Chapter 11

Blockchains

SOME OBSERVERS TODAY BELIEVE THAT BLOCKCHAIN is structurally required for the Metaverse to become a reality, while others find that claim absurd.

There remains a good deal of confusion about blockchain technology itself, even before getting to its relevance to the Metaverse, so let’s begin with a definition. Put simply, blockchains are databases managed by a decentralized network of “validators.” Most databases today are centralized. A single record is kept in a digital warehouse, managed by a single company that tracks information. For example, JPMorgan Chase manages a database that tracks how much money you have in your checking account, as well as detailed records of prior transactions that validate how that balance was accumulated. Of course, JPMorgan has many backups of this record (and you might too), and it really operates a network of different databases, but what matters is that these digital records are managed and owned by a single party: JPMorgan. This model is used for almost all digital and virtual information, not just bank records.

Unlike a centralized database, blockchain records sit in no single location, nor are they managed by a single party—or, in many cases, even an identifiable group of individuals or companies. Instead, a blockchain “ledger” is maintained through consensus across a network of autonomous computers situated around the world. Each of these computers, in turn, is effectively competing (and being paid) to validate this ledger by solving what are essentially cryptographic equations that arise from an individual transaction. One benefit of this model is its relative incorruptibility. The larger (that is, the more decentralized) the network, the harder it is for any data to be overwritten or disputed as the majority of the decentralized network would have to agree, rather than, say, an individual at JPMorgan or the bank overall.

Decentralization has its downsides. For example, it is inherently more expensive and energy-consuming than using a standard database because so many different computers are performing the same “work.” For similar reasons, many blockchain transactions take tens of seconds, or even longer, to complete as the network must first establish consensus—which can mean sending information across much of the world just to confirm a transaction two feet away. And of course, the more decentralized the network, the more challenging the problem of consensus typically becomes.

Due to the above issues, most blockchain-based experiences actually store as much “data” as they can in traditional databases, rather than “on chain.” This would be like JPMorgan storing your account balance on a decentralized server, but your account log-in information and bank account in a central database. Critics argue that anything that is not fully decentralized is in effect fully centralized—in the above case, your funds are still effectively controlled and validated by JPMorgan.

This leads some people to contend that decentralized databases represent technical steps backward—less efficient, slower, and still dependent upon their centralized peers. And even if data is fully decentralized, the upside seems modest; few worry, after all, that JPMorgan and its centralized database might misplace its customers’ account balances or steal from them. It’s arguably scarier to think a collection of unknown validators are all that protect our wealth. If Nike said you owned a virtual sneaker, or managed and then tracked a record stating you sold it to another online collector, who would dispute it or discount its value because Nike was the one recording the transaction?

So why is a decentralized database or server architecture seen as the future? It helps to put aside the idea of NFTs, cryptocurrencies, fears of record theft, and the like. What matters is that blockchains are programmable payment rails. That is why many position them as the first digitally native payment rails, while contending that PayPal, Venmo, WeChat, and others are little more than facsimiles of legacy ones.

Blockchains, Bitcoin, and Ethereum

The first mainstream blockchain, Bitcoin, was released in 2009. The sole focus of the Bitcoin blockchain is to operate its own cryptocurrency, bitcoin (the former is usually capitalized while the latter is not, in order to distinguish between the two). To this end, the Bitcoin blockchain is programmed to compensate processors handling bitcoin transactions by issuing them bitcoin (this is called a “gas” fee and is typically paid by the user to submit a transaction).

Of course, there’s nothing novel about paying someone—or even many people—to process a transaction. In this case, however, the work and payment happen automatically and are united; a transaction cannot happen without the processor being compensated. This is part of why blockchains are referred to as being “trustless.” No validator need wonder whether, how, and when they’ll be paid, or if the terms of their payment might alter. The answers to these questions are transparently baked into the payment rail—there are no hidden fees, nor risks of sudden policy changes. Related, no user need worry about whether unnecessary data is being shared or stored by an individual network operator, or might then be misused. Contrast this with using a credit card stored on a centralized database that might later be hacked by an outside party or improperly accessed by an employee. Blockchains are also “permissionless”: in the case of Bitcoin, anyone can become a network validator without needing to be invited or approved, and anyone can accept, buy, or use bitcoin.

These attributes create a self-sustaining system through which a blockchain can increase capacity while decreasing cost and improving security. As transaction fees increase in dollar value or volume, additional validators join the network, which decreases prices through competition. This, in turn, increases a blockchain’s decentralization, which makes it harder for anyone trying to manipulate a ledger to establish consensus (think of an electoral candidate trying to tamper with 300 voting boxes versus three).

Advocates also like to highlight that the trustless and permissionless blockchain model means that the “revenue” and “profits” from operating its payment network are set by the market. This differs from the traditional financial services industry, which is controlled by a handful of decades-old giants with few competitors and no incentive to cut rates. The only competitive force on PayPal’s fees, for example, are those charged by Venmo or Square’s Cash App. For Bitcoin, fees are pushed down by anyone who chooses to compete for a transaction fee.

Not long after Bitcoin emerged (its creator remains anonymous), two early users, Vitalik Buterin and Gavin Wood, began developing a new blockchain, Ethereum, which they described as a “decentralised mining network and software development platform rolled into one.”¹ Like Bitcoin, Ethereum pays those operating its network through its own cryptocurrency, Ether. However, Buterin and Wood also established a programming language (Solidity) that enabled developers to build their own permissionless and trustless applications (called “dapps,” for decentralized apps), which could also issue their own cryptocurrency-like tokens to contributors.

Ethereum, then, is a decentralized network that is programmed to automatically compensate its operators. These operators do not need to sign a contract to receive this compensation, nor worry about being paid, and while they compete with one another for compensation, this competition enhances the performance of the network, which in turn attracts more usage, thereby producing more transactions to manage. In addition, with Ethereum, anyone can program their own applications on top of this network, while also programming this application to compensate its contributors, and, if successful, providing value to those who operate the underlying network, too. All of this occurs without a single decision-maker or managing institution. In fact, there is and can be no such body.

