Metaverse Explained: What you need to know – Part 1 of the Metaverse series

What is this fuss about Metaverse? Microsoft spent $68B in net cash to buy Activision citing reasons to support their metaverse campaign, Meta platform (formerly FB) is spending $14B a year on Reality labs for the next 7-8 years. Per the WSJ article, analysts estimate people are currently spending around $80B in virtual world avatars via video games. Analysts estimates revenue to be earned from metaverse by 2028 will be around $1T. The current market stands at $47B in revenue mainly from gaming and crypto and it is expected to grow around 44% CAGR. This reflects a growing belief for these companies that the emerging virtual realm will unlock serious real-world dollars. (I am writing about metaverse in multiple parts, this is the introduction and its history, you can skip to part II directly if you understand what metavsere is. Part II is on the technological requirements. Part III is still work in progress and is on the costs and ROI related to metaverse)

For those of you who are new to this term let us understand what is this really about? In recent days you would have heard the term “METAVERSE” thrown around in the conversations. The definition may differ from person to person or entity to entity but the basic concept of the metaverse is a virtual world that blends into reality. It’s a shared virtual space that all can inhabit and participate in. A physical world is augmented with virtual assets, 3D scanned elements from different ecosystems. It can take you back to a speakeasy in Chicago in the prohibition era. As technology evolves it will make virtual worlds to be less disconnected but sort of really be absorbed into our world. What the virtual world allows you to do is walk in someone else’s shoes by using your avatars to shift your perspective of the world in some sort of way. Maybe some of you like me would want to become an avenger and save the world from Thanos. (Just saying saving is secondary, Primary is to wear that iron man suit and travel the world).

The grand vision of the metaverse is to provide a parallel digital universe connected to our physical world through multiple digital technologies. The convergence of the virtual (online) and real (offline) universes will enable us to communicate in the digital world through avatars. The process of the metaverse is multi-dimension and has already begun through the creation of new virtual worlds both in gaming with MMORPG (massively-multiplayer online role-playing games) and other social ventures and experiences. Much of the process is bottom-up and driven by market forces and the general direction of technical innovation (which I discuss in part 2)

Well, this looks fancy some of you may comment, will we adopt it? For some of us like me who are not gamers and do not associate ourselves with online games. Everything desirable about this metaverse resembles a pared-down version of the online games millions have been playing for decades. Below is an excellent definition provided by Matt Ball (by the way if you have not read Matt Ball’s nine-part Metaverse Primer you are missing a lot on this technology)

 “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.

By Matt Ball

The ultimate goal of the metaverse is to look and feel like physical reality, allowing your avatars to move around freely, interact with others, and access information within 3D environments, just like real worlds.

To understand more about Metaverse, I would recommend watching this video:

To understand the future, we must understand the past and present of the metaverse. We already have MMOs (Massively Multiplayer Online) that are essentially entire virtual worlds such as digital concerts, video calls with people all around the world, online avatars, and commerce platforms. Before I move too far into the past or present, let me try and explain how tech revolutions occur. We are for sure in midst of one now.

Understanding the Phenomenon of Tech Revolutions

Tech revolutions never occur in a single period they occur in waves. It is called Smihula waves. Each of these waves has an innovation phase (inventions occur in form of application in practical life and their first real application which we call a technological revolution) followed by an application phase in which the number of revolutionary innovations falls, and attention focuses on exploiting and extending existing innovations.

