Although the Metaverse is a ‘word of the year’ for 2022, people haven’t stopped asking the question: what is it?

Defining a fluid development

Even the people building it haven’t come to a consensus on meaning and therefore trying to definitively say what the Metaverse is, is a difficult exercise. However, we, at Dezenz, are going to try to set out what we think it is going to be. It’s an important concept to pin down before trying to assess its legal implications.

What we set out below is our attempt to define the Metaverse. It is based on a combination of what thought leaders are saying in the space and our own views and interpretations. Like the industry, there hasn’t been 100% consensus within Dezenz on every point but we think it provides the best overall picture. This will likely need periodic review given the transient nature of the underlying technology and evolution of other constituent elements.

We will also consider some of the regulatory and legal implications related to the Metaverse in subsequent publications – so keep a look out for those.

The Metaverse – by looking at what it is not

One of the best ways to define an ever moving concept is, in our opinion, to rule out the things that it’s not.

In our view, the Metaverse is not:

• A new concept: The term “Metaverse” was first coined in a novel called “Snow Crash” dating back to 1992 so is not, in itself, a new concept. In addition, 3D “virtual worlds” have been built by games companies for several years. For example, Second Life, a platform allowing users to live in a virtual world was released in 2003 and had 1 million active users in 2007. Prominent examples of 3D worlds today include Fortnite, Grand Theft Auto V and Animal Crossing.

• A single virtual world: Although it is commonly referred to in the singular, the Metaverse is currently a multiverse made up of an ever-growing number of platforms and virtual worlds (and likely will be for the foreseeable future). One of the big questions for the development of the Metaverse is the extent to which those platforms will be interoperable (i.e. whether the users from one platform will be able to interact with users from another) or whether they will be a collection of ‘walled gardens’ (i.e. platforms which are self-contained systems).

• Completed now: “The” Metaverse is not yet built – it is a combination of some key underlying features (that we set out below) but not all of these are of a sufficient state in order to have the functioning ideal of “the” Metaverse as we believe it will be.

• One prevailing technology: The Metaverse is not just Web3. The Metaverse is not just gaming. The Metaverse is not confined to one prevailing technology. It’s the opposite: it’s a convergence of many technologies.

• A replacement for real life: We already have digital lives (think social media, internet shopping, email – in particular the data collected about us). These tend to involve interactions between our physical and digital lives. For example, we have real friends that we speak through digital media. The Metaverse will be an extension of that rather than a facilitator for those digital lives to usurp our physical lives. We will still have real friends and connections, but the ways we interact digitally will be more prevalent and there may be more options for our interactions.

• Exclusively AR/VR or dependent on a VR headset: This is a common theme following Meta’s announcement of its name change and focus on bringing the Metaverse to life. But this is not the extent of the Metaverse. The Metaverse tends to have a different view depending on who is asked. Meta’s view is just one of those views. In fact, many metaverse developers intend for their platforms to be ‘device agnostic’ – i.e. they can be used on a phone or any other normal screen, as well as a headset.

• Restricted to gaming: The Metaverse is not just gaming nor is it just for gamers. That would be like saying the internet is only for gamers and gaming. Gaming will play a massive part and this is due to the underlying requirement around real time 3D (i.e. live, not pre-recorded/pre-prepared), which we cover below. There are going to be (and are currently) various industrial and healthcare use cases, particularly linked to the concept of ‘digital twins’.

What we think the Metaverse is (or is going to be)

In our view, the Metaverse can be thought of as the augmentation of the internet – the “next evolution”, allowing users more control. It will largely be built on the technology that gaming companies have been working on for decades: real time 3D. “A democratised internet built by game developers”.

That, of course, is a simple distillation. The reality is that there will be other technologies at play too. The Metaverse will consist of large scale, persistent and interoperable virtual landscapes which are rendered in real time, in 3D, to create immersive digital experiences for users. It is a convergence of a number of technology trends including real time 3D software, AI, Web3 and blockchain technologies, augmented, virtual and extended reality. For the Metaverse to work in this guise, these tools will need to be “open source” in nature. This doesn’t necessarily mean for free, but rather accessible to many.

Importantly, it is a long term endeavour, likely 5-10 years before we start to see an impact on the daily lives of large portions of society.

The building blocks of our Metaverse view

Our view of the Metaverse is underpinned on four building blocks – foundations which permit capital and consumers to flow into the virtual landscape:

1. Infrastructure: i.e. the hardware and technologies underpinning the Metaverse and its access or the “roads” and “bridges”. These are the devices and accessories on and through which content and Metaverse experiences are consumed, and the infrastructure which facilitates access to these spaces. In essence, the bridge between the physical and the digital. These are also the systems and technology that allow commerce and activities to take place. Think computers, mobile devices, payment systems, AI, data centres, VR headsets.