The decentralized governance approach does not prevent their underlying programming from being revised or improved. However, the community governs these changes and must therefore be convinced that any revisions are to their collective benefit.^* Developers and users need not worry that, as an example, “Ethereum Corp” might suddenly increase Ethereum transaction fees or impose new ones, deny an emerging technology or standard, launch a first party service that competes with the most successful dapps, and so on. Ethereum’s trust­less and permissionless programming actually encourages developers to “compete” with its core functionality.

Ethereum has its detractors, who level three primary criticisms: its processing fees are too high, its processing times are too long, and its programming language is too difficult. Some entrepreneurs have chosen to address one or all of these problems by constructing competing blockchains, such as Solana and Avalanche. Other entrepreneurs instead built what are called “Layer 2” blockchains on top of Ethereum (the Layer 1). These Layer 2 blockchains effectively operate as “mini-blockchains,” and use their own programming logic and network to manage a transaction. Some “Layer 2 scaling solutions” batch transactions together, rather than processing them individually. This naturally delays a payment or transfer, but real-time processing is not always required (just as your wireless phone-service provider doesn’t need to be paid at a specific time of the day). Other “scaling solutions” look to simplify the process of transaction validation by polling just a portion of the network, rather than all of it. Another technique involves letting validators propose transactions without proving they’ve solved the underlying cryptographic equation, while keeping them honest by offering bounties to other validators if the latter prove this proposal as dishonest, with the bounty mostly paid by the dishonest validator. These two approaches reduce the network’s security, but many consider the trade-off appropriate for small-dollar-value purchases. Think of it as the difference between buying a coffee and buying a car; there’s a reason why Starbucks doesn’t require your credit card’s billing address, while a Honda dealership does, along with a credit check and government ID. “Sidechains,” meanwhile, allow tokens to be moved on and off of Ethereum as needed, serving a bit like a petty cash drawer versus a locked safe.

Some argue that Layer 2s are a patchwork solution—that developers and users would be better off working on higher performance Layer 1s. They might be right. Yet it’s significant that a developer can use a Layer 1 to jumpstart their own blockchain, and then disintermediate that Layer 1 from its users, developers, and network operators by using, or even building, a Layer 2 blockchain. What’s more, the trustless and permissionless programming of Layer 1s mean that competing Layer 1s can “bridge” into it, enabling developers and users to forever shift their tokens to another blockchain.

The Arc of Android

An obvious contrast to trustless and permissionless blockchains are the policies of Apple and its iOS platform. However, iOS was never billed as an “open platform” nor as a community-centric one. In this regard, it’s an unfair comparison. A better one would be with Android.

The Android OS was bought by Google for “at least $50 million” in 2005, and the search giant was always going to have an outsized role in its development. To assuage concerns, Google established the Open Handset Alliance in 2007, which would collectively steer the “open-source mobile operating system” based on open-source Linux OS Kernel, and would prioritize “open source technologies and standards.” At launch, the OHA counted 34 members, including telecommunications giants China Mobile and T-Mobile, software developers Nuance Communications and eBay, component manufacturers Broadcom and Nvidia, and device makers LG, HTC, Sony, Motorola, and Samsung. To join the OHA, members had to agree not to “fork” Android (take a copy of the “open-source” software and begin independently developing it) or support those who did (Amazon’s Fire OS, which powers its Fire TV and tablets, is an Android fork).

The first Android released in 2008 and by 2012 the operating system had become the most popular in the world. The OHA and Android’s “open” philosophy were less successful. In 2010, Google began building its own “Nexus” line of Android devices, which the company positioned as “reference devices” that would “serve as a beacon to show the industry what’s possible.”² Only a year later, Google purchased one of the largest independent manufacturers of Android devices, Motorola. In 2012, Google began moving its key services (maps, payment, notifications, the Google Play Store, and more) outside of the operating system itself and into a software layer, “Google Play Services.” To access this suite, Android licensees would need to comply with Google’s own “certifications.” In addition, Google would not allow uncertified devices to use Android branding.

Many analysts considered Android’s progressive closure a response to Samsung’s growing success with the operating system. In 2012, the South Korean giant sold nearly 40% of Android-powered smartphones (and the majority of high-end ones)—more than seven times as many as the second-largest manufacturer, Huawei. In addition, Samsung had become increasingly aggressive with its alterations to the “stock” version of Android, producing and marketing its own interface (TouchWiz), while also preloading its devices with its own suite of apps, many of which competed with those offered by Google. Samsung even added its own mobile app store. Samsung’s success as an Android manufacturer is inarguably connected to these investments, but their approach is not dissimilar from “forking” it. Regardless, Samsung’s de facto TouchWiz OS threatened to disintermediate Google from its developers and users, while also serving as the true “reference device.”

The arc of Android is important to any understanding of the future of the Metaverse. The Metaverse offers the opportunity to disrupt today’s gatekeepers, such as Apple or Google, but many fear that we’ll just end up with new ones—maybe Roblox Corporation, or Epic Games. While Tencent’s WeChat has low fees for real world transactions, for example, the company has used its control over digital payments and video games to charge 40%–55% for all in-app downloads and virtual items—a sum that far exceeds that of Apple, whose power Tencent was able to overcome. Just as an entry on a blockchain ledger is considered incorruptible, many believe the blockchain itself is too.

Dapps

Unlike the major blockchains, many dapps are only partially decentralized. The dapp’s founding team tends to hold a large portion of the dapp’s tokens (because they inherently believe the dapp will succeed, they have incentives to keep holding these tokens, too) and may therefore have the ability to alter the dapp at will. However, the success of a dapp depends on its ability to attract developers, network contributors, users, and often capital providers, too. This requires the sale and awarding of at least some tokens to outside groups and early adopters. And to maintain community support, many dapps make a commitment to what’s called “progressive decentralization,” which is sometimes explicitly programmed to be consistent with the trustless nature of blockchains.