This is comparable with Simon Kuznets´ or Gabriel Tarde’s “S-curve” of technological development: small and slow successes during the first (“shadow”) phase, the second phase of the quick progress, and then the third phase of slowing down because the limits were reached. The first Kuznets´ phase runs in a shadow without any direct impacts on the society and economy (for example, the first steam engine of Thomas Newcomen has constructed already in 1705 but the real applicable engines emerged only 70 years later). The rapid second phase corresponds to the technological revolution and the slow third phase to the application phase. Each wave (each age) of technological innovations can be characterized by the area in which the most revolutionary changes took place. These are also called “leading sectors”. This does not mean that development in other areas stagnates (for example the industrial revolution had its own “informational” revolution (mass newspapers and school systems) and progressive changes in agriculture and banking did not stop). But the long-term economic success of any nation in any period depends mostly on the success in the leading sectors of a given era. Let us look at another example, electricity was invented by Thomas Edison in 1881 – this marked the first wave which is the innovation phase. Some 30 years after Edison’s first station, less than 10% of the mechanical drive power in the US came from electricity. But then suddenly, the second wave began, between 1910 – 1920 the share rose to 50% and by 1929 it stood at 78%.  At first, the plants used electricity for lighting and never thought of replacing their legacy machines to be power enabled. But eventually, new technologies and understanding gave factories the need to redesign factories to use electricity end to end. In 1913, for example, Henry Ford created the first moving assembly line, which used electricity and conveyor belts to reduce the production time per car from 12.5 hours to 93 minutes, while also using less power. It is difficult to estimate the leading sectors era in exact but for electricity, we can say it started sometime between 1910-120 (do take this with a grain of salt). So, when was the first phase or shadow phase for metaverse begin? This would be very difficult to estimate at best it could be described as a successor to mobile internet. The reason it could be said so is that metaverse will not replace the internet but will build on top of it. Also based on how technology revolutions take place, consumers shift to new mindsets, so does industry. Over the past 20 years, nearly every industry has hired, restructured, and re-oriented itself around mobile workflows, products, or business lines. This transformation is as significant as any hardware or software innovation — and, in turn, creates the business case for subsequent innovations. To analyze the origin of metaverse let us run through the process in the last three decades and understand the technology revolutions that took place.

History of Metaverse

Now that we understand Metaverse a little and define a common definition let us walk through Metaverse’s history through the year.

Before diving too much into history, let us understand why the sudden interest for masses erupted in the metaverse and why it became a hit. On Oct 18th, the Meta platform (formerly Facebook) announced the transition and revealed its vision for the metaverse. This sparked a sudden interest from everyone to understand what one of the biggest corporations in the world is talking about. See a snapshot of google trends for the word metaverse. Right after this let’s jump to understand metaverse’s past.

1990’s – Vision of metaverse is born. All about Snow Crash – A Dystopian Novel.

Let us go back to 1992, I was two years old and Neal Stephenson has come up with an incredible novel called “Snow Crash“. Mr. Stephenson is understood to be the first one to coin the term metaverse. “Meta” means beyond, and “Verse” means universe. Snow Crash imagined the metaverse as a collective and physically present virtual shared space connected to the real world rather than just existing in cyberspace. Cyberspace was coined by William Gibson in his book “Neuromancer“, where he referred to cyberspace as collective digital information space within an electronic medium. Set in the early 21st century, “Snow Crash” imagines a bleak future: The global economy has collapsed, and federal governments have lost most of their power to a handful of giant corporations. Metaverse is an escape and the novel’s main character Hiro spends most of his time there. Hiro says, “It was big and getting bigger all the time, like expanding universe. Theoretically, there was no limit to how big the Metaverse could be”. To gain access the visitor requires physical hardware including virtual reality glasses and sound equipment to visit and interact with others. Hiro Protagonist, socializes, shops, and vanquishes real-world enemies through his avatar. The metaverse in “Snow Crash” features an encrypted electronic currency, which people utilize to buy virtual assets and real estate.

I would argue and state that Mr. Stephenson’s vision is what futurists and technologists are using to frame up metaverse for us. Dystopian or not but Mr. Stephenson’s future is here. Today, a host of engineers, entrepreneurs, futurists, and assorted computer geeks (including Amazon C.E.O. Jeff Bezos) still revere Snow Crash as a remarkably prescient vision of today’s tech landscape

The 1990s saw the rise of blockchain in theoretical discussions and primitive conceptualizations of viable AI. across the 2000s, technology evolved in leaps and bounds to give birth to digital twin technology in 2002, and Second Life in 2003. (More in next section)

2000’s – Entry of Second Life. The root of Metaverse as we know it today

Philip Rosedale in 2003 launched the online game where players using avatars can hang out, socialize with other players and make purchases. Linden Labs its creators emphasize that Second Life is not just a game like Fortnite or Roblox. In second life there are no goals or objectives. Instead, users create a digital avatar to represent them and are then free to explore the world, meet other users, create their digital content and even trade goods and services in the in-world currency, the Linden Dollar. Second life reached a million users and around ~650M in transactions through virtual sales.

