Domain Money Advisors, LLC | 2/4/22
As we look ahead to the future of the internet, we see parallels to the opportunity seen 20 years ago, when one had the opportunity to invest in fundamental pieces of the current internet economy – like Apple or Google. The Metaverse may be a vague concept now, but we view it as a critical investment opportunity in the larger move to Web 3.0.
To properly frame the concept of the Metaverse and Web 3.0, it is helpful to understand the evolution of the internet over the last 30 years. While the internet has technically existed since the 1960s, it was only since the 1990s that a meaningful amount of the population interacted with the internet on a daily basis, so we will start there.
Web 1.0 (1990 - 2005): The web was based on open protocols and accessed from stationary desktop computers.
Web 2.0 (2005 - present): The current incarnation of the internet can be defined by a shift from desktop to mobile computing and the rise of the ‘cloud.’ We believe we are in the middle to late innings of the innovation curve of Web 2.0 (especially in consumer technology) and the leaders (e.g. Facebook, Amazon, Apple, Netflix, etc.) are firmly established.
Web 3.0 (present - future): We are just in the early stages of the internet’s next development cycle defined by -- the Metaverse as the new user experience, blockchain-based asset ownership, decentralized infrastructure, data sovereignty and privacy, creator economy.
Each stage in the development of the internet brought about a new primary user experience (e.g. Desktop Computer -> Mobile Phone -> Metaverse) and Web 3.0 will be no different. Just as the mobile internet was enabled by components of Web 2.0 like cloud platforms, the Metaverse will be enabled by Web 3.0 components, such as decentralized infrastructure, blockchain-based asset ownership (e.g. NFTs) and the creator economy.
The “Metaverse” is commonly referred to as a virtual world in which people gather for various purposes, from socialization to gaming. We think this simple definition is true but misses a lot of what the Metaverse will be.
Is a network of virtual worlds that can be experienced by potentially millions of people in real-time.
Spans the physical and virtual worlds using both Augmented Reality (AR) and Virtual Reality (VR) technology.
Is an open economy where creators, brands and consumers can interact.
Is an open design space for creators to monetize their work.
Is not controlled by one company but rather is designed with interoperability as a key feature so that users can move with their identity, assets and intellectual property from one Metaverse to another, a departure from the Web 2.0 model where users leave this all behind.
Just as the mobile internet is not just a single App – it’s an economy of applications that facilitate modern life – we believe that the same will be true with the Metaverse. The Metaverse will be composed of virtual worlds and virtual elements overlaid upon the real world, known as augmented reality, that when combined will become the primary online venue for spending time with friends, family and colleagues, as well as attending performances, playing virtual games, viewing art, shopping and more.
Once this becomes a reality, doing the same via a mobile phone will likely be an antiquated experience.
As we think about investing in an emerging technology, we find it helpful to create a simple visual model for the entire technology stack to better understand its component parts as well as where value will accrue. The Metaverse technology stack will look like this:
Blockchain Technology/NFTs - Key to the success of the Metaverse will be a well-functioning digital financial system with a clear and efficient mechanism for digital property rights. In order to incentivize creators to build experiences, culture, and art, creators must retain control over the assets they produce and the revenue generated from those assets. Blockchains will evolve to support this value creation across the Metaverse. NFTs (or non fungible tokens) are one such way to record ownership of uniquely valuable assets on the blockchain. We think that NFTs will be the primary ownership mechanism in the Metaverse.
Centralized/Decentralized Compute Resources - The Metaverse will not only require substantial computing resources, but also massive computing innovations. Consider that state-of-art animation studios spend weeks on individual scenes of a movie within a controlled and virtual environment, painstakingly rendering the surroundings and individuals in high definition. Next, consider what would be required to do this in real time for hundreds of millions of users. Intel estimates that it will take 1000x our current computing resources to render a convincing Metaverse.
Therefore, the computational base of the Metaverse will not only rely on the traditional public cloud and edge computing (where computation and data storage are brought closer to the user), but increased innovation like decentralized computing (crowd-sourced from latent computing supply) to effectively handle the load.
Centralized/Decentralized Data Storage Resources - The Metaverse will also need substantial data storage resources. The amount of data that is created, captured, copied and consumed worldwide sits at roughly 97 zetabytes per year and is primarily composed of text, 2D pictures and video.
By moving to a substantially 3D data model used for the Metaverse, we can assume that the amount of data that will be created will likely be at least 1000 zetabytes per year, or about 10x what we currently produce if the baseline doesn't move. We expect that the data storage for the Metaverse will come from a combination of traditional cloud providers as well as decentralized storage that takes advantage of idle capacity.
Decentralized storage has the extra benefit of neutrality, that will help the Metaverse and Web 3.0 more broadly avoid the platform monopolies that have become synonymous with Web 2.0. Imagine the innovation that might occur if the world’s primary social graph was not owned by a single company but rather open for developers across the world to build upon.
Immersive/Social Real-time Virtual Worlds - The predominant user experience of the Metaverse will exist in realistic virtual worlds where users can spend time with their friends and family, meet with colleagues, attend performances, shop, view art and much more. Creators will rely on these worlds for greater innovation and freedom, which should drive an important feedback loop. Epic Games, the creator of Fortnite, and Roblox are the leaders in this space, and we expect massive innovation to arise in the years to come.
VR/AR Hardware - Virtual Reality and Augmented Reality hardware bring the Metaverse to life for users by either bringing the user into the Metaverse (VR) or bringing the Metaverse into the real world (AR). VR/AR hardware has been in development for decades and is arguably the most difficult part of the stack to solve. Even one of the leading companies in the space, Meta Platforms, has expressed frustration. Mark Zuckerberg, the founder and CEO of the Facebook parent, believes there is still massive innovation and investment required to create a compelling VR/AR device.
The opportunity of the Metaverse lies in its ability to replace portions of the existing digital economy and grow the digital economy to capture a larger share of the world’s economic value as real world experiences increasingly move online. Goldman Sachs estimates that the digital economy was about 16.8% of Global GDP or about $15T in 2021, and in their most pessimistic assumptions, expects the Metaverse to replace 15% of the digital economy and grow the entire digital economy by 2.5%. The revenue opportunity for the Metaverse in such a circumstance was valued at $2.6T per year. Alternatively, in their most optimistic assumptions, the Metaverse will replace 33% of the digital economy and grow the entire digital economy by 25%, yielding a revenue opportunity of $12.5T per year. We apply a 15x multiple on these revenue estimates and reach a potential market capitalization of $37.5T to $190T for the companies and decentralized protocols in the Metaverse technology stack.
Investing in the Metaverse is a long term investment strategy and returns will materialize over the next decade as innovations progress.
As detailed in our description of the Metaverse Technology Stack, we believe that there will be components of the stack built and controlled by centralized companies as well as components that are built using decentralized protocols (e.g. blockchains, decentralized computing, decentralized data storage) where value will accrue to cryptocurrencies used to organize participants in the decentralized protocol.
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