This might seem like a conventional start-up approach. Most applications and platforms need to keep their developers and users happy—especially at launch. And over time, their creators (the founders and employees) see their equity stakes diluted. Perhaps they even go public, thereby making the app’s governance “decentralized” and enabling anyone to permissionlessly become a shareholder. But this is where the nuances of the blockchain come into sharp focus.

As an application becomes more successful, it tends to become more controlling. Google’s Android and Apple’s iOS followed this path. Many technologists view the phenomenon as the natural arc of a for-profit technology business—as it accumulates users, developers, data, revenue, and so on, it uses its growing might to actively lock in developers and users. This is why it’s difficult to export your account from Instagram and re-create it elsewhere. It’s also why many applications close their APIs as they scale or face competition.

Facebook, for example, long allowed Tinder users to use their Facebook account as their Tinder profile. Tinder, of course, would rather its users have their own Tinder account—but Tinder isn’t intended to be a lifelong service and it was more important, especially early on, that it prove easy to use. The application also benefited from allowing users to quickly place their “best” Facebook photos on the application, rather than being forced to dig through years of cloud storage. Facebook also allowed users to connect their social graph to Tinder, thereby enabling them to see if they had friends in common with a would-be match, and if so, who. Some users preferred matching with someone they could reference check, for safety reasons. Others liked being able to go on a date to make a true “first impression,” and thus “swiped right” only on individuals with whom they had no friends in common. Although many Tinder (and Bumble) users enjoyed this social graph feature, Facebook shut it down in 2018—not long before it announced its own dating service, which was naturally based around its unique social graph and network.^†

Most blockchains are structurally designed to prevent this arc. How? They effectively maintain what’s valuable to a dapp developer—their tokens—while the user has custody of their data, identity, wallet, and assets (for example, their images), via records that are, again, on the blockchain. In a simplified sense, a fully blockchain-based Instagram would never store a user’s photos, operate their account, or manage their likes or friend connections.^‡ The service cannot dictate, let alone control, how this data is used. In fact, a competing service can launch and then immediately tap into this same data, thereby placing pressure on a market leader. This blockchain model does not mean applications are commodified—the real Instagram outmaneuvered its competitors in part because of its superior performance and technical construction—but we generally recognize that ownership of a user’s account, social graph, and data to be the primary store of value.^§ By keeping most of this outside the hands of an application (or in this case, a dapp), blockchain enthusiasts believe they can disrupt the traditional developer arc.

We’ve arrived at a simplified understanding of blockchain operations, capabilities, and philosophies. But the technology remains well below modern expectations for performance (today, a blockchain-based Instagram would likely store almost everything off-chain and every photo would take a second or two to load). More importantly, history is littered with technologies that might have disrupted existing conventions, only to fall short of promise or potential. Might blockchains fare better?

NFTs

The greatest indicator of what blockchains might accomplish is what they have already achieved. In 2021, total transaction value exceeded $16 trillion—over five times as much than digital payment giants PayPal, Venmo, Shopify, and Stripe combined. In the fourth quarter, Ethereum processed more than Visa, the world’s largest payment network and 12th-largest company by market capitalization.

That this was possible without a central authority, managing partner, or even a headquarters—that it all happened via independent (and sometimes anonymous) contributors—is a marvel. What’s more, these payments were made across dozens of different wallets (rather than limited to a tightly controlled network, as is the case with peer-to-peer rails such as Venmo or PayPal), could be made at any time (unlike ACH and wires), and were completed within seconds to minutes (unlike ACH). Both sender and receiver could confirm a successful or failed transaction (without an additional fee). In addition, none of these transactions required a user to have a bank account, nor did any businesses need to sign, let alone negotiate, a long-term agreement with any specific blockchains, blockchain processors, or wallet providers. And as we’ll see, blockchain wallets can also be programmed for automatic debits, credits, reversals—and more.

Although the majority of this transaction volume reflected investments and trading in cryptocurrencies, rather than making payments, it was also backed by a wellspring of crypto-based development. The simplest productions are NFT collections. Developers and individual users will place the ownership of an item (say, an image) onto a blockchain, in a process called “minting,” after which the right to the image is managed similarly to any cryptocurrency transaction. The difference is that the right is to a “non-fungible token,” or a token that, unlike a bitcoin or a US dollar, which are fully substitutable with any other, is unique.

Blockchain advocates believe that this structure increases the value of these virtual goods because they provide the purchaser with a truer sense of “ownership.” Consider the adage “possession is nine-tenths of the law.”³ Under centralized server models, a user can never truly take ownership of a virtual good. Instead, they are simply provided access to a good that’s held, via digital record, on someone else’s property (that is, a server). And even if the user took that data off that server and onto their own hard drive, that’s not enough either. Why? Because the rest of the world needs to acknowledge that data and agree on its use. Blockchains can do this by design.

The sense of possession is augmented by another key property right: the unrestricted right to resale. When a user buys an NFT from a given game, the trustless and permissionless nature of a blockchain means that the game’s maker cannot block the sale of that NFT at any point. They’re not even actively informed of it (though the transaction is recorded on a public ledger). For related reasons, it is impossible for a developer to “lock” blockchain-based assets into their virtual world. If Game A sells an NFT, Games B, C, D, and so on can incorporate it if the owner so chooses—the blockchain ownership data is permissionless and the owner is in control of the token. Finally, token structures mean that even if a duplicate version of this virtual good is minted, the original remains distinct and “original”—like a signed and dated painting listed as one of one.

Throughout 2021, roughly $45 billion was spent on NFTs and across a wide variety of categories.⁴ These included Dapper Labs’ NBA Top Shots, which turned individual moments from the 2020–2021 and 2021–2022 NBA seasons into collectible, trading-card-like NFTs; Larva Labs’ Cryptopunks, a series of 10,000, algorithmically generated 24 × 24–pixel 2D avatars that are typically used as profile pictures; Axies, which are a sort of blockchain-based Pokémon that can be collected, bred, traded, and battled; and 3D horses used on Zed Run’s virtual casino racetracks. Bored Apes, another profile picture NFT series, are also used as a form of membership card to the Bored Apes Yacht Club.