In 2007, Second Life founder Philip Rosedale made a bold proclamation: “The 3D web will rapidly be the dominant thing, and everyone will have an avatar.” And then Second Life stopped growing. It wasn’t uncommon for users to struggle for hours onboarding into the world, only to find themselves wandering around ghost cities with empty storefronts.

Reuters—which made a big fuss of opening a bureau in Second Life in 2006—pulled out about two years later; brands abandoned their posts. As we look back on Second Life a dozen years after its peak, it’s less a transformative cultural lynchpin than the punchline of a scene in The Office.

The Office Second life

Having said this, it would be gross representation to call second life a failure. In fact, it is responsible to introduce millions of people to virtual space for the first time and fostering a tight-knit online virtual community. So what are the lessons that we can take away from second life, (I would strongly recommend reading this interview from Philip Rosedale to IEEE spectrum)

  • People will stay in virtual worlds, even without an explicit mission
  • People will spend money on digital goods—but very few creators will make a living – In its 10-year journey, second life says its users/visitors spent $3.2B of real money but only a handful of creators made money. It’s similar to the YouTube phenomenon “You have a relatively small percentage who make income from it, and a lot of people who are just consumers, or some people who sort of informally make stuff that they don’t sell to make money”
  • Ease of use and technological challenges remain a huge roadblock for mass adoption (more on this in Article 2)
  • Virtual worlds might always struggle to appeal to certain demographics – If you live a comfortable life in New York City and you’re young and healthy, you probably are going to choose to live there. If I offer you the life of an avatar, you’re just not going to use it very much.  On the other hand, if you live in a rural location with very little social contact, are disabled, or live in an authoritarian environment where you don’t feel free to speak, then your avatar can become your primary identity”

What else happened in the 2000s,

2006 – Roblox

This online platform was introduced that allowed users to create and play games developed by other users. During the 2020 pandemic, it became a significant source of interaction for young people, and it became the third-highest-grossing game that year.

2009 – Bitcoin

On the 3rd of January in 2009, the bitcoin network came into existence with its mysterious founder, Satoshi Nakamoto, mining the genesis block of bitcoin (block number 0), which yielded a reward of 50 bitcoins. This was the day Bitcoin was born.

2009 – Blockchain

Along with the invention of Bitcoin, Satoshi Nakamoto also invented blockchain to serve as the public transaction ledger for Bitcoin. Even though others have claimed to have invented the concept of blockchain earlier, the same day that Bitcoin was launched is the same day that a usable form of Blockchain was born.

2010 to Present – Decade of exponential growth

This decade is all about the video game industry blowing up with Metaverse, virtual reality (VR), and augmented reality (AR). Let us face it, video games got here first be it a virtual world or virtual currency. Games had developed successful online economies that meaningfully intersected with IRLs for decades. Eve-online the game developed in 2003 had its economist who was looking over their virtual world. It made a visitor spend $30k of real money on a virtual spaceship. No matter what has been done there is still time to reach the snow crash level of 1992. Let’s still look at relevant events of this decade that helped shaped the metaverse of today.

2011 – Ready Player One

This novel by Ernest Cline introduced many young people to the concept of a virtual reality world. The Steven Spielberg adaptation in 2018 made the idea even more vivid and the interest more widespread.

2012 – NFTs

An NFT or “Nifty” is a Non-Fungible Token, representing a unique item instead of fungible tokens, which are mutually interchangeable, such as cryptocurrencies like Bitcoin. The concept of NFTs has been with us since December 2012 with the creation of “Colored Coins,” in which additional information is incorporated onto a bitcoin so that it is no longer fungible but unique. This, interestingly enough, was a project spearheaded by a young Vitalik Buterin as he worked on improvements for the Bitcoin blockchain.

