Grayscale Research Report: How Decentraland is Building the Metaverse?

Source: Grayscale

Original Title: 《An Introduction to Decentraland》

Compiled by: Linqi, Chain Catcher

Background

Most current games and social networks are based on centralized architectures, which means that users are very limited in terms of ownership and freedom. It is estimated that in the United States, the market share of video games has exceeded 47%. For example, looking at data from April 2020, "Fortnite" had over 350 million registered users, with a total online duration exceeding 3.3 billion hours.

As people increasingly participate in activities within virtual environments, it is clear that these companies have absolute power over controlling user experiences. Centralized companies manage the parameters of a network and dictate what users can create, how they can communicate, and how they can transact. Furthermore, these companies extract immense value from users.

However, while these companies are responsible for creating platforms, the true value of the ecosystem is generated by interactions among users. The more power users have in the virtual world, the more creative they become in generating value for the community. Public blockchains create digital property rights, allowing for the creation of open digital markets.

Just like Bitcoin and Ethereum are user-owned economic systems, games built on public and open blockchains empower users to participate in the adoption and establishment of the games. This creates a positive feedback loop, as users' continuous contributions in the game are rewarded, compelling them to ensure a lasting virtual life within these games.

For example, a user might purchase a piece of land and build an art gallery to showcase their favorite digital artworks. Because the user owns the land and the digital artworks displayed in the gallery on Decentraland, it drives the user to be more motivated to create and cultivate a community in this virtual neighborhood, thereby increasing the demand for land and artworks.

How Decentraland Works

Decentraland is built on the concept of digital property rights, providing users with the ability to manage the entire gaming experience without the constraints of a centralized party. The project uses smart contracts and the concept of NFTs to create scarcity within the game. NFTs are non-fungible digital proofs that represent unique digital ownership of an asset.

In Decentraland, users can create a social experience in a 3D world, driven by the existing layers of land ownership and capacity distribution, previously referred to as the "Iron Age." With the launch of the "Iron Age," Decentraland introduced two functional digital assets: (1) LAND, (2) MANA.

LAND is an NFT that uses ERC-721 to partition Decentraland, which is a development standard on Ethereum that outlines how to build NFTs. In contrast, most NFTs follow the ERC-20 standard on Ethereum. LAND is non-fungible because each piece of land in Decentraland has a unique set of (x,y) coordinates.

The value of LAND is based on its adjacency to other LAND, as well as its ability to host content and connect users within Decentraland. The highest price for a piece of LAND has exceeded $150,000, while the lowest price is below $200. Developers and other content creators can request to build on LAND to reach their audience goals. LAND can also be further organized into themed communities based on shared interests, known as Districts.

In contrast, MANA is a digital asset that serves as a unit of account for assessing LAND prices and is used to pay for goods and services in Decentraland. Users can bundle multiple LAND parcels into Estates for easier management of their properties. Estates are organized under a user's ownership, while Districts are organized within a community.

In 2018, Decentraland announced the layout of its first city, Genesis City. While Genesis Plaza is the center of Genesis City and the entry point for new users, the designers were cautious not to implement heavy urban planning that could stifle organic creativity.

Below is a heatmap of LAND parcel prices after the initial sale in Genesis City.

Figure 1: Price Heatmap

To fully decentralize the protocol, Decentraland transferred control of smart contracts to a DAO. The DAO allows users to control changes to the protocol by voting with the assets they hold. Each MANA provides one unit of voting power, while each LAND token provides 2000 units of voting power. The DAO will vote on policy updates, LAND auctions, market transaction fees, or any matters important to the community. The DAO can also vote on members of the security advisory committee, which consists of five members tasked with supporting the protocol's security.

Applications of Decentraland

Decentraland aims to be a metaverse, or a persistent virtual shared space that enhances physical reality. Beyond the initial gaming parameters, Decentraland does not dictate what users can do, leading to interesting experimental phenomena. Below, we will introduce some interesting activities that have already taken place or are currently operating in Decentraland.

At the most basic level, users can go to the Decentraland marketplace to purchase names, LAND parcels, and wearable devices. As mentioned earlier, when someone purchases these items, their private key allows them to obtain a unique digital token representing the corresponding item in the metaverse. This operation is unique compared to other role-playing games, such as "Second Life," where companies restrict players' rights to trade. In fact, there have been multiple lawsuits against game providers for unilaterally restricting users' use of their property.

To ensure that the wearable devices needed by the first batch of users are of high quality, Decentraland DAO initially launched an initiative to issue licenses to entities to create wearable devices for community users. This initiative concluded with ten winners. We can see that an economy has emerged in what could be considered the digital fashion business. The following image is from a fashion show in Decentraland.

