(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
Looking back on recorded human history, it becomes apparent how much luck played in the circumstances of our modern existence. Readers of this blog– using internet-enabled devices,sitting in climate-controlled environments, and discussing the best way to allocate modern excess income– are some of the luckiest humans on the planet. The most likely outcome of the ovarian lottery is starvation, slavery, mindless toil, and/or brutal combat. We don’t like to admit the role luck plays in our existence, because it directly conflicts with the notion of self-determined life outcomes.
However, as modern citizens of various nation states, we strive to create level playing fields where individuals can achieve a life of plenty, regardless of their birth conditions. Some countries are more successful at this than others, but in general, things are admittedly a lot better than they used to be — thanks in large part to our most effective field-leveling ideas spreading more easily through international travel and the web.
Nation states have always been a collection of humans who share similar beliefs. A nation state is a squiggly line on a map with a founding story / myth to confer legitimacy on the ruling governing body. Those heretics who live amongst us are either tolerated, expelled, or slaughtered. The number of users or subjects contained in a nation state at a macro level determines the resources their governments can draw on. That is why governments pay great heed to demographics.
The inclusive or extractive nature of a particular government determines its tolerance for the free movement of people. Because if your territory’s power rests on ideals that favour only a small fraction of society, and the switching costs are low enough, people leave. People move because of ideological issues they have with the dominant story or narrative, and/or due to a dearth of resources / opportunity.
The pre-COVID affordability of global travel is an anomaly when viewed over the span of human history. It has not always been — and in some places still isn’t — a given that if you want to practice a certain religion or work in a certain industry, you can just purchase a budget airline ticket and restart your life multiple times.
COVID and the different responses of governments vis-a-vis immigration has shattered the mobility of humans. The location of the womb out of which you emerged is more important than who you are as a person. For those of us used to the mobility and freedom to self-select the community to which we belong, this new reality is infuriating. But this is just a reversion to the mean.
There is hope. 60% of the world is connected via the internet. That is larger than any make-believe nation state. The COVID induced lockdowns accelerated the adoption of all internet-enabled activities. While many of us cannot physically visit our fellow humans in other countries or even our next door neighbors, we can all commune online. That does not diminish the importance of physical interactions; however, unless we are all ready to rise up and usurp the bone-headed politicians in charge of the global COVID response, our reality ain’t changing.
The cost to associate with those who share our same belief systems through the internet has plummeted to almost nothing. At a fundamental level, the new make-believe nation states of the now and future are collections of avatars in various metaverses. As intra-metaverse distinct economies emerge, the ability to “move” to better one’s station also plummets to almost nothing.
The question now is, what types of metaverses will emerge? This essay posits that there will be two types of metaverses: corporatist or closed metaverses, where activity is hemmed in via explicit rules, and creativity is channelled into “acceptable” outcomes; and community or open metaverses, where any and all activity is permitted, and human creativity is allowed to roam free. Because switching costs are zero, open systems, while more expensive to maintain due to a lack of direct profit motive, will over time destroy the initial success of corporate closed metaverses. And of course, the community metaverse will need a community currency … y’all know what time it is. Cryptocurrency will be used exclusively to power the largest silicon nation etched on wafers on planet Earth.
Cancelled
Social media revolutionised the way in which we congregate and communicate. Initially, it was a free-for-all. The major American and Chinese tech platforms, which contain most of the world’s social media users, allowed complete freedom of expression. As the obsolescence of television and printed news became clear, governments on both sides of the ideological spectrum woke up to the “danger” of social media. The ways in which big tech social media platforms were brought to heel illustrates the respective “-ism” a particular government practices.
In China, the Party essentially controls everything. Every post is monitored and overtly censored, and self-censorship is rampant, lest you be deplatformed as a user and suddenly lose the ability to communicate with anyone.
In the “West,” or so-called liberal democracies, the big tech platforms were threatened with the cessation of the limited liability they enjoy from the content posted on their platforms. The giants like Facebook, YouTube, Twitter etc. have whole departments tasked with censoring what they unilaterally determine to be “fake news”. Should you or your business run afoul of these nebulous rules, you are “cancelled”.
Remember Parler? It was a social media platform that became a home for those on the political right in America. Their users challenged the dominant narratives pushed by many of the establishment media platforms, and the company got cancelled.
The moral of the story is that centralised communication platforms will always tend towards illiberalism, because every nation state has an approved story and its longevity as a nation is contingent on as many citizens believing that story as possible. Freedom tends to be a bit of an illusion, and laws can always police the centralised entities that provide the space for interactions.
As metaverses mushroom, the big global tech platforms must provide a product for the people. Because if the people would rather spend two hours daily in the metaverse rather than on TikTok, Instagram, or Weibo, then big tech platforms must adapt. Facebook is already aggressively investing in hardware to power a virtual metaverse, and every other large social media platform will follow.
The most immersive and impressive centralised metaverses will be developed first by corporations. They can unilaterally direct resources at the behest of a small senior management team. Given that big tech companies are the most profitable and well-capitalised entities on Earth, they alone can invest the billions needed to build the infrastructure that powers the first metaverses.
Remember that, while big tech currently extracts the most rent from the internet, it is ISPs and telecommunications companies that spend the billions of dollars of CAPEX necessary to build and maintain the physical infrastructure required to power the internet. Google, Facebook, Tencent et al. are the new telcos in the metaverse-driven world we are trending towards. They will bear the immense cost to develop the wearables and servers to power our new digital metropolises.
