Overview of the Digital Identity Market Structure: Who Will We Become in the Metaverse?

Original Title: 《Digital Identities Market Report: Who will we be in the Metaverse?》

Written by: web3 Studios

Compiled by: angelilu, Foreignsight

TL; DR

This report discusses what digital identity means for us as humans and why we need digital identities, the pros and cons of the real world vs. the virtual world, and the role of digital fashion in achieving self-expression.

To write this report, we collaborated with professionals from the metaverse, NFTs, and other institutions. We conducted an in-depth study of the current market structure and dynamics.

Everyone is talking about the metaverse—a new mode of human interaction. It is set to become the next trillion-dollar opportunity in the tech space, with more and more companies showing interest in immersive virtual spaces. These spaces will allow customers to travel beyond the limits of what is physically possible.

Significant investments from businesses have driven a sharp increase in attention, as these companies seek new ways to interact with customers, and venture capitalists look to fund the next generation of unicorns. Entrepreneurs are building new worlds and creating innovative ways for people to interact.

Our main point is that the digital identity market is still in its infancy—but it will experience exponential growth in the coming years.

We predict that by 2030, the digital identity sector will generate over $600 billion in revenue, as people's lives increasingly shift to the digital realm. The answers to some core questions about digital identity in this report will become even more important:

• What should our digital identities look like in the future, and why?
• What are Web3 native companies and established brands doing?
• What will happen in terms of mergers and acquisitions in this field?

Various companies are building the infrastructure for digital identity, creating an ecosystem that can be categorized into different types:

When expressing a person's digital identity in virtual spaces, Avatars play an important role.

Large tech companies and emerging third-generation internet companies are leading the way in enabling digital identity across vertical industries.

Digital fashion provides a way for subtle self-expression in digital spaces, and established brands in the market are beginning to recognize its value, investing heavily in this area.

Startups are creating foundational concepts, and in addition to work on visual expression, many are striving to address the trust gap in digital identity. In this regard, cryptographic credentials seem to offer a promising practical concept.

Two main aspects are driving M&A activity in this field:

• Large companies are trying to get involved by acquiring smart teams and internalizing technology.
• Large companies are horizontally expanding their products by acquiring adjacent businesses or vertically integrating parts of the value chain.

What is the Metaverse

In simple terms, the metaverse does not have a precise definition. Is it a replication of the real world in the digital realm, or is it a product of immense imagination?

Brian Trunzo, head of the metaverse business at Polygon Studios, states that the metaverse represents a new digital realm that will improve the relationship between consumers and businesses. Digital identity will play a crucial role in this, allowing users to have data ownership and decide how and when their data is used.

The exact definition of the term "metaverse" is under discussion, and perhaps a clear definition is not needed right now. The development in the coming years will be different; who would have imagined what the internet would look like ten years ago? We must keep our minds as open as possible, eliminating the psychological constraints that these definitions impose on our imagination to truly embrace this opportunity. Here are some directional characteristics to help you perceive the metaverse:

• Interoperable identities
• The fusion of digital life and real life
• Carrying identity and property through NFTs
• Cross-space mobility
• Real-time interpersonal interaction

1. Opportunities for Brands

It is most likely that there will not be "one metaverse," but rather many separate metaverses, which may be divided into different themed metaverses, some of which will be interconnected for interoperability.

2. Brands Entering the Metaverse

3. Five Major Events in the Metaverse

• The metaverse is a hub for gaming forums, advertising platforms, and social interactions.
• Huge opportunities for merchants and creators—Nike acquired RTFKT, Adidas acquired NDFKT, and Microsoft purchased Activision.
• Consumer interest is rising—searches for the metaverse on Google Trends increased by 2200% in 2022.
• NFTs are key—digital ownership is becoming a reality.
• Human creativity is elevated to a new level—free from the constraints of the physical world.

Digital Identity: Who Will We Become in the Metaverse

1. From Physical Identity to Metaverse Identity

• Physical identity: Includes your appearance, where you went to school, where you live.
• Internet identity: What you searched for, what you bought, what you said online.
• Metaverse identity: Your domain name and virtual address.

What we refer to as metaverse identity is the connection of your physical and internet identities with your digital identity. A digital identity will only exist if you choose to have one; you can control your interactions with others and manage the information about your personal identity. The necessary support layer is a decentralized platform built on public blockchain technology.

2. Avatars: Digital Identity is Taking Shape

An early concrete manifestation of digital identity is the world of Avatars, which is also an extension of us in the virtual realm. There are no restrictions on the appearance of these Avatars, but there are differing opinions. Large tech companies like Meta are striving to design avatars that closely resemble our real identities and equip them with purchasable clothing from well-known brands, focusing on achieving a virtual representation of a person's real-world characteristics.

On the other hand, some voices argue that digital identity should emphasize anonymity and diversity in the virtual world, breaking the long-established patterns and limitations of the real world, such as living environment, socioeconomic status, gender, and physical characteristics.

