Entering the Metaverse: A Collision of Cryptocurrency, Gaming, and Capitalism

Author: Charlie Wells, Misyrlena Egkolfpoulou

Original Title: 《Into the Metaverse: Where Crypto, Gaming and Capitalism Collide》

Translation by: Linqi, Chain Catcher

To understand why Mark Zuckerberg believes the "metaverse" is the next frontier, it helps to look at the story of Sam Peurifoy. This 27-year-old chemistry PhD from Columbia University quit his job at Goldman Sachs during the height of the pandemic and is now searching for his fortune in the crypto space by playing video games.

From Mexico to the Philippines, he has recruited dozens of people and formed a "guild" that operates under the leadership of "President" Peurifoy. In exchange, he pays the fees required to enter the game Axie Infinity, a game where players can collect Smooth Love Potion, a digital token that can be converted into cash.

Zuckerberg's dream of the metaverse is a place where everyone can connect to virtual reality, supporting spatial movement and mental teleportation, achieved simply by thinking about it, effectively transcending the limitations of the physical world and entering a bold new digital realm. At the same time, the billionaire admits that there is "a long way to go."

However, what Peurifoy and his guild are doing on Axie now serves as an early experience of this future. It is not exactly "Ready Player One," nor is it "Snow Crash" (where Neal Stephenson coined the term "metaverse" in his 1992 novel). Instead, it is a "decentralized finance," also known as DeFi, thriving in the online realm, merging cryptocurrencies, blockchain technology, NFTs, and video games.

Yet, this world is fraught with dangers and is far from altruistic. Investors and bankers have serious disagreements about how cryptocurrencies will ultimately shake up the entire market, but one thing they can agree on is that their prices are highly volatile. While Bitcoin, Ethereum, and other currencies are gaining more recognition on Wall Street, this vast crypto universe is filled with an increasing number of new and untested altcoins, some of which are problematic, commonly referred to as junk coins.

Due to technological disruptions and sudden price fluctuations, there is no guarantee that these tokens can actually be converted into cash. In the crypto world, this is seen as a rite of passage for users who may be scammed at some point. This might not be a problem for wealthy investors who can afford the risk, but it could weaken the investment willingness of market participants, including those from developing countries.

The Boom of Axie Infinity

At the forefront of the "GameFi" trend, Axie has generated over $2.5 billion in transaction volume. Other competitors offering crypto-based games are also gradually gaining popularity among users. Venture capitalists and hedge funds are trying to profit from this new online gold rush. They predict that billions will engage in various operations within games to earn digital tokens.

If Axie is viewed merely as a game, it is actually quite ordinary compared to many stunningly realistic games. It resembles Pokémon, where players battle and breed in a simple strategy game. What makes Axie unique is that players can earn something more valuable (at least theoretically) than stars, hearts, or crushed candy in game battles: Smooth Love Potion (SLP).

Some players have changed their lives through this play-to-earn model. In the Philippines, where many lost their jobs due to pandemic lockdowns, this play-to-earn gaming model has exploded in popularity. The dollar, as well as digital tokens, has gained more power, at least when their prices are rising.

It is impossible to accurately count how many people are involved in play-to-earn games. However, various signs are continuously strengthening this trend. One notable indicator is the relationship between games and digital wallets, which are the accounts people use to receive and store cryptocurrencies. According to DappRadar (a company tracking decentralized finance data), as of last March, about 51,000 active wallets were associated with game-related contracts in the blockchain ecosystem. Three months later, this number soared to 359,284, a 599% increase.

Games like Axie demonstrate why tech giants are attracted to this concept: the metaverse and its possibilities could not only disrupt our work, income, and consumption patterns but also fundamentally change our lives, plans, and how we live. Essentially, they promise to alter the way capitalism operates.

"Axie embodies the new generation of games where creators are not operating in a precarious environment but in an open, free market economy," wrote Arianna Simpson, a general partner at venture capital firm Andreessen Horowitz, which invested in the Vietnamese studio Sky Mavis that developed Axie. "What this means for the future of gaming and the internet as we know it is as vast as you dare to imagine."

What Simpson implies is not just the fact that Axie players can earn cryptocurrencies. Axie showcases a key pillar of the metaverse: how NFTs work and why someone would want to own them.

NFTs are digital certificates that help users prove ownership of assets in the online realm. Some of these have sold for millions of dollars, but most have no clear economic value. Recently, an NFT sold for over $500 million, but subsequent reports revealed it had not actually been sold. Most Americans remain confused by all of this.

NFT Collectibles

In the Axie metaverse, players must first purchase round monster NFTs called Axies before they can play. They are required to own at least three Axie monsters, each costing about $300, paid in Ethereum. In other words, players need to prepare about $1,000 in capital before starting, with no guarantee of profit.

