The next version of the Internet will expand blockchain technology applications, morphing into a creator-driven, decentralized marketplace. Facebook is changing its name to Meta Platforms and spending $10 billion in 2022 alone to further develop the virtual reality called the Metaverse. The media has both embraced these future evolutions of technology as inevitable, compelling, and visionary, or denounced them as simply marketing hype or unrealistic. With the vast amount of money and brain power devoted to the creation of Web3 and the Metaverse investors need to be aware of their issues and potential.
The Internet has evolved as technological advancements coupled with enhanced applications have allowed greater utilization by a broader base. The first version of the Internet – Web 1.0 – began around 1990 through the mid-2000’s. It consisted of website developers providing static content from files (versus databases) for consumers in text or image formats, with limited interactivity between sites. It can be considered the “read-only web” where website development was key.
Web 2.0 is today’s Internet, also known as the “participatory web”. It is much more interactive and social. The explosive increase in app creation has allowed anyone to create content, not just developers. It is simple to use and universal. Data, centralized at a few mega-tech search engine and social media companies, is now the key factor. However, according to techno pundits, it is this centralization of data that will bring about the next iteration of the Internet: Web3.
Web3 (not sure why it is not called Web 3.0) will combine blockchain technology with decentralized peer-to-peer networks. The “cryptoeconomic protocols” will eliminate the need for data to be stored in the cloud or servers, which are currently centralized and thereby controlled, monitored, protected, and governed by a handful of mega-cap technology companies.
This decentralization of data will transfer power from corporations to individuals, establishing a blockchain-based network that is verifiable, self-governing, and distributed. In a perfect Web3 world, data and its applications will no longer require the constructs or controls necessary today for commerce or economic activities. Corporations will be replaced by Decentralized Autonomous Organizations (DAOs) and create “micro economies” where individuals collaborate on a blockchain to create and sell (predominantly) services. Similar to cryptocurrency miners, those that add to a product’s infrastructure – the coders – will be issued utility tokens as compensation.
These tokens may rise in value because others see value in the product and can be traded or exchanged. Token holders also have an equal vote to make product decisions (one vote no matter how many tokens one holds) thereby democratizing economic decisions. This “tokenization” becomes a different means of obtaining capital – basically digital crowdsourcing using tokens instead of equity. Also, these micro economies will utilize native payment – through cryptocurrencies on apps such as Stripe, PayPal or Square – which is the direct payment between consumers and producers, eliminating retail middlemen and financial intermediaries. In Web3, coding becomes key.
According to Chris Dixon, partner at venture capital firm Andreesen Horowitz, Web3 is where “cryptonetworks combine the best features of the first two internet eras: community-governed, decentralized networks with capabilities that will eventually exceed those of most centralized services.” However, the progression to Web3 will not be without challenges.
A main component of Web3 is decentralized finance, or DeFi. However, DeFi disregards the basic economic principles of
A productive, inspirational leader is necessary for almost all companies or groups to survive or thrive. The committee-type leadership of DAOs, while “democratized”, will prove less effective and profitable than businesses with a decisive leader, one who is capable of implementing a strategic plan and reacting swiftly to the dynamic forces it operates within. Just think of the effectiveness of the various committee meetings in multiple organizations held each day. They often delay decisions, fall into groupthink, or become political, all impeding success.
Another issue facing Web3 is compensation. While workers may receive tokens as payment, what happens if the decentralized “cryptonetworks” within these micro economies fail to produce? There are concerns that Web3 will create a fragmented economy of side hustles without the productivity, profitability, motivation or employment that corporations create in our current economy.
Web3 will probably evolve similar to cryptocurrencies. ***link to Cryptocurrency article**** Utilizing blockchain technology to encrypt and regulate the generation (mining) of units and to verify transactions, cryptocurrencies are also decentralized, which means they operate outside any government or central bank.
However, while the initial developers sought to create a means of exchange outside the established structures or controls, cryptocurrencies have only become mainstream at all due to the gradual inclusion and adoption by established companies and governments.
Likewise, the next version of the Internet will employ blockchain technology to improve security and increase individual and small crypto-based DAO production and creativity – think an explosion of a wide variety of goods and services akin to NFTs. Yet, economic power and control will reside with corporations and governments, who, while transitioning to Web3 by adopting blockchain and developing their own internal DAO structures, will continue to provide the frameworks, funds, leverage and support necessary for economic expansion and financial health.
The Metaverse is an alternative, virtual reality where our avatars can work, shop, entertain, travel, go to concerts, do almost anything one can do in the real world. And then some! Unlike the real world, the Metaverse is not constrained by physical limitations or realities but bounded only by our imaginations and ability to create them in seamless virtual world. But is this new dual existence feasible, and more importantly for investors, profitable?
Some may remember Second Life, one of the earliest digital reality worlds launched in 2003. Players used avatars, individualized personas, to socialize with other players and purchase stuff using real money. While still operating, Second Life never gained significant traction as MMORPGs (Massively Multiplayer Online Role Playing Games) like Fortnite and World of Warcraft became increasingly popular. These video games are the foundation for the Metaverse, validated by Microsoft’s recent $68 billion bid for gamer Activision Blizzard.