2. Platforms: i.e. the software and tools determining how we will access and continue to build the Metaverse or the “towns” and “cities” to the “roads” and “bridges” of the Infrastructure. Some platforms are centralised – i.e. they are developed and maintained by a single company (e.g. Meta, Roblox) whilst others are decentralised, using infrastructure based on blockchain technology (e.g. Decentraland, Sandbox). What is key to both is that they are 3D and operate in real-time. These worlds are built using the “tools” provided largely by the gaming industry or “engines” which permit design, discovery and distribution of content and experiences to end users. Prominent examples of these are Unreal Engine, Nvidia Omniverse and Unity.

3. Content: i.e. what people will do in the Metaverse on the Platforms. These are the immersive experiences and the applications that allow people to interact and partake in activities. This is how the array of use cases for the Metaverse will be demonstrated. Content will initially be created by platform owners but to have scale and rapid growth, user generated content must take precedence with the ability for user’s to truly own their content. A useful analogy is the impact that platforms such as YouTube and Instagram have had on the current iteration of the internet – they have provided the tools for users to create their own content and create revenue streams. The scale of content production will be dependent on the quality, ease of use and uniformity of the tools available to users.

4. Governance: i.e. the rules of the Metaverse. In order for users to develop trust in Metaverse platforms and commit time and resources to interacting with other users on them, there will need to be a clear understanding of the rules which govern those relationships. Many of those rules are likely to already exist today in other contexts, and will need simply to be extended to apply to the Metaverse. These rules will need to cover, amongst other things, the means by which content, users and digital assets are secured and moderated, and the tools through which the privacy of participants is ensured. The platform owners and builders of the Metaverse also need to work together to ensure that interoperability is possible and ensure the user is put first. The launch of the Metaverse Standards Forum is an example of such an attempt – the Forum aims to foster open standards that are intended to guide organisations involved in building the Metaverse.

The obstacles to overcome

As ever with building projects, there will be hurdles that need to be overcome. We consider some key obstacles below.

• Democratisation

  As the old adage goes: give someone a fish, you feed them for a day. Teach someone to fish, you feed them for a lifetime. A similar principle applies to the Metaverse. The Metaverse will grow faster if the tools used to build it are available and accessible to more people. If the tools to build the Metaverse are restricted to use by the platform owners only then this will limit its growth.

  Take the example of the proliferation of the current iteration of the internet and the emergence of the web. Initially, it was in the hands of the US universities, with funding from the US Department of Defence. Over time, as more tools were developed (such as the TCP/IP protocol and HTML) and, crucially, become more accessible to everyone, the internet grew exponentially, with more people involved in its expansion. We appreciate that this is an oversimplification. The point we are trying to make is that “democratising” tools facilitates growth faster than allowing a few to have access to the same tools.

  This challenge applies to the Metaverse. Many of the technologies are increasingly becoming accessible to many but the big test is whether companies can create democratised real time 3D generating software – something that the gaming companies have not yet achieved, despite evolving the technology for several decades.

• Funding and returns on investment

  It is the basic human problem in modern society. To build something requires something people can exchange, which is generally capital. The Metaverse is no different. Technological advancements cost money and the people working to build the Metaverse need to be paid. If you’re building the Metaverse, then your options to raise capital are familiar: look internally or, more likely, externally, through debt financing or equity fund raisings.

  The challenge with external financings for companies is that the financiers want returns on their investment. And there lies the ideological challenge for the Metaverse. If the Metaverse is about putting users first and giving them more power and control, then can this be the case if those building it have to prioritise returns for investors first? This is linked to the idea of “walled gardens” i.e. areas/platforms/experiences which generate income for the one or few entities that ‘own’ them. Walled gardens are good for investors but not for the Metaverse which has decentralisation, democratisation and interoperability at its core.

  A lot of the current money flowing into the development of the Metaverse is from venture capital. Examples include:

  • Singapore venture firm NGC raised $100 million for its Metaverse Ventures.
  • European venture capital firm Hiro Capital announced a fund, totalling €300 million (around $340 million) for new gaming and metaverse-based ventures.

  Venture capitalists, like many investment funds, are ultimately seeking a return on their investments. Some venture capital firms experienced a much shorter rate of return through the receipt and sale of project tokens during the bull run. Now that the crypto winter is here, added to the fact that building the Metaverse is a long term project, can investment funds wait the length of time it would take? Undoubtedly, the solution to this problem will be how investors and participants find a balance.

• Access points and frictionless experiences

  Consumers currently face the most choice they have ever had in human history. They can purchase a bag of coffee from hundreds of providers. They can book a hotel through several platforms. They can now have video conversations with relatives on the other side of the planet on numerous video conferencing applications. The current internet is key to this choice.