Forty-five billion dollars is enough for even virtual eyes to pop, but it’s not clear exactly how one might compare this sum to the nearly $100 billion spent in 2021 on video game content managed by a traditional database. If someone purchases a Cryptopunk for $100, then sells it for $200, a total of $300 has been “spent,” but only $100 has been spent on a net basis. Conversely, almost all purchases for traditional virtual goods are one-way—that is, the goods cannot be resold or traded. Every dollar out is “net.” This means that in 2022, another $100 billion might be spent on traditional game assets, but even if NFT spending doubles, there might only be $10 billion or so spent incrementally. Suddenly, the argument NFTs generated half the revenue of the game industry seems to have been exaggerated by a factor of ten. Perhaps a more accurate contrast would be between each year spend on traditional virtual assets and the market value of NFTs. The floor market cap for the 100 largest NFT collections was estimated at roughly $20 billion by the end of 2021—roughly half the trading volume, but still a quarter of the traditional gaming market. However, “floor market caps” assume every NFT in a given collection would be sold at the price of the lowest-priced NFT in that collection. This sort of analysis is a helpful way to compare the growth in different collections, but not their market value.

Some critics argue that most of the value in NFTs is speculative—i.e., based on the potential of profit—not based on utility, as is the case with Fortnite skins. This would make any sort of comparison impossible. At the same time, the global art market recognized $50.1 billion in spend (from buying and trading) in 2021, and few would debate the underlying purchases lacked utility, even though they also have speculative value. The closeness between these two categories is also instructive as to the scale of the NFT market. Furthermore, it’s the very fact that NFTs can be resold that blockchain enthusiasts believe users place more value on them. NFTs can even be lent to other players or games, with the owner receiving a programmatic “rent” as these NFTs are used or “yield” when they generate revenue.

Irrespective of whether one should, or how they might, compare NFT spending to that of video game items and content, their growth rates are starkly different—as is their foreseeable growth potential. Overall spending on NFTs in 2021 was more than 90 times that of the roughly $350 million to $500 million spent on NFTs a year earlier, which in turn was more than five times that of 2019. In contrast, sales of traditional virtual items grew at a roughly 15% compound average rate. In addition, the utility of NFTs is severely constrained today by the fact that most video games do not yet support them. And because none of the major console platforms or mobile app stores support purchasing in blockchain-based games, most of the games that do use NFT titles are limited to the web browser and as a result have rudimentary graphics and gameplay. This is one of the reasons why many of the most successful NFT experiences are based around collecting, rather than active “play.” It is also why the majority of the most popular games, game franchises, media franchises, brands, or companies haven’t even issued NFTs—and why only a few million people are believed to have purchased an NFT, whereas billions of people make in-game purchases each year. As the functionality of NFTs improves, and the number of brands and participating users increases, the value of NFTs will of course grow. There’s certainly a lot of headroom to each.

The most important upside may come from realizing interoperability in NFTs. While members of the blockchain community often say that blockchain NFTs are inherently interoperable, this isn’t really true. I have mentioned that using a virtual good requires both access to its data as well as code to understand it. Most blockchain experiences and games do not have such code. In fact, most NFTs today place the rights to the virtual good on the blockchain, but not the virtual good’s data, which remain stored on a centralized server. As such, the NFT’s owner cannot export the good’s data to another experience unless it receive permission from the centralized server that stores it. For similar reasons, almost no blockchain-based experiences are truly decentralized—even those that issue NFTs. The developers may not, for example, be able to revoke the rights to these NFTs but they could alter the code that uses it, or delete a user’s in-game account.

The fact that “decentralized” assets have “centralized” dependencies leads to two major conclusions. First, NFTs are useless—propped up by fraud, speculation, and misunderstanding. This was often the case in 2021 and is likely to remain largely true for years to come. Second, the untapped potential of this technology is extraordinary and will be realized as the utility of, and access to, blockchain-based games and products expands.

This second conclusion points to the importance of blockchain for the Metaverse. For example, blockchains don’t just establish a common and independent registry for virtual goods; they also provide a potential technical solution for the biggest obstacle to virtual goods’ interoperability: revenue leakage.

Many players would love to bring their assets and entitlements from game to game. However, a number of game developers generate the bulk of their revenue by selling players goods that are exclusively used inside their games. The ability for a player to “buy elsewhere, use here” endangers a game developer’s business model. Players might accumulate so many virtual goods that they no longer see the need to buy any more. Alternatively, players might start buying all of their skins from Game A, but then exclusively play them in Game B, which would result in distortions of where the majority of costs and revenues occur. In fact, it’s likely that virtual goods sellers would emerge that could deeply underprice the goods sold inside the game because they don’t need to recoup on a game’s initial development nor operating costs.

Many developers are held back by the worry that an open-item economy might create far more value than they themselves capture. Developer A might produce Skin A for Game A, only for Game A to decline, and Skin A becomes a popular (and valuable) item in Developer B’s longer running title. In this case, Developer A has actually created content for a competitor that beat them! Or maybe it just turns out that Developer A’s creations have become iconic and highly valuable, thereby allowing a player to make far more profit from Developer A’s creations than Developer A ever might. (Making matters worse, Developer A might never see an additional dollar after the initial sale.)

Trade is, of course, a messy process that involves some losers, even if the aggregate economic impact is strongly positive. However, interoperability can be partly facilitated with a mixture of taxes and duties (as is the case in the real world). For example, most NFTs are programmed to automatically pay its original creator a commission upon trade or resale. Similar systems can be established to pay upon importing or using a “foreign” good. Other observers propose programmed degradation of virtual goods, thereby attaching an implied “cost” to “use” that slowly removes value from a good and drives repurchasing. Blockchain programming cannot alone stop leakage, as prevention requires these systems and incentives to be “perfect”; the lessons of globalization tell us this is impossible. But through its trustless, permissionless, and automatic compensation models, many believe blockchains can nevertheless produce a more interoperable virtual world.

