Blockchain and beyond: transacting in the metaverse

Buying and selling redefined

As a uniquely disruptive fusion of the physical and the digital, the metaverse is set to radically transform how we interact. It will bring new approaches to engaging, socializing, working, learning and many other day-to-day activities.

Crucially, it is also set to radically transform how we transact. Traditional types of money and payment are likely to persist in the virtual ecosystems of the near future, but we can expect our avatars’ wallets to contain much more besides.

This is largely thanks to blockchain, an idea first outlined in a 2008 white paper published under the name of Satoshi Nakamoto¹. Many aspects of the cutting-edge hyperconnectivity that defines life today increasingly rely on this technology.

Belying its prevalence now, blockchain initially went relatively unremarked. Nakamoto’s accompanying notion of cryptocurrency instead generating the lion’s share of headlines and was widely hailed as the Next Big Thing.

Cryptocurrency has unquestionably made its mark since, and it will most likely continue to do so within the metaverse – as we will discuss here. Now, though, we recognize the enabling power of blockchain as even more significant in shaping what Facebook founder Mark Zuckerberg has called “an embodied internet”².

Digitization and decentralization

Blockchain can be simply summarized as a means of recording digital transactions in a safe, verifiable and permanent way. This ability is likely to be vital to the successful functioning of the metaverse.

Nakamoto laid out a groundbreaking solution to the problem of “double-spending” – the risk of a digital token being used more than once as a result of duplication or falsification. He proposed employing a distributed digital ledger that is decentralized and therefore acts as a “data democracy”.

In a centralized system, the model previously favored for digital transactions, a single participant stores and maintains all data. In a decentralized system, as envisaged by Nakamoto, this hub-and-spoke set-up is replaced by a network in which every participant hosts a copy of the ledger.

Decentralization allows the sharing of data on a peer-to-peer basis and enables every participant to verify the integrity of the information at any time. Much of the metaverse is expected to operate in this way, with blockchain and its use of “smart contracts” serving as key infrastructure.

Described by its co-developer, Gavin Wood, as “one computer for the entire planet”³, Ethereum is the dominant blockchain technology today. Wood has highlighted the supreme importance of providing users with “strong guarantees” around their digital transactions – not least in respect of “what they are paying and what they are receiving in return”⁴.

The world of non-fungible tokens

Non-fungible tokens (NFTs) represent arguably the most compelling evidence to date of the effectiveness of blockchain-enabled, metaverse-style transactions. In fact, it was a marked rise in NFT sales at the end of 2021 that helped fuel popular awareness of the metaverse phenomenon⁵.

NFTs are basically digital assets. They are immutable, tradeable and usually interoperable. Many take the form of collectibles – including works of art, in-game items and even algorithms or text lists – with blockchain permitting the easy verification of their provenance and rarity.

Principally because of the potential expense, NFTs themselves are rarely stored on a blockchain. The technology is instead used to ensure permanence and an incontrovertible history of ownership, which can in turn encourage what is known as “composability” – the freedom for developers to co-create without the possibility of underlying components losing attribution or vanishing altogether.

The most popular use case for NFTs at present is gaming, but the value of most transactions in this space is miniscule. Art leads the way in terms of value, accounting for $18.4 billion worth of sales between April 2021 and March 2022⁶; in March 2021 a single NFT, representing a collage by digital artist Beeple, sold for $69 million⁷.

Other use cases include sport-related media, fashion, luxury items, domain names and “social” tokens.

Money in the metaverse

This brings us back to Nakamoto and his then-pioneering cryptocurrency concept. NFTs are usually bought and sold using cryptocurrency, but it is already clear that this will not be the sole means of transacting in the metaverse.

Cryptocurrency has proven volatile ever since its introduction, famously leading to a craze and a crash shortly after the publication of Nakamoto’s formative paper. An alternative is stablecoin, which relies on a less mercurial asset.

Although most are still in their development stages, state-issued central bank digital currencies (CBDCs) could also gain ground. China’s digital renminbi was the first CBDC to be issued by a major economy, and the European Central Bank has reported that more than 80 countries are considering following suit⁸.

In-game tokens in particular are currently attracting investor attention⁹. Some commentators trace this idea all the way back to the amusement arcade boom of the 1980s and 1990s¹⁰, but it seems safe to say we have come a long way since the days of pumping extra quarters into Double Dragon III.

Today the combined market capitalization of gaming coins such as Axie Infinity, Illuvium and The Sandbox runs to billions of dollars¹¹.

From mystery to mass disruption

Most of the innovations that can be thought of as genuinely transformative are readily associated with their inventors. Think the printing press and Guttenberg, the telephone and Bell or the worldwide web and Berners-Lee.

Perhaps the most striking exception is the wheel, a revolution – pun intended – whose genesis has been lost in the mists of time. As the metaverse age grows nearer, the origins of blockchain are similarly enigmatic.

Despite sparking a trillion-dollar market, Satoshi Nakamoto remains a figure shrouded in mystery. Although there are people who claim to have found him or even to be him, we do not even know for certain whether he is Japanese, male or even just one person.

What we can say with reasonable conviction, though, is that blockchain’s role in underpinning the metaverse is likely to prove as sweepingly disruptive as any of the epochal breakthroughs of the past. It is already changing how we buy, how we sell and even how we think about money itself.

As we have seen, it is also opening up multiple opportunities for investors. The likes of NFTs, cryptocurrency and tokenization are in many ways the stuff of a whole new world – which is, of course, precisely what the metaverse aims to be.

Dr Henning Stein is Invesco’s Global Head of Thought Leadership and Market Strategy.