverse economy, the likely outcome is “fat protocols and fat applications.” This is because the underlying infrastructure protocols of the metaverse also have a built-in monetary system and financial system, making the protocols “fat protocols” that realize value and monetize at the protocol level.

The application of the metaverse in the future will integrate many digital technologies. Within a space, its application should be larger than the internet, so it may be described as a “thick protocol, thick application”.

Ninth, digitalization and virtualization have greatly disrupted the manufacturing industry, and eventually, it will also have the “fax machine effect” on manufacturing.

Producing a car has a high fixed cost. Producing 100 cars also has its marginal cost for each car. High fixed costs and increasing marginal costs are the characteristics of the manufacturing industry. The feature of the network is that the fixed costs are very high, but the marginal costs decrease or even become zero.

The design and development of a software require a high fixed cost, but once the software is created, whether it is used by one person or by a million people, its marginal cost is close to zero.

Without digitalization and virtualization, the manufacturing industry would not have network effects. However, when the manufacturing industry becomes sufficiently digitalized and virtualized, it also gains the internet effect of decreasing costs with increasing scale and increasing returns with increasing scale.

For example, once all cars are connected to the internet, buying a car also has the “fax machine effect.” When you buy a car, you are joining a vast and valuable network of connected vehicles.

07 Decision mechanism

The above are the top ten economic rules of the metaverse that some people believe in, and the content mentioned may not necessarily be correct. However, the economic rules of the metaverse are likely to be very different from those of the internet, just as the economic rules of the internet are different from those of the manufacturing industry.