Figure 2: Decentraland Fashion Show

After names, land, and personal wearable devices, users may also want to build their personal art collection activities. Consequently, Decentraland hosted an art week, where attendees purchased over 1500 pieces of art and experienced various activity scenes ranging from concerts to skateboarding. Additionally, logged-in users attended Decentraland's Christmas party, where popular DJ artist 3LAU performed for a virtual audience.

Here is a photo of the DCG team enjoying music in Decentraland.

Figure 3: DCG Enjoying Music in Decentraland

Finally, video game creator Atari is creating a large amusement park in the metaverse featuring its classic games. Users can also create games in the Atari amusement park for anyone to play. This collaborative relationship will benefit the various games currently in Decentraland.

Below is an image of a user playing games in Decentral Games Casino.

Figure 4: User Playing Games in Decentraland

Applications of MANA

MANA is an ERC-20 token that serves as Decentraland's native digital currency, as well as a unit of account for users to pay for goods, services, and LAND. MANA is burned (removed from circulation) when used to pay on the marketplace and for any primary goods sold in Decentraland.

Additionally, MANA gives users one vote per token, while LAND gives users in the Decentraland DAO 2000 votes per token.

Overview of Decentraland's Journey

Decentraland was initially discussed in a white paper by two blockchain developers, Ari Meilich and Esteban Ordano, in 2015. The project started as a proof of concept, previously referred to as the "Stone Age" development phase, using blockchain to allocate ownership of digital real estate to users on a 2D grid. By the end of 2016, the creators began developing a 3D virtual world, partitioning it into parcels using an improved Bitcoin blockchain, previously referred to as the "Bronze Age."

Decentraland's initial funding was raised through an ICO in August 2017. At the launch of Decentraland, approximately 2.8 billion MANA were created. After the ICO, all additional MANA tokens were sold by a smart contract at fixed intervals, starting with an inflation rate of 8% per year.

Since the ICO, the company has auctioned LAND through the "Terraform" events. The first auction began on December 15, 2017, and lasted for a week. Similar to real land, LAND was sold at different prices and for various reasons during the auction, such as proximity to roads, distance from Decentraland's center, and distance from various districts.

Since the first Terraform event, a secondary market for LAND has developed, allowing MANA holders and LAND owners to buy and sell LAND. The MANA price of LAND on the secondary market is determined by buyers' expected purchase prices and sellers' expected selling prices. Decentraland has no control over pricing or buying and selling.

Token Distribution and Sale

When the MANA network was launched, 2.81 billion MANA were created. Through the ICO, the company sold approximately 112 million MANA for $25 million. No additional MANA has been created since then. At the launch of the MANA network, the distribution of MANA was as follows:

Table 1: MANA Distribution Proportions

• Initial Distribution: 112 million MANA, or 40% of the supply, was sold to investors in the ICO.
• Community Members and Partners: 561.2 million MANA, or 20% of the supply, was reserved for community members and partners.
• Developers, Contributors, and Advisors: 561.2 million MANA, or 20% of the supply, was reserved for the development team, early contributors, and advisors, including the company. This allocation is subject to a three-year vesting period.
• Decentraland: 561.2 million MANA, or 20% of the supply, was reserved for Decentraland. This allocation is released through a smart contract at fixed intervals, starting with an inflation rate of 8% per year.

Potential Risks

• Competition: Decentraland is the leading decentralized virtual world and has spent years developing its community and improving governance models. However, there are competitors in this space, including Axie Infinity, Cryptovoxels, and Somnium Space.
• Decentralization: While fully decentralizing Decentraland's organization through the DAO increases the robustness of the protocol, there may be concerns about the speed of innovation as decision-making power is distributed among a broader group.
• Network Economy: The value of MANA may not correlate with the usage or utility of the underlying Decentraland platform. MANA tokens do not generate cash flow, making it difficult to evaluate or price them using cash flow discount analysis. Instead, the token is used as a medium of exchange on the platform, which makes it harder for some investors to value.
• Volatility: The volatility of the token may also affect users' interest in Decentraland and impact the prices of in-game assets.
• Token Centralization: At the time of writing this report, approximately 86% of the total supply of tokens is held by the top 100 addresses.
• Regulation: The SEC has indicated that certain digital assets may be considered "securities" under federal securities laws. So far, the SEC has only identified two digital assets, Bitcoin and Ethereum, but they do not intend to classify them as securities. Therefore, any other digital asset, including MANA, could potentially be classified as a security, which could have significant adverse effects on these digital assets.

Conclusion

We believe Decentraland is the leading decentralized metaverse to date. It allows users to create a digital experience, enabling them to truly own their LAND, collectibles, and creations within the digital ecosystem. With the explosive growth of digital collectibles, Decentraland has become a popular place for collectors to browse and view digital artworks for sale. Musicians are also eager to participate in the metaverse, with artists like 3LAU performing on the platform, which is a positive sign of Decentraland's cultural expansion. Although the project is still in its early stages, Decentraland is likely to become a pinnacle of decentralized virtual worlds in the future.