2014 – Vitalik Buterin

The Thiel Fellowship – In 1999, Peter Thiel’s company Confinity merged with Elon Musk’s company to form PayPal (read my latest article on PayPal as a product company). Three years later, eBay bought PayPal for $1.5 billion, making both Musk and Thiel very wealthy. In 2010, Peter Thiel announced the formation of the Thiel Fellowship, offering $100,000 grants for students under the age of 22 to leave school and pursue other work. In 2014, one of the recipients of this grant was 20-year-old Vitalik Buterin, the co-creator of Ethereum.

2015 – Ethereum

In July of 2015, Vitalik Buterin and Gavin Wood launched the Ethereum Network, along with the Ethereum blockchain.

2015 – Decentraland

The first iteration of this virtual reality platform was introduced in 2015. It allocated “land” via a proof of work algorithm. The 2021 boom in NFTs has led to sales of some of the game’s real estate plots for more than $100,000.

2015 – Smart Contracts

Smart contracts were first proposed in the early 1990s by Nick Szabo, who coined the term to refer to “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.” Since the 2015 launch of the Ethereum blockchain, the term “smart contract” has been more specifically applied toward the notion of general-purpose computation that takes place on a blockchain or distributed ledger.

2016 – Pokémon GO

Pokémon Go was the first game to overlay a virtual world onto the real world. It uses mobile devices with GPS to locate, capture, train, and battle virtual creatures, called Pokémon, which appear as if they are in the player’s real-world location.

2016 – The DAO – Decentralized Autonomous Organizations

The company named The DAO was launched through a crowdfunded token sale in May 2016, setting the record for the largest crowdfunding campaign in history at that time. It was meant to be an alternative venture capital fund, created on Ethereum’s blockchain, that would serve as a decentralized funding model. In June 2016, users exploited a vulnerability in The DAO code which enabled them to siphon off one-third of DAO’s funds into a subsidiary account. This led to the death of The DAO as a company. But the concept of decentralized autonomous organizations (DAOs) lives on, yet substantially improved by lessons learned from The DAO experience. Moving forward, each DAO will serve as an essential ingredient for future metaverse companies that are governed collectively by participants in the organization, with rules and financial transactions recorded on the blockchain. DAOs, for example, have been formed around joint ownership of NFTs

2017 – Fortnite

This multiplayer video game was a huge success upon its release, and it introduced many people to the look and feel of the metaverse and cryptocurrency. Fortnite user base totals 350 million.

2018 – Dai Stablecoin

The Dai Stablecoin was introduced to add a new element to the volatile crypto universe. In contrast to cryptocurrencies that aren’t anchored to any fiat currency or are only anchored to other cryptocurrencies, the centralized Dai Stablecoin was pegged to the U.S. dollar, making it far less volatile and more reliable cryptocurrency for decentralized finance (DeFi). Today, blockchain-based banking services are available on several similar platforms for cryptocurrency borrowing, lending, and investing. For now, they’re largely unregulated by our traditional institutions, and users seem just fine with that, for the most part.

2018 – Decentralized Exchanges (DEX)

Cyber currency exchanges took a major PR hit when Bancor lost $13.5 million to hackers. Although their legal/regulatory foundation remains a little uncertain, DEXes continue to serve as a way for people to sell and trade their cyber currency assets person-to-person based on smart contracts, rather than through a centralized exchange.

2018 – Axie Infinity

The popular NFT virtual reality game, Axie Infinity, based on a mythical world of animal husbandry, was introduced this year. By mid-2021 it had the highest combined value of NFTs of all play-to-earn game platforms.

2020 – COVID

When COVID exploded on the scene in 2020, people around the world found themselves being quarantined with few options to dedicate their time and energy to. For this reason, the metaverse quickly became the go-to place for a growing number of young people, gamers, and those wanting to make money in the online world. In our polarized world, the metaverse has taken on a tone of rebelling against current institutions – the more ingrained they are more they’re at risk. This is pushing people to the underground economies and worlds of the metaverse, setting up a “perfect storm” for Metaverse growth.