How will they convince us that the metaverse is where we should hang out? They will allow human creativity to flourish. And there will be no cost to participate. Imagine, your meatspace life is dictated by crushing lockdowns, lack of economic opportunity, or lack of free expression– but now you can create a new you inside a slick metaverse. The adoption curve will be one of the fastest ever once the hardware, software, and networks create the first truly immersive experience.
Everything is possible inside the metaverse. You want to flex? Get some NFTs. You want to build a cool pad? Hire a metaverse architect, purchase some digital land, and build your palace unconstrained by the physical laws of nature. You want to meet the love of your life? Your possible matches for a life companion number in the billions, rather than who is physically proximate to you. Many of us think that metaverse interactions remove the je ne sais quoi or serendipity of life, but that is just because we grew up in an analogue era. Children today clutch a smartphone in their hands before they can walk, and are the star of an Instagram page the moment they emerge from the womb. In short, the ways in which humans socialise are evolving.
What does it mean to be a citizen of a physical space when your personal fulfillment occurs exclusively inside a corporate, walled garden metaverse? While governments aren’t hip to this existential question currently, when they witness trillions of Zuck bucks worth of economic activity occurring inside a realm where they have zero control, watch out. Pledging allegiance to the metaverse, rather than the flag, is not a desired outcome.
And then the restrictions will slowly begin as pressure mounts to control what is acceptable behavior inside a metaverse. The corporations will hem and haw, but because they are the single points of failure, they will comply. And slowly, creativity will be channeled into acceptable canals of behavioural outcomes. And then the small, shittier open metaverses will start feeling the love of users. This process may be quick or slow, but it has been roughly 13 years since the smartphone busted onto the scene with the first iPhone. While there are billions more users than back then, the range of acceptable thought has narrowed considerably. I predict the transition from closed to open metaverses will happen faster due to the mindshare captured already by Bitcoin and DeFi.
Open Sesame
Humans will spend the majority of their time inside the metaverse only when the hardware powers a rich virtual experience. We are not there yet. The cost to develop the perfect experiential apparatus for traversing the metaverse will run in the billions and be borne by a few large tech companies. The best hardware will power closed systems exclusively at first. It is not in the interest of big tech to spend shareholder money on developing kick-ass hardware and then open source it for the world.
While there are and will be many community-driven projects developing rival digital universes, without the hardware, the experience will be subpar when compared with the centralised offerings. The belly of the Gaussian distribution will only value decentralisation after their freedom is expropriated.
No problem, though — this gives community projects more time and more information to construct a richer and freer environment. Developing an open platform that allows for maximum human creativity is extremely difficult. Prescriptive systems are easier to build because you can narrow the universe of permitted expression and activity. Open communities can learn from closed systems what works and doesn’t, without spending their scarce resources.
As with everything in this new crypto age, projects will issue tokens to fund the initial and ongoing development of a particular open metaverse. The big issue that metaverse tokenomicists must solve is how to create a circular economy that can pay for the cost of hosting the environment. The token must possess an innate value vs. the dominant energy token accepted by hosting companies.
Everything in this universe costs energy. To host billions of humans in a virtual world requires real world infrastructure. Whether it’s through transaction taxes within the metaverse, or a per byte fee charged while inside, the cost of servers must be paid by the participants. The most successful platform will ultimately be able to allow an initial zero or very low upfront cost to enter the metaverse, but because of the surfeit of activity, taxes can be levied to cover infrastructure costs. It will be interesting to witness the various economic models with which platforms experiment. Most will fail, but there will be a clear winner.
The evolution of the Decentralised Autonomous Organisation (DAO) will allow for effective decentralised governance of the most successful open metaverses. DAOs must become extremely effective at balancing the different needs of participants and come to decisions in an acceptable timeframe such that open metaverses can be governed effectively. The DAO is the bulwark against the illiberal tendencies of centralised systems. The more specific human egos involved in governance of a metaverse, the more susceptible the metaverse is to attack and censorship.
The final and most important question is, how does the governing DAO pay for the energy needed to operate its metaverse? Thinking machines require a currency that is digitally native and a pure representation of energy. That is Bitcoin. The Proof-of-Work process intentionally burns energy in exchange for a native token. Bitcoin is the most liquid and safe cryptocurrency in existence. Therefore, the (Metaverse Token / Bitcoin) exchange rate will become extremely important.
The USD is valuable because hydrocarbons that power our lifestyle are priced in these units. It allows the issuing organisation the privilege to print infinite amounts of money in exchange for real goods and services. Open metaverses that eventually contain billions of users, and consume immense data, must pay Bitcoin to the machines that underpin the network. This is another and possibly the most important pillar of demand that will underpin the value of Bitcoin. There is no actionable trade idea based on this theory other than simply HODL’ing.
The Logical Outcome is Metaverse
Many of us cannot imagine a world where the majority of our waking hours are spent inside a virtual world. Would visiting aliens be perplexed by a race of sentient beings sat in contraptions to illuminate a virtual world, rather than physically interacting with one another? Maybe, but if said aliens spent time studying the civilisation arc of humanity, they would discover that the last 50 years are the exception and not the rule.
The metaverse is an answer to the scourge of communicable disease available to humans only through our technological advancement. Without our current technology, when faced with a fast spreading virus, the current policy options would not be available to us. And given that the acceleration of internet-enabled activities happened only after we shut down the world economy to fight a virus, the Metaverse is just the next step in the evolution of a global society willing to sacrifice personal liberty in the fight against COVID and other similar scourges.
Mean reversion is a bitch.
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