Sorry Meta, this is not what Avatars should look like. Avatars are our new digital identities in the metaverse, allowing us to unleash our imagination, seize this opportunity to become who we truly want to be, and build a more inclusive and diverse digital nation. ------Sebastiel

Without judging the correctness of either viewpoint, ultimately, we need this two-dimensional/three-dimensional version to interact with virtual services.

Digital Identity Avatar Map

Compared to humanoid Avatars, abstract Avatars have the following characteristics:

• True self-expression: Can dynamically change based on role, mood, or opinion;
• Social class mobility: Disabled individuals can express themselves online without restrictions;
• Open diversity: Can experience the feeling of being different races, genders, or even species through various Avatars;
• Interactive design: Breaks the interaction limitations of humanoid Avatars, which are limited to talking, dancing, and playing games;
• Greater creativity: Opens up new design possibilities in virtual storytelling, visual arts, and entertainment.

3. Digital Streetwear

The new Web3 model provides unprecedented opportunities for the digitization of the fashion industry. In recent years, we have observed three main trends and participants in digital fashion:

• Newly created Web3 native digital fashion brands
• Physical brands launching NFT-based digital fashion collections
• Digital fashion infrastructure layers (such as marketplaces, showrooms, creator tools)

According to data from McKinsey, global spending on virtual fashion goods exceeded $30 billion in 2021, accounting for 2% of the global fashion market. However, as the adoption of the metaverse and digital identity continues to grow, more market opportunities will be developed.

Megan Kaspar, co-founder of Red DAO, states that there are five main trendsetting use cases for on-chain digital fashion today: investment, digital tailoring, 2D wearables, 3D wearables, and supply chain proof.

Three driving factors can trigger the adoption of digital fashion, one of which recently occurred in China. The Chinese version of Instagram—Xiaohongshu—has over 148 million daily active users and recently launched an NFT marketplace. AR digital fashion is a major driver of sales and is the most popular case on the platform.

4. Making Digital Identity More Trustworthy

In contrast to the real world, digital identity recognition adopts a cryptographic trust foundation rather than a humanistic trust foundation.

Web3 offers new possibilities for security and privacy control, and cryptographic credentials can be promoted for use in metaverse applications with digital identity. Although these credentials may ultimately become very complex, wallet addresses and histories are already a good starting point.

Digital Identity Market

1. Digital Identity Ecosystem Map

While many emerging concepts have just been created, the first segment of the digital identity market has already appeared.

• Virtual Worlds: Platforms like The Sandbox, Decentraland, and Somnium Space are building NFT-native worlds, allowing users not only to truly own their identities but also to own land and items within the world.
• Avatars: Facilitate the realization of digital identity; communities, brands, or creators can develop their own series of Avatars, including matching fashion collections.
• NFT PFP Collections: Owning an NFT can grant access to corresponding communities, giving a sense of belonging or perspective on certain matters.
• Digital Identity Infrastructure: Addresses the trust gap in digital identity and ensures security and privacy regarding identity.
• Digital Fashion: Aims to provide people with various clothing options that suit their personalities and environments for their digital identities.

2. Market Size: How Significant Will the Impact of Digital Identity Be?

We believe that the economic value of the digital identity sector will experience exponential growth over the next decade. Unlike other technologies from the Web 2.0 era, digital identity no longer needs to build the basic technological infrastructure from scratch. The open-source nature of Web3 accelerates the software development cycle. Additionally, consumers are increasingly enthusiastic about their digital identities and willing to pay for them.

We expect that by 2030, the digital identity sector will generate over $600 billion in revenue.

Acquisitions—Expanding the Ecological Landscape

In any innovation cycle, as an industry matures, network effects and economies of scale become more apparent. Larger participants expand their service offerings through horizontal acquisitions of adjacent businesses, such as the decentralized cryptocurrency exchange Uniswap acquiring the NFT marketplace aggregator Genies, or through vertical acquisitions, such as the NFT marketplace Opensea acquiring the NFT marketplace aggregator Gem.

• Research-driven acquisitions
• Integration and decentralization

Conclusive Thoughts: Why Get Involved Now

Who will we become in the metaverse?

This question will largely determine who will participate in value creation, naturally leading to a range of different stakeholders with varying interests.

Tech giants like Meta are striving to connect real identities with humanoid Avatars to bridge the gap between social media and metaverse roles.

The Web3 community also has different factions, closely aligned with the core ideas of decentralization and community ownership, calling for anonymity and diversity in the virtual world.

Avatars are a starting point for expressing part of our digital identity, but to truly reflect our uniqueness and the complexity of the self while ensuring their security, the correct concept needs to be found in practice. Currently, early experiments with programmable public blockchains are creating new opportunities. Web3 companies, enterprises, institutions, and end-users will need to maintain an open mindset to shape the future of digital entities.