The initial gaming phase utilized PC and TV screens to immerse a player into the virtual world. While graphics improved over the years becoming more “real”, it is the advent of VR (virtual reality) and AR (augmented reality) headsets, and eventually glasses, that has excited both consumers and tech companies. Virtual reality immerses one totally in a virtual world while cutting off the real world completely. Augmented reality superimposes digital content onto one’s vision of the real world. Both will require cordless headsets or glasses to unlock the Metaverse’s full potential. These untethered devices will provide freedom of motion and full immersion.
These headsets and glasses are seen as the key to unlocking the full potential of the Metaverse. They will bring the Metaverse beyond gaming and into the marketplace and office, where consumers can purchase an almost unlimited amount of goods and services provided by almost any company, and businesses can utilize VR or AR to expand their global reach/connectivity, enhance their R&D and enrich their workplace environment.
Of course, these marketplaces will be created by the mega tech companies who will also act as fee-charging gatekeepers. It is this creation of a new market – and the potential revenues – that will incent companies to pour billions into Metaverse development for the foreseeable future.
Microsoft’s CEO Satya Nadella has stated that the Metaverse will provide individuals, corporations, and governments with choices as to how they want to interact digitally with the world. While gamers today can purchase “hides” or costumes for their role-playing avatar, in the Metaverse consumers besides gamers will be able to buy anything to make their virtual reality what they desire. While you may nor be able to afford a Ferrari in the real world, your avatar can drive one in the virtual world for a fraction of the cost. All types of entertainment beyond games – movies, concerts, travel – will be available wherever and whenever.
Also, as described by Strategic Horizons’ founders B. Joseph Pine II and James Gilmore, “consumer values have shifted greatly over the years, most notably from goods and services to experiences”. The Metaverse will supply the “Experience Economy” end users with the ability to explore and discover an infinite number of destinations and events in the real and virtual world. All types of entertainment beyond games – movies, concerts, travel – will be available wherever and whenever.
Companies will also utilize features of the Metaverse. A multitude of applications, from training sessions, employment interviews, meetings to any other normally in-person task, can be accomplished in virtual reality. As we have learned through the COVID pandemic, many corporate actions can be accomplished remotely. The Metaverse can be considered Zoom on steroids! Through augmented reality, workers will be able to access information, perform analysis, communicate and collaborate globally by wearing headsets or glasses. It like wearing your laptop or smartphone on your head! Governments and militaries too will employ the Metaverse for training and war game-type simulations.
While this all sounds wonderful, the Metaverse is mostly conceptual. And the technological obstacles are not small. To be successful, beyond video games, the Metaverse will need to physically embody a person digitally into the virtual realm. As VR market analyst Stephanie Llamas of VoxPop points out: “presence is the key”.
One will need to fell fully present in the virtual world for it to be worthwhile. And pay money to exist there. But is that possible? It is never wise to argue against technology, especially when billions of dollars are being thrown at a problem by the giant tech companies. However, while many compare the current stage of the Metaverse to the early Internet, it remains to be seen if there will be mass appeal or if there will only be specific niches where the Metaverse will be profitable.
Due to the amount of uncertainty regarding the success or even basic structures of both Web3 and the Metaverse, it is difficult to focus on only a few companies and hope they are the winners five or ten years from now. Investors should look to invest in a basket of stocks to minimize their risks. There are, however, two themes which appear to be central to the realization of Web3 and the Metaverse: blockchain technology and VR/AR headsets/glasses. And there are a number of stocks investors can choose to build these portfolios.
Blockchain technology companies run the gamut from financial companies like PayPal (PYPL), Block (formerly Square) (SQ) and CME Group (CME) to technology companies like Nvidia (NVDA), Riot Blockchain (RIOT) and IBM (IBM) to infrastructure software company VMware (VMW) to specialty industrial company Honeywell (HON). These companies are all leaders in integrating blockchain into their internal systems and user interfaces.
Besides the obvious Metaverse-related companies like Meta Platforms (formerly Facebook) (META), Apple (AAPL) and Microsoft (MSFT) there are a number of other tech and gamer stocks that are either developing 3D immersion platforms or producing components for headsets and glasses: Sony (SONY), (Qualcomm (QCOM), Unity Software (U), Immersion Corporation (IMMR), Roblox (RBLX), Snap, Inc. (SNAP) and GoPro (GPRO).
Web3 and the Metaverse are years away. And while there is a great deal of hype and promise for each, it remains to be seen what will actually come to fruition. Can a Web3 economy actually work? Will the masses be willing to spend real money for virtual good, services or experiences? Is a digital world sufficient, or do we progress to VR and AR because we eventually can? Unfortunately, these questions can not be answered today. But investors should understand the benefits of blockchain technology and the massive investment and spending to develop the Metaverse and its marketplace.