  Companies using the internet to sell have to ensure their products and services are easy to use and appeal to customers or they risk becoming ‘irrelevant’ and no longer have regular users. The customer’s journey must be smooth, or have minimal ‘friction’ given consumers can vote with their feet like never before and switch to competitors easily.

  It is similar for business customers. They are increasingly forced to move rapidly, provide deliverables speedily and achieve growth swiftly. Procuring technology with high levels of friction will no doubt act as a blocker to these actions.

  Thus, the same applies to the Metaverse. In order for the Metaverse to be a viable option for consumers and businesses alike, the user experience must be as frictionless as possible or else people will be unlikely to use them.

  In addition, how will people be able to access the Metaverse when they are unlikely to have the same devices? This is a key question for Metaverse developers – they will need to work together.

• Jurisdictional differences

  You only need to look to how different countries have different laws and customs to understand why there would also be different views of the Metaverse too. This may be the single biggest barrier to a unified, interoperable Metaverse as it would require every country to work together.

  The varying methods in regulating the current internet could provide an insight as to how different jurisdictions will approach the Metaverse. For example, China currently does not permit access to prominent platforms such as Facebook, WhatsApp and Google and instead has its own platforms which have similar functionality (e.g. WeChat and Baidu). We therefore consider it unlikely that the Chinese state will readily permit access to or allow interoperability with all other platforms underpinning the Metaverse.

  Governments in the Middle East also have intervened to varying degrees with the internet to prevent access to certain platforms and media content and liability around non-compliance with local laws have discouraged some media businesses from accessing such markets directly. But, this does not mean that they will fall behind on the Metaverse opportunity. Quite the contrary, emerging markets with clear state-backed digital agendas will be well-positioned to extract different types of value from the Metaverse. We anticipate each state to reflect on its short and mid-term digital aspirations and use this to inform its Metaverse strategy. For example, the notable formal push by the Kingdom of Saudi Arabia in e-sports and gaming gives it a valuable foundational layer from which to build. Collaborations in Qatar around the FIFA world cup are also creating an accelerated roadmap into the Metaverse, for example, Qatar hosted the first EA Sports FIFA Metaverse tournament where viewers received free NFTs exchangeable for merchandise, player interactions, amongst more. Oil-rich Gulf states will see the Metaverse as a key domain through which their transition away from hydrocarbons towards a knowledge-based economy can be accelerated. For example, Dubai recently announced a new Metaverse strategy with a view to adding 5 times the number of blockchain and Metaverse companies in 5 years and becoming a “top 10” metaverse economy through adding USD 4 billion to the city’s GDP during that window.

  South Korea is another jurisdiction optimistic about the Metaverse. Its government is planning to invest 224 billion Korean Won (approximately USD 170 million) in the Metaverse headed by South Korea’s Ministry of Science and Information and Communication Technology under its “Digital New Deal” programme. The broad list of use cases outlined by the Ministry includes things like accessing municipal services in Seoul, cultural events and virtual tourism. What is interesting is that, so far, investment in the Metaverse has predominantly been driven by the private sector.

  The Metaverse has been a trend pushed by Big Tech. However, could South Korea encourage other public bodies in Asia (and beyond) to take notice, and push the building of public services with the metaverse in mind?

  Local Japanese government bodies are also looking at beginning Metaverse projects. The city of Yabu in the Hyogo prefecture has partnered with Yoshimoto Kogyo, a large entertainment industry player. The space that the city is creating is planning to feature a virtual recreation of the city’s Tendaki waterfall and the Hachikogen winter sports resort.

  Sony has announced its plan to create new entertainment experiences in live sporting events through its partnership with Manchester City FC. Sony is also looking at capitalising opportunities in the music industry with live virtual performances. Japan also has a history of rich IP in respect of anime, games and movies. It will be interesting to see how this will translate over into virtual assets by way of content, avatars and a way for users to express themselves in the Metaverse.

• Regulation

  As mentioned in our building blocks above, governance of the Metaverse will be key and central to governance is regulation. Regulators will need to think about introducing regulation that is not so restrictive that it stifles Metaverse growth but is also firm enough to avoid a consolidation of resources and capital into the hands of a few companies to facilitate a democratised Metaverse.

  As law and regulation is largely reactive, we consider it unlikely that many new regulations will be issued in the first instance and the legislative will look to existing constructs to see if they apply to the Metaverse.

Conclusion: A multiverse (of regulatory and legal issues)

There you have it. The Metaverse will, in our view, be a democratised internet built on gaming technologies. Its future is very much uncertain and we would not be surprised if this view needed amending in 12 months’ time.

One thing is for certain: as a result of the development and convergence of technologies, there will be a variety of different regulatory and legal issues that arise. Over a series of articles, we will consider the regulatory and legal challenges posed by the development of the Metaverse across jurisdictions, in line with our view.