As a result: Axie has become the most valuable NFT collectible to date.

Numbers like these are eye-opening for the wealthy. Last May, Mark Cuban and Reddit co-founder Alexis Ohanian invested in Sky Mavis. BitTorrent CEO and TRON Foundation founder Justin Sun created a $300 million fund focused on play-to-earn and GameFi. Andreessen Horowitz valued Sky Mavis at $3 billion and recently led a $150 million Series B funding round for the company.

It is important to understand that NFTs in GameFi are not just digital files to be viewed. They can engage in certain activities, interact with other NFTs, and appreciate over time. Imagine this:

Imagine you could earn money by playing Mario Kart. You don't need to be exceptionally skilled at the game, nor do you have to play it 24/7. Because, as long as you want, you can be Mario because you own that character.

Since your Mario is an NFT, it cannot be duplicated. You, and only you, own Mario. Because you own Mario, your kart will always be better and faster than the karts driven by other familiar faces in the Mushroom Kingdom (like Luigi, Toad, and Princess Peach). So, you can get started earning digital currency in the kingdom, and let's call it Mario Coin.

Given the market economy, you might need to pay more for the Mario NFT than, say, the Luigi NFT. But you would also earn more because Mario is the fastest racer in the Mushroom Kingdom. When you log off and return to your daily life, Mario still belongs to you. When you start playing again, Mario is there waiting for you, ready to earn you Mario Coins.

You can sell your Mario to other players at any time. If you play Mario exceptionally well, it might now be worth more than when you bought it. Perhaps you've proven how profitable Mario can be. Maybe more people want to play Mario Kart. Perhaps the value of Mario Coins has skyrocketed because everyone is talking about it on social media.

In short, this is what the "evangelists" of GameFi are trying to build.

Aleksander Leonard Larsen, co-founder of Axie, said, "Players can actually own in-game items, and they recognize that these game items are scarce, which is much more real than seeing someone on the street with an LV bag. You have no idea if that's real. Your skepticism fits perfectly in today's world because everything is so fake. What blockchain brings is trust, and that trust extends to digital assets."

Crypto Tokens

As Axie continues to attract players, the value of Axie Infinity Shards (another token in the game) has skyrocketed. AXS has risen from $3.22 in June to about $136 now, even as some more popular cryptocurrencies are in a downturn.

This negative state has not spread to game users, especially players from developing countries. Chat rooms are filled with stories about how Axie helped them get through tough times during the pandemic lockdowns, even earning enough money to buy homes.

In the Philippines, Axie is also immensely popular. Red Bantilo turned to the game after losing his job as a fitness trainer. His wife also quit her nursing job due to anxiety during the pandemic and is now a loyal Axie player.

34-year-old Bantilo made a small initial investment to acquire 130,000 Axie tokens. His investment is now enough for him to purchase health insurance, and he hopes to earn enough to renovate his house in Bulacan. Additionally, he has funded 28 scholars.

Shreyansh Singh, head of NFTs and gaming at Polygon, stated that major game studios are continuously monitoring this situation. He predicts that the shift to play-to-earn will be slow and difficult, but this transition seems "inevitable." "They can't give up what they have and jump onto a brand new ship," Singh said of the gaming lords, "they don't want to upset their users."

Countless obstacles are approaching. Thomas Olsen, a partner at Bain & Co., stated that game developers are trying to establish "Know Your Customer (KYC)" functionalities similar to those banks use to track illegal funds. The entire financial world is shifting towards blockchain-based technological development.

"In the next 10, 20, or 30 years, all assets will be tokenized," Olsen predicts, "all stocks, all bonds will be on a digital asset platform built by today's crypto experiments."

Virtual Currency

Nick Kneuper's company is launching a game called Crypto Raiders, which he refers to as "World of Warcraft in NFTs." He has a team of about 10 people and around 1,800 players. They initially priced their NFTs at $45. Within three months, these NFTs rose to $680.

31-year-old Kneuper is aptly called the "Head of Growth." But will uncontrolled growth lead to problems? Second Life has existed since 2003 as a precursor to the NFT online world, with its regulated economy primarily for entertainment rather than profit. Compared to the extreme fluctuations in token values in the cryptocurrency space, its virtual currency, Linden, is very stable.

"The real challenge," Kneuper says, "is creating a balanced game." Too many players earning excessive digital currency could effectively disrupt the game economy. What would happen if suddenly millions wanted to play Axie tomorrow, or if for some reason, the SLP that players have been pursuing for hours, days, weeks, and months suddenly crashes?

In such a scenario, the problems players encounter in the virtual world would explode. Kneuper says that the future metaverse economy will need to be managed like our real-world economy. His prediction is: "Those with economics degrees will be the target hires for NFT gaming companies."