Gaming on the Blockchain

Regardless of one’s long-term belief in NFTs, there are more interesting aspects of blockchain-based virtual worlds and communities. Earlier on, I noted that dapps could issue their own cryptocurrency-like tokens to their network and users. These need not be issued for computing resources, as is the case with transaction processing of bitcoin and Ethereum. They can also be awarded for contributing time, delivering new users (customer acquisition), data entry, IP rights, capital (money), bandwidth, good behavior (such as community scores), helping to moderate, and more. These tokens can be provided with governance rights and, of course, may appreciate in value alongside the underlying project. Every user (that is, player) can often buy these tokens, too, enabling them to participate in the financial success of the games they love.

Developers believe that this model can be used to reduce the need for investor funding, deepen their relationship with the community, and significantly increase engagement. If we love to play Fortnite, or use Instagram, it stands to reason that we’ll invest in and use them more if we can profit from and/or help govern them. After all, millions of people spent billions of hours tilling fields and sowing crops in Farmville for neither income nor ownership of Farmville, or even their own farms. As is always the case, blockchains are not a technical requirement for these sorts of experiences, but many believe its trustless, permissionless, and frictionless structures make such experiences more likely to take off, thrive, and, most importantly, prove sustainable. Sustainability stems not just from increased user involvement in and ownership of an application, but from the ways blockchain discourages the application from betraying user trust and instead forces the application to earn it.

A good example of dapp-to-user blockchain dynamic is demonstrated through the competition between Uniswap and Sushiswap. Uniswap was one of the first Ethereum dapps to gain mass adoption, having pioneered the automated market maker model, which allowed users to swap one token for another through a centralized exchange. Uniswap’s predominantly open code was copied and forked by a competitor, Sushiswap. To gain adoption, Sushiswap issued tokens to its users. Users had the exact same functionality as they had from Uniswap, but received what was effectively an equity stake in Sushi­swap for doing so. This forced Uniswap to counter by offering its own token, while retroactively rewarding all prior users. A user-beneficial “arms race” like this is typical. Dapps have few barriers that prevent the emergence of better versions of their functionality, specifically because blockchains, not dapps, maintain much of the data we typically value in the digital era—a customer’s identity, data, and digital possessions, etc.

In addition to operating dapps and account services, blockchains can also be used to support the provision of compute-related gaming infrastructure. In Chapter 6, I highlighted the insatiable need for more computing resources and the long-held belief that realizing the Metaverse would require tapping into the billions of CPUs and GPUs that sit mostly unused at any given point in time. Several blockchain-based startups are pursuing this—and they are succeeding. One, Otoy, created the Ethereum-based RNDR network and token so that those who needed extra GPU power could send their tasks to idle computers connected to the RNDR network, rather than to pricey cloud providers such as Amazon or Google. All of the negotiation and contracting between parties is handled within seconds by RNDR’s protocol, neither side knows the identity or specifics of the task being performed, and all transactions occur using RNDR cryptocurrency tokens.

Another example is Helium, which the New York Times has described as “a decentralized wireless network for ‘internet of things’ devices, powered by cryptocurrency.”⁵ Helium works through the use of $500 hot-spot devices which allow their owner to securely rebroadcast their home internet connection—and up to 200 times faster than a traditional home Wi-Fi device. This internet service can be used by anyone, from consumers (say, to check Facebook) to infrastructure (e.g., a parking meter processing a credit card transaction). Transportation company Lime is a top customer and uses Helium to track its fleet of more than 100,000 bikes, scooters, mopeds, and cars, many of which regularly encounter mobile network “deadzones.”⁶ Those operating a Helium hotspot are compensated with Helium’s HNT token, and in proportion to usage. As of March 5, 2022, Helium’s network spanned more than 625,000 hot spots, up from fewer than 25,000 roughly a year earlier, distributed across nearly 50,000 cities in 165 countries.⁷ The total value of Helium’s tokens exceeds $5 billion.⁸ Notably, the company was founded in 2013, but struggled to gain adoption until it pivoted from a traditional (i.e., unpaid) peer-to-peer model to one which offered contributors direct compensation via cryptocurrency. The long-term viability and potential of Helium remains uncertain; most internet service providers (ISPs) prohibit their customers from rebroadcasting their internet connection, and while the ISPs typically have ignored such service violations as long as the connection was not resold and total data usage was low, there is no guarantee that the ISPs will continue to ignore such violations by users of Helium or any analogous system. Regardless, the company serves as another reminder of the potential in decentralized payment models, and is now striking deals directly with ISPs.

The scale and diversity of the crypto-gaming boom in 2021, matched with its relative infancy and enormous revenues per player, have led to a surge in development. One of the leading gaming investors in the world told me that nearly every talented game developer she knew, with the exception of those already running world famous studios, was focused on building games on the blockchain. In total, blockchain-based games and gaming platforms received more than $4 billion⁹ in venture investment (total VC funding for blockchain companies and projects was roughly $30 billion; some speculate another $100 billion–$200 billion more has already been raised or earmarked by venture funds).¹⁰

The influx of talent, investment, and experimentation can quickly produce a virtuous cycle whereby more users set up a crypto wallet, play blockchain games, and buy NFTs, increasing the value and utility of all other blockchain products, which also attracts more developers, and in turn more users, and so on. Eventually, this leads us to a future in which a handful of exchangeable cryptocurrencies are used to power the economies of countless different games, replacing one where spending remains fragmented across Minecoins, V-Bucks, Robux, and countless other proprietary denominations. And in this future all virtual goods are at least partly intended for interoperation.

At enough scale, even the most successful game developers of the pre-blockchain era, including Activision Blizzard, Ubisoft, and Electronic Arts, will find the technologies financially irresistible and competitively essential. The transition will be eased by the fact that they’ll be opening up their economies and account systems to a system that is owned not by their platform competitors, such as Valve and Epic Games, but by the gaming community.

Decentralized Autonomous Organizations

The most disruptive aspect of digitally native “programmable” payment rails, however, is how they enable greater independent collaboration and easier funding of new projects. This is not a structurally separate point from anything I’ve discussed thus far, but it’s important to understand it in a broader context.