2020 – Decentralized Apps (Dapps)

The value of the tokens on the six major blockchain platforms surpassed $2 billion. The movement to cut out the middleman continues, as open-source, transparent applications continue to emerge to enable gaming, DEXes, DeFi, and other acronymized uses. While many people refer to dapps as an emerging trend, the first dapp was the Bitcoin app more than a decade ago.

2020 – First Concert in the Metaverse

In April 2020, Travis Scott and Marshmello performed in the video game, Fortnite to just under 30 million people.

2020 – Solana

Also in April, the Solana blockchain dapp was introduced. In contrast to Ethereum, this dapp’s cryptocurrency, called an SOL, is mined based on the alternate proof of stake (POS) algorithm. Further, issues related to block ownership were clarified and simplified in Solana, with a new consensus tool known as “proof of history” that inserts timestamps into its blockchain.

2020 – Alien Worlds

This wildly popular dapp was created with a multi-metaverse interplanetary scenario that had NFT characters interacting in a decentralized autonomous organization to mine tokens and perform other tasks. By 2021 Alien Worlds had more than 2.5 million users, but its significance goes beyond that – the game has been built around critical lessons for teaching people about the principles of cryptocurrency and crypto-mining.

To the Future

Let’s be clear about one thing, there is no metaverse, at least not yet. We are still struggling to come up with a firm definition for metaverse. What I believe is that tech companies have discovered the benefits of characterizing a metaverse as a continuation of their business models, products, and services. Meta, for example, has decided that virtual reality integration is important to a metaverse; and conveniently, its Horizon Worlds runs on the company’s Oculus Quest headset. Then there are the blockchain companies preaching the essentiality of their coins to their cyberspaces. Now, after almost a year of hype, it has become marginally easier to separate meat from metaverse fat. What we’re dealing with here is cyberspace—connected, incarnated, and economized. There’s still just one problem. Everything actually desirable about this metaverse resembles a pared-down version of the online games millions have been playing for decades. s professional cyberspace architects and governors, it is game developers who have iterated on and mastered the two to three promising attributes of a metaverse, mostly revolving around socializing in virtual worlds.

Second life came 20 years ago, yet here we are today hearing tech executives preaching about things digital we were doing back then. So, what is the future then? Is Metaverse a rich kid technology? Or will it reach the masses? Facebook acquired Oculus for $2B in 2014 and currently its investing 20% of its workforce and $18.5B annually on Reality Labs. Mark Zuckerberg recently told Facebook employees that over the next five years he expects to transition “from people seeing us as primarily being a social media company to being a metaverse company.” It’s not just Facebook and Oculus. In May 2016, WIRED’s cover story introduced readers to Magic Leap, “A mysterious startup, a mountain of money, and the quest to create a new kind of reality.” Magic Leap was developing a set of semitransparent “Mixed Reality” goggles that could integrate virtual objects into the user’s physical environment. The company raised more than $2 billion in funding from A-list Silicon Valley investors. It looked like the biggest leap forward in hardware since the iPhone. But the actual product never lived up to the breathtaking demo. The company laid off 1,000 employees in 2020, hired a new CEO, and pivoted to focus on narrower enterprise applications.

With all of this said, the trouble predicting the future is that sometimes you can get the vision right and dates completely wrong. That is what happened to General Magic the legendary 1990 start-up that tried to make mobile phones 15 years too early. But later its team went on to work for apple created iPhone and Google which created the Android operating system. It’s tempting to look at that first VR boom-bust cycle through a similar lens. Sure, the Nintendo Power Glove and the Battletech VR gaming centers were commercial flops. The technology wasn’t ripe yet. They were just ahead of their time. Will this time be different? Beyond gaming (and, I suppose, porn—there’s always porn), it isn’t clear what other thirsts Virtual Reality are meant to quench. Immersive virtual gatherings could be a slight step above endless Zoom meetings.

In part II, I discuss the technical requirements of the metaverse. Learn more about network, hardware, and interoperability requirements for the metaverse.

Nikhil Varshney

Nikhil Varshney is a product manager by profession and technologist by nature. Through this blog he wants to showcase disruption in the technology world. The idea is to break the concept into simple layman words to help everyone understand the basics

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