The 'Metaverse Primer' recap by MetaPortal - Part VII
Payments, Payment Rails, and Blockchains, and the Metaverse
Before we dive into today’s article, we wanted to briefly mention our friends at Metamundo.
Metamundo is a “platform for 3D creators and collectors to buy, sell, mint and license high-end, interoperable 3D NFTs (think buildings, vehicles, interior furniture) ready for use across the metaverse.”
They are currently hiring for a range of roles from an NFT marketing guru to a financial controller. If you want to work with a top team and contribute to the development of an interoperable Metaverse, check them out!
Okay, time to recap Part VII of the “Metaverse Primer”, which focuses on payments, payment rails and blockchain (FINALLY!). Now, the original piece is almost 10,000 words long. Really. That’s like 30% of all the words in the 9-part Metaverse Primer. Let’s see if we can work our magic and sum it up in under 1,000 words! (spoiler: we failed!)
For this article, Matthew defines Payments as “The support of digital payment processes, platforms, and operations, which includes fiat on-ramps (a form of digital currency exchange) to pure-play digital currencies and financial services, including cryptocurrencies, such as bitcoin and ether, and other blockchain technologies.”
For the Metaverse vision to succeed, it needs a thriving economy with competition, constant innovation, capital mobility, etc. This requires appropriate, digitally-native payment rails and services, which we don’t currently have. The article provides an overview of traditional payment rails, then describes the status quo for Metaverse payments (Metaverse here is mostly gaming) and, finally, talks about the potential of blockchain technology as payment and ownership rails for the Metaverse.
The Major Payment Rails
We have to shrink this section quite a bit, but it basically describes the traditional options folks have for moving money around (US-centric). These payment rails have become more critical over the years, as non-cash transactions as a percentage of total volume have increased.
In the US, there are “ACH (“Automated Clearing House”), Fedwire, CHIPs (“Clearing House Interbank Payment System”), Credit Cards, PayPal, and peer-to-peer payment services like Venmo.” Wires are generally pretty expensive, ACH is cheaper but takes a couple of days, credit cards are easy for the consumer but cost merchants between 1.5% and 3% of each transaction and digital payment networks are mostly US only, free for users of the same network, but rely on ACH and credit cards when interacting with outside networks.
“The various US payment rails tend to trade off security, fees, and speed.”
However, Matthew highlights the competition and abundance of choices more than the technical attributes. We can say much more about traditional payment rails, but this is not the article for that.
The Fight to Control Payments in the Metaverse
Alright, so this section talks about the payment options for the virtual goods part of the economy, things like in-game purchases, apps, etc.
"Roughly $54B was spent on virtual goods, skins, and lives last year, compared to $42B at the movie box office and $30B on recorded music in 2019."
The current state of payment rails in the Metaverse really comes down to platforms and their policies to lock in users and developers while getting a cut of as many transactions as possible. This means that consumers have fewer choices, and the actual virtual economy is severely restricted. Let's see how.
We know that console platforms charge game developers 30% of post-tax revenue, which also applies to microtransactions and DLC content. This dates back to when games had to be manufactured (cartridges), not just licensed. That no longer holds today, but the fee structure hasn't changed.
The argument used by Sony and Microsoft is that they sell the PlayStation and the Xbox below cost, which grows the market for developers to sell their games into. These companies also provide additional services, do platform maintenance, etc. Now, some of these things make sense, and some don't. Overall, it's pretty challenging to say what the fair price is for these services. A recent developer poll, for example, shows that a 10-15% cut would be more appropriate.
However, a bigger problem is that the likes of Apple adopted this 30% platform cut. Unlike consoles, Apple doesn't sell hardware at or below cost and doesn't provide additional services like player network, game communications, or achievements. Also, no one buys an iPhone for gaming, so arguably, it doesn't really grow the market size for developers in the same way consoles do.
So, to sum up, traditional payments take a bit of time but are relatively cheap and are 1.5% to 5% in extreme cases. But selling virtual items as a developer (which ultimately affects consumer choice) costs 30%. Remember, we are looking at it from the business/seller point of view.
When it comes to the Metaverse, we need many people building experiences to enable a rich and immersive virtual environment. But developers are hamstrung in what they can do due to platforms and their control over distribution, payments, player data, etc. This limits competition, innovation and, in turn, the size of the Metaverse economy.
We covered Apple quite a bit in the previous article about platforms. But let's add a few more things. For example, Apple prevents any iOS browser from using WebGL, making it impossible to develop rich browser-based games and experiences, locking developers into the App Store. Apple also doesn't allow apps to use its NFC chips for payments, making sure Apple Pay is the only app that can do that. It claims it's all in the name of security and performance.
Then there's a problem of interoperability. Basically, in-game currencies, achievements and cosmetics only exist on a given platform and do not appear elsewhere. V-bucks purchased on PlayStation do not exist on Xbox and so on.
Lastly, let's talk about economics. We briefly covered this subject in our article on NFT gaming vs. traditional gaming. Let's use Roblox as an example. Roblox has an operating margin of -25%. That's right, negative 25%. Why? The main reason is that they have to pay Apple 30%. You add infrastructure costs and overhead, that's another 40% gone, which doesn't leave much to pay developers who are building the UGC content Roblox is famous for and still invest in the platform itself.
"If value in the Metaverse will be primarily driven through virtual worlds and virtual creations, rather than better phones, then we want the most profits going to developers of the virtual platforms and the developers on them. However, you can't access the Metaverse except through hardware, and every hardware player is fighting to be the (or at least a) payment gateway to the Metaverse."
This is part of why most current Metaverse projects in crypto, be it Decentraland or Axie, run in a browser or require you to download a standalone application.
The Challenges of the Proto-Metaverse Economy
We are going to shorten this section considerably. Here, Matthew mostly talks about the importance of interoperability, using in-game currencies as an example, and ownership of your assets. Both concepts are valued highly by the crypto community, which brings us to blockchain.
The Potential of Blockchain and the Metaverse
We certainly hope that most of our readers can write this section themselves! We know that blockchain is the future. Yes, gas is pricing out a lot of people on Ethereum L1. There are energy consumption and storage issues (most NFTs use pointers to off-chain data that can be fragile). There are other issues.
However, public blockchains are permissionless, trustless and credibly neutral. The in-game currency fragmentation is not a problem in crypto. Most in-game items and NFTs are traded in ETH or another token, which can all be exchanged back into USD or anything else for that matter. NFTs themselves represent true ownership of digital items. You buy a skin for your Axie (there aren't Axie skins, just an example); you own it and can do whatever you want with it. Furthermore, blockchains offer a near-instant settlement, on and off-ramps have no real gatekeepers, and the future will likely see much lower transaction costs than legacy solutions. These characteristics make blockchains more developer-friendly and should, in theory, lead to much more significant economic activity and innovation.
We also have tokens that change the game regarding bootstrapping adoption, revenue models and marketing. And with smart contracts giving us the ability to implement features like seamless royalties, revenue leakage from enabling cross-play and interoperability is no longer an issue for developers.
Matthew also briefly touches on DAOs. His main point is that DAOs are a quick, easy and inexpensive way to organize and fund initiatives that contribute to the development of the Metaverse. We, at MetaPortal, believe that DAOs are the future of human coordination and, indeed, a future of work. We certainly expect them to play a prominent role in building out the open and interoperable Metaverse we all want to see.