To this end, I want to talk about a vending machine. The first of these devices actually emerged millennia ago (around AD 50) and allowed a consumer to insert a coin and receive holy water in return. By the late 1800s, these machines supported a wide variety of different purchases—not just a single item, such as water, but also gum, cigarettes, and postage stamps. No shopkeeper or lawyer managed the distribution of goods, nor accepted and validated payment, but the system worked through fixed rules: “if this, then this.” Everyone trusted the system.

Blockchains can be thought of as a virtual vending machine. Only much, much smarter. For example, they can track multiple contributors and value them differently. Imagine someone wanted to buy a candy bar from a real-world vending machine. Maybe she only had $0.75 and wanted to purchase a $1 candy bar, so she asked a passerby for 25¢ to complete the transaction. Perhaps they agreed, but only if they received half of the candy bar, rather than their pro rata share of a quarter. A “blockchain vending machine” would enable the two collaborators to write what’s called a “smart contract” for this arrangement, and then after accepting each individual payment, the device would then automatically (and incorruptibly) deliver the appropriate amounts (half and half) to the appropriate owner. At the same time, the blockchain vending machine might have automatically paid everyone responsible for that candy bar as well—5¢ to the person who stocked the machine, 7¢ to the machine’s owner, and 2¢ to the manufacturer.

Smart contracts can be written in minutes and serve almost any purpose; they can be small and temporary, or massive and persistent. A number of independent authors and journalists use smart contracts to fundraise for their research, investigations, and writing—serving as a sort of advance against future earnings, but one that comes from the community rather than a corporation. Upon completion, their works are minted to the blockchain and sold, or perhaps put behind a crypto-based paywall, with the proceeds shared back to their patrons. In other cases, a collective of authors have issued tokens to fundraise for a new, ongoing magazine that is then exclusively available to token-holders. Some writers use smart contracts to automatically share tips with those who helped or inspired them. None of this requires credit card numbers, entering ACH details, invoices, or even, really, much time—just a cryptowallet with cryptocurrency.

Some envision smart contracts as the Metaverse-era version of the LLC (limited liability corporation) or 501(c)(3) (nonprofit organization). A smart contract can be written and instantaneously funded, with no need for participants to sign documents, perform credit checks, confirm payments or assign bank account access, hire lawyers, or even know the identities of the other participants. What’s more, the smart contract “trustlessly” manages much of the administrative work for the organization on an ongoing basis, including the assignment of ownership rights, calculation of votes on bylaws, distribution of payments, and so on. These organizations are typically called “Decentralized Autonomous Organizations,” or “DAOs.”

In fact, many of the most expensive NFTs have been purchased not by individuals, but by DAOs comprising dozens (and in some cases, many thousands) of pseudonymous crypto users who could never have made the purchase on their own. Using the DAO’s tokens, the collective can determine when these NFTs sell and at which minimum price, while also managing disbursements. The most notable example of such a DAO is the ConstitutionDAO, which was formed on November 11, 2021, to purchase one of the thirteen surviving first editions of the United States Constitution, which was to be auctioned by Sotheby’s on November 18. Despite limited planning and no “traditional” bank account, the DAO was able to raise more than $47 million—far more than the $15 million–$20 million that Sotheby’s estimated would be needed to win the auction. ConstitutionDAO ultimately lost to a private bidder, the billionaire hedge fund manager Ken Griffin, but Bloomberg, reporting on the effort, wrote that it “showed the power of the DAO . . . [DAOs have] the potential to change the way people buy things, build companies, share resources and run nonprofits.”¹¹

At the same time, ConstitutionDAO also illuminated many of the problems with the Ethereum blockchain. For example, an estimated $1 million to $1.2 million was spent processing transactions to fund the DAO. Though this represented 2.1% of contributions—within the average range for traditional payment rails—the median contribution was estimated at $217, with nearly $50 spent in “gas.” In addition, the Ethereum blockchain cannot “waive” fees for reversing or refunding a transaction. As a result, these fees were effectively doubled as a result of the auction, as most contributors reclaimed their donations. Many donations remain in the DAO because the cost to retrieve a contribution exceeds its value. (Many of these problems are attributed to sloppy smart contract coding and could have been avoided, especially if another blockchain or Layer 2 solution had been used.)

Though a member of “traditional finance” was able to outmaneuver the “decentralized finance” community for the US Constitution, the world of high finance is also using DAOs to make their investments. One such example is the Komorebi Collective, which makes venture investments into “exceptional female and nonbinary crypto founders,” and includes among its members a number of high-profile venture capitalists, technology executives, journalists, and human rights workers. In late 2021, some 5,000 outdoor enthusiasts used a DAO to purchase a 40-acre plot of land near Yellowstone National Park in Wyoming, which had passed legislation recognizing the legitimacy of DAOs earlier in the year. “CityDAO” is mostly organized through Discord and has no official leader (Ethereum co-founder Vitalik Buterin is a member), with all major decisions made through vote and members able to sell their membership tokens at any time. One member, CityDAO’s de facto figurehead, told Financial Times that he hoped Wyoming’s embrace of the DAO structure would “become this fundamental link between digital assets, crypto and the physical world.”¹² As a point of reference, Wyoming was also the first state to authorize the creation of LLCs, having passed related legislation in 1977, some 19 years before it was available nationwide.

Friends with Benefits is effectively a DAO-based membership club where tokens are used to gain access to private Discord channels, events, and information. Some have argued that by requiring users to buy tokens to gain entry, FWB is simply replicating the centuries-old “membership dues” model of every exclusive club that came before it only now benefiting from the “crypto” hype. However, this view ignores the potency of FWB’s token design. Members do not pay annual “dues.” Instead, they need to buy a certain number of FWB tokens to gain entry—and then hold them to remain members. As a result, every member is a part owner of FWB, and can leave at any time by selling their tokens. Because these tokens appreciate as the club becomes more successful or desirable, every member is incentivized to invest their time, ideas, and resources into the club. Appreciation also makes it increasingly impractical for spammers to join FWB, whereas under normal circumstances the popularity of an online social platform only encourages trolls. Appreciation means the club must work harder to earn its ongoing role in a member’s life. If you joined a club by buying $1,000 in tokens, but these tokens quadruple in value, the club must do more to keep you as a member. After all, if you leave, your sale depresses the market value of the remaining tokens. Finally, many social DAOs use smart contracts to issue tokens to individual members for their contributions, or to those who can’t afford to join the collective but are deemed worthy by its members.

