An investor’s guide to the metaverse

As well as providing a gateway to some of Oregon’s best mountain biking, fishing and white-water rafting spots, the city of Bend is home to a unique tourist attraction. Once a franchise with more than 9,000 stores, the Bend outlet of Blockbuster Video* is the last one standing. It does a roaring trade satisfying demand for 90s nostalgia, has hosted Airbnb* sleepovers and even featured on The Ellen DeGeneres Show.

It also offers a stark reminder of how quickly new technology can demolish long-established business models – and pave the way for innovative upstarts.

The metaverse represents the latest chapter in the development of the internet, and although it still faces numerous technological, cultural and legislative hurdles, it may eventually drive the next wave of change. To understand the economic drivers beneath the hype, it’s useful to consider how the internet is evolving in terms of production and remuneration.

The three ages of the internet

The early days of the internet, roughly 1991 to 2004, have become known as the Web 1.0 era. In this period, creating content was technologically challenging, so publishers tended to be the producers, while most users were passive consumers. Publishing companies made money from display advertising and subscriptions.

Today, we live in the Web 2.0 era. The user has become the primary creator of content thanks to the simplicity of pushing content to the web. While publishers find themselves increasingly sidelined, it’s not users but rather network controllers (Big Tech) that have profited from user-generated content.

Web3 represents a challenge to the status quo, and it is based on the idea that as well as being the content originator, the user will take control of the networks and become the beneficiary of monetisation. The key technology for Web3 is the blockchain, allowing a distributed trail of ownership and non-centralised payment interfaces.

Play to earn

If the metaverse succeeds in further blurring the lines between the virtual and the real, we could see the emergence of unfamiliar forms of economic activity. One example of how the blockchain is already facilitating this, albeit on a small scale, is ‘play to earn’ games.

Axie Infinity is a blockchain-enabled online video game in which players train creatures, called Axies, that are also non-fungible tokens (NFTs). By spending time training Axies, users increase their value and in battles, successful Axies earn the owner tokens. This means that the game can provide a living if users exchange their NFTs and tokens for cryptocurrencies and in turn fiat money.

Boasting 2 million daily active users, the game has so far generated $2 billion in transactions, with a trading volume of $33 million per day. It’s early days for play to earn, but Axie Infinity has proved that the concept has potential. Although you won’t get rich playing Axie Infinity (the hourly rate has been estimated at about $2-3 per hour at some times), it has nonetheless put food on the table for quite a few people, especially in the Philippines during the pandemic last year. From a macro perspective it raises the fascinating question whether the earnings from such games could set a global minimum wage and ultimately raise wages for some of the lowest paid workers across the world?

Virtual realty

The pandemic led many city dwellers to reassess the benefits of urban living, with record numbers looking to swap cramped apartments for high ceilings and generous gardens. After decades of speculation about remote working, Covid-19 made it an everyday reality in the blink of an eye. As we begin to emerge from the pandemic, it’s clear that some form of technology-enabled hybrid working is likely to continue for a large proportion of the world’s office workers. The emergence of the metaverse could extend and cement this shift and it might not be too long until we find ourselves heading off to the metaverse to start the working day.  

Increasingly, white-collar workers will be able to choose where they live, and they might not live in the place where they work. For cities, this could represent a turning point.

While the economic draw of cities might be set to fade, prime metaverse properties are already drawing attention. Recent purchases include Republic Realm’s* headline-grabbing $4.3 million purchase in The Sandbox, a virtual world filled with NFTs for sale. In a digital world, digital assets become very important.

Picks and shovels

While properties in the metaverse are extremely speculative given the uncertain road ahead, the companies building the underlying infrastructure could stand to benefit from rising interest, in our view.

One example is cloud computing, which will be needed to power the computationally intensive creation of 3D virtual worlds. Chipmakers also stand to benefit, in our view, as the requirement for smaller, lighter and more powerful VR hardware adds to a demand outlook that has already been boosted by automakers incorporating more technology into cars.

Complementing advances in hardware, of course, will be the need for increasingly sophisticated software to power the metaverse. As we mentioned in the previous blog, one less obvious area where advances in software could be crucial is artificial intelligence systems that can monitor and moderate unwanted behaviour in the metaverse.

The next chapter in the history of the internet has yet to be written, and there are no guarantees that the metaverse will succeed where previous virtual reality visions have faltered. But one thing is certain: billions and billions of dollars will be spent finding out.

In part one of Lars’ blog, he explained what the meterverse is and how likely it is to become a reality. Click here to read the first installment.

*For illustrative purposes only. Reference to a particular security is on a historical basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.