Real profit and loss in the metaverse

Mark Zuckerberg loves the metaverse, even to the point of renaming Facebook as Meta Platforms. Nascent virtual worlds like Decentraland have the potential to be the next social-networking hits. Punters can also profit by, say, snagging virtual real estate. But is the metaverse for real and, if so, what does it offer users and investors?

What is the Metaverse? 

The idea of the metaverse refers to a shared, round-the-clock digital environment, sometimes making use of augmented and virtual reality to make it feel more realistic. There are potentially multiple metaverses. Some video games, like Epic Games' "Fortnite" and Roblox's platform, have arguably created such spaces, allowing users to hang out, chat and wander around.

The concept has become trendy as Covid-19 has forced people to interact online rather than in person, while advances in VR headsets and high-performance chips have made its feasibility less fanciful.

More recently, nascent metaverses have been expanding beyond gaming to replicate places where everyday activities occur, like shopping or attending concerts. For example, Decentraland is a web platform that mimics a metropolitan area, with commerce districts, offices and event spaces. A music festival held there in October was attended by about 50,000 virtual fans.

Why would i want to hang out there? 

Because – eventually – the metaverse is supposed to offer the distractions of social media and online shopping, only more immersively. Leaving aside video games, most metaverse platforms for now have niche audiences, partly because content creation is still at an early stage. Most also feel like games even if they aren't, because of the use of user avatars and game-style graphics.

But the potential is there for more. Metaverses can expand the availability of certain activities, since there are no limitations relating to accessibility, travel or public health. Last September, rapper Snoop Dogg partnered with metaverse platform the Sandbox to create Snoopverse, which will include a virtual version of his real-world mansion to host parties and hold concerts. The Sandbox's majority owner, Animoca Brands, on Jan. 18 raised $359 million from investors including the Winklevoss twins and Soros Fund Management.

Many of the platforms embrace decentralized models. They allow participants to vote on how an area is run and share in revenue. For example in Decentraland, the community can propose and have a say on various issues, including land auctions, marketplace fees and grants for development efforts.

That kind of system fits under the broader definition of Web 3.0 or Web3, as it has become known. It's the latest version of the internet in which power is more dispersed, instead of what's dubbed the 2.0 model in which huge technology companies like Meta Platforms or Google owner Alphabet are in control.

Ok, so how do people make and spend money? 

The ways users can profit or lose money are similar to the real world, whether it's through real estate, advertising, buying and selling, or charging people to attend virtual events.

One feature of digital real estate is that, in theory, it is in almost unlimited supply, and that's not conducive to investment. But platforms like Decentraland cap the amount of virtual space available, and certain areas, like a shopping hub, are consequently in demand. Toronto-listed Tokens.com spent $2.4 million in November for what the company said was the equivalent of about 6,100 square feet in Decentraland's fashion district.

Because of brands trying to reach consumers in this new world, advertising is another play. Tokens.com plans to be a digital landlord, charging companies like Nike to market to users or lease virtual stores. Samsung Electronics(005930.KS) has opened a temporary store in Decentraland, while auction house Sotheby's created a virtual gallery there last June to showcase digital art.

Users also take part in the growth and commerce of a metaverse. Roblox's users can design mini-games and sell them to other players for Robux, which can then be converted into real money. Many platforms allow users to create art, apparel and more in the form non-fungible tokens, or NFTs – unique digital assets stored on the blockchain. They can then sell these to other users.

Wait, now we're layering on Cryptocurrencies?

Yup – cryptocurrencies are often the only way to do transactions, and many metaverses have currencies unique to their platform. For example, buying real estate in Decentraland means paying in Mana, the value of which – currently about $2 each – will depend in part on the popularity of Decentraland's platform.

It can be pricey. A user paid about $450,000 in December to be Snoop Dogg's digital neighbor. Early access passes to the rapper's metaverse were going for about $1,600 each in late January.

What are the risks?

There's plenty to consider, for sure. First off, the value of a platform, its real estate and any dedicated cryptocurrency depend on popularity. Different metaverses are generally not interoperable so even if the concept takes off, some of them could wither, taking the value of related assets down. Facebook-style network effects could play out yet again as metaverses fight it out.

Second Life, a virtual world created nearly 20 years ago, is a cautionary tale. It hit a peak of more than 1 million monthly active users in 2007 before fading, though it still exists. One challenge was the learning curve to use it; another was that it struggled to develop a mobile version. There are similar obstacles for today's upstarts: It can take a while to get the hang of moving around in Decentraland, which is working on a mobile version.

Decentralized governance, a feature of many metaverses, could also turn out to be a bug given the potential for decisions that don't favor all users. Of course, digital platforms and assets are also vulnerable to hacks, as are individual cryptocurrencies, whether through the wallets used to hold them or otherwise. Security breaches could put data, the lifeblood of virtual worlds, at risk, as well as users' cash.

It's perhaps easiest to see how businesses read more could move deeper into some kind of metaverse, given the obvious value of digital gatherings to scattered employees trying to work as teams. For everyone else, the future may hold anything from occasional metavisits to VR goggle addiction. What's certain is that as companies chase consumers in virtual reality, real-world financial ups and downs will follow them.