Nouns DAO is effectively a remix of FWB with Cryptopunks. Each day, one new Noun—an NFT of a cute pixelized avatar—is auctioned, with 100% of the net proceeds going into the Nouns DAO treasury, which exists exclusively to enhance the value of Nouns NFTs. How, specifically, does this treasury do so? By funding proposals authored by and voted on by owners of the NFTs. In effect, it is a constantly growing investment fund governed by a constantly growing board of governors.

Some see social DAOs and tokens as a way to address targeted harassment and toxicity on large-scale online social networks. Imagine, for example, a model whereby Twitter users were awarded valuable Twitter tokens for reporting poor behavior, could earn more for reviewing previously reported tweets, and lost them if they violated the rules. At the same time, rather than rely on tips or posting promotional tweets on behalf of advertisers to generate income, super-users and influencers could be awarded tokens for hosting events. By the end of 2021, Kickstarter, Reddit, and Discord had all publicly described plans to shift to blockchain-based token models.

Blockchain Obstacles

There are still numerous obstacles facing a potential blockchain revolution. Most notably, blockchain remains too expensive and slow. For this reason the majority of “blockchain games” and “blockchain experiences” are still running mostly on non-blockchain databases. As a result, they are not truly decentralized.

Given the computational requirements of large-scale real-time rendered 3D virtual worlds, as well as their need for ultra-low latency, some experts debate whether we can ever fully decentralize such an experience—let alone “the Metaverse.” Put another way, if computing is scarce and the speed of light already a challenge, how could it ever make sense to perform the same “work” countless times and wait for a global network to agree on the right answer? And, even if we could pull this off, wouldn’t the energy use melt the planet?

This may sound too glib, but opinions vary. Many people believe the key technical problems will be resolved in time. Ethereum, for example, continues to overhaul its validation process so that network participants can perform less work (and crucially, less duplicative work), and it already uses less than a tenth of the energy per transaction of the Bitcoin blockchain. Layer 2s and sidechains are also proliferating, solving many of the shortfalls of Ethereum, while newer Layer 1s, such as Solana, are matching its programming flexibility but with far better performance. The Solana Foundation claims that a single transaction uses about as much energy as two Google searches.

In most countries and US states, DAOs and smart contracts are not legally recognized. This is beginning to change, but legal recognition is not a complete solution. There is a common adage: “the blockchain doesn’t lie,” or “the blockchain can’t lie.” That may be true, but users can lie to the blockchain. A musician might tokenize the royalties to their song, thereby ensuring smart contracts execute all payments. However, those royalties may not be received “on chain.” Instead, a music label might send a wire to that musician’s centralized database, and then the musician must put the appropriate sums into the appropriate wallet, and so on. And many NFTs are minted by those who don’t own the rights to the underlying works. Blockchains, in other words, do not make everything trustless—just as contracts don’t solve for all bad behavior.

Then there’s the app store issue: if Apple and Google don’t allow blockchain-games or transactions, what’s the point? Well, blockchain maximalists believe that the totality of its economic forces will force even the world’s mightiest corporations to change, rather than just game makers and gaming conventions.

How to Think about Blockchains and the Metaverse

There are, as I see it, five ways to think about the blockchain’s significance, both within the context of the Metaverse and within society at large. First, it’s a wasteful technology propped up by scams and fads, and it receives attention not because of its merits, but due to short-term speculation.

Second, blockchains are indeed inferior to most, if not all, alternative databases, contracts, and computing structures, but may nevertheless lead to cultural change around user and developer rights, interoperability in virtual worlds, and compensation for those who support open-source software. Perhaps these outcomes were already inevitable, but blockchains may usher them in more quickly, and democratically.

Third, and more hopefully, blockchains will not become the dominant means for storing data, computing, payments, LLCs and 501(c)(3)s, and so on, but they will become key to many experiences, applications, and business models. Nvidia’s Jensen Huang has argued that “blockchains [are] going to be here for a long time and [will] be a fundamental new form of computing,”¹³ while global payment giant Visa has launched a cryptocurrency payment division, with its landing page declaring “Crypto is reaching extraordinary levels of adoption and investment—opening a world of possibilities for businesses, governments and consumers.”¹⁴ Recall from Chapter 8 the many problems which arise when one virtual world wants to “share” a unique asset with another, as would be the case with using an avatar bought in Epic Games’ Fortnite but inside Activision’s Call of Duty. Where is the asset stored when it’s not in use: Epic’s server, Activision’s server, both, or somewhere else altogether? How is the storer compensated? If the item is altered or sold, who manages the right to make such a change and record it? How do these solutions scale to hundreds, if not billions, of different virtual worlds? If all blockchains do is offer an independent system which partly addresses some of these problems, many believe it will still produce a revolution in virtual culture, commerce, and rights.

A fourth view holds that blockchains are not just critical technologies for the future but also the key to disrupting today’s platform paradigms. Recall why closed platforms tend to win. Free, open-source, and community-run technologies have been available for decades, and often promise developers and users a more fair and prosperous future, only to lose out to paid, closed, and privately owned alternatives. This is because the companies that operate these alternatives can afford enormous investments in competing services and tools, engineering talent, customer acquisition (for example, below cost hardware), and exclusive content. Such investments, in turn, attract users, producing a lucrative market for developers, and/or they attract developers, thereby attracting users who bring additional developers. Over time, the corporation that manages these developers and users leverages that control, alongside their ever-growing pool of profits, to lock in those same groups and stymie competitors.

How might blockchains alter this dynamic? They provide a mechanism through which significant and diverse resources—from wealth to infrastructure and time—can be easily aggregated and at a scale that contends with the mightiest of private companies. In other words, the only way to fight trillion-dollar corporate giants pursuing trillion-dollar opportunities is billions of people contributing trillions more. Blockchains also have a baked-in economic model to compensate those who contribute to its success or ongoing operations, rather than rely on altruism and empathy, as is the case with most open-source projects. Moreover, blockchain-based experiences seem, at least thus far, to promise developers far greater profits than closed gaming platforms do. Just as important, the leaders of blockchain platforms and companies have significantly less control over their users and developers than those who build on traditional databases and systems, in that they cannot forcibly bundle a user’s identity, her data, payments, content, services, and so on. Chris Dixon, a crypto-focused venture capitalist at Andreessen Horowitz, argues that if the dominant ethos of Web 2.0 was “Don’t be evil,” the phrase that (in)famously served as Google’s unofficial motto, then a (blockchain-based) Web3 is “Can’t be evil.”

It’s unlikely, however, that all data is “on chain,” meaning few experiences will be fully “decentralized” and therefore remain de facto centralized or at least strongly controlled by a given party. In addition, control does not just come from data ownership, but from proprietary code and IP. It’s relatively easy to copy Uniswap’s code, which is mostly open-source, but the ability to copy the code that runs a blockchain-based Call of Duty’s doesn’t mean a developer has the right to do so. A Disney blockchain game may provide users with indefinite rights to Disney-based NFTs, but that doesn’t mean other developers can build Disney games with Disney’s IPs. Put another way, a child can tell their own stories in the bathtub while using a Darth Vader action figure and a Mickey Mouse figurine, but Hasbro can’t buy these figures and use them to sell a Disneyland board game. Another form of “lock in” is habit—the search results offered by Bing may be more accurate (and less ad-laden) than those of Google, but few of us think to use it. And even if they are better, how much better do they need to be to convince a user to change behaviors or overcome the synergies of using Google’s search engine and browser? While Dixon’s point is exaggerated, you’ll note the examples above speak to how independent developers and creators establish power—rather than the ways in which the underlying platform (for example, Ethereum) builds or protects its own. In general, society believes the rights of the former group are more important to economic health than those of the latter.

The fifth perspective on blockchains suggests they are essentially a requirement for the Metaverse—at least one which meets our lofty imaginations and we would actually want to live in. In 2017, Tim Sweeney said that we will “come to the realization that the blockchain is really a general mechanism for running programs, storing data, and verifiably carrying out transactions. It’s a superset of everything that exists in computing. We’ll eventually come to look at it as a computer that’s distributed and runs a billion times faster than the computer we have on our desktops, because it’s the combination of everyone’s computer.”¹⁵ If we ever hope to produce richly, real-time rendered, and persistent world simulations, figuring out how to leverage the world’s entire supply of computing, storage, and networking infrastructure will be necessary (though this doesn’t require blockchain technology).

In January 2021, not long before the public craze over the Metaverse and NFTs began, Sweeney tweeted, “blockchain based underpinnings for an open Metaverse. This is the most plausible path towards an ultimate long term open framework where everyone’s in control of their own presence, free of gatekeeping.” In a follow-up tweet, Sweeney added two disclaimers: “1) The state of the art is far from the 60Hz transactional medium needed for 100M’s of concurrent users in a real-time 3D simulation” and “2) Don’t read this as an endorsement of cryptocurrency investment; that’s a wild, speculative mess . . . But the tech is going places.”¹⁶

In September 2021, Sweeney remained optimistic about the potential in blockchain, but also seemed discouraged by its misuse, declaring “[Epic Games isn’t] touching NFTs as the whole field is currently tangled up with an intractable mix of scams, interesting decentralized tech foundations, and scams.”¹⁷ The following month, Steam banned games that used blockchain technology, prompting Sweeney to announce that “Epic Games Store will welcome games that make use of blockchain tech provided they follow the relevant laws, disclose their terms, and are age-rated by an appropriate group. Though Epic’s not using crypto in our games, we welcome innovation in the areas of technology and finance.”¹⁸ Sweeney’s critiques highlighted a problem often overlooked by blockchain enthusiasts, a group which typically sees decentralization as only a way to protect wealth, rather than also a way to lose it. Without intermediaries, regulatory oversight, or identity verification, the crypto space has become rampant with copyright violations, money laundering, theft, and lies. Many NFTs and blockchain-based games are propped up by user confusion around what exactly is being bought, how it can be used, and how it might be in the future (many don’t care as long as the prices go up).

How much of the blockchain remains hype versus how much is (potential) reality remains uncertain—not unlike the current state of the Metaverse. However, one of the central lessons of the computing era is that the platforms that best serve developers and users will win. Blockchains have a long way to go, but many see their immutability and transparency as the best way to ensure the interests of these two constituencies remain prioritized as the Metaverse economy grows.

^* This is not automatically the case, as blockchains can be programmed to bestow (or withhold) a wide range of governance rights to token holders, while the creators of said blockchain control the initial distribution of these tokens. However, most major “public blockchains,” in contrast to “private blockchains,” which are typically owned by a corporation, are decentralized and community-run.

^† Facebook still allows Tinder users to use their Facebook account to sign up and log in, and to populate their Tinder profile with photos from their Facebook profile. Keeping this functionality, while shutting down access to a user’s social graph, does make sense. Facebook cannot stop users from repurposing photos uploaded to Facebook, as they’re easy to save (“right click, save as”) and, through “like counts,” also helps a user identify their best photos, too. Furthermore, if Facebook users are going to use Tinder, Facebook benefits from knowing as much. At minimum, it enables Facebook to then recommend its dating service, which does still use its social graph, to this user.

^‡ In a simplified sense, this data is only “exposed” to the service on an as-needed basis.

^§ Some venture capitalists and technologists say that blockchains are “fat protocols” that support “thin applications,” in contrast to the “thin protocol” and “fat application” model of today’s internet. While the Internet Protocol Suite is enormously valuable—and thankfully, not a for-profit product—it does not operate a user’s identity, store their data, or manage their social connections. Instead, all of this information is captured by those building on TCP/IP.