It’s hard to open up the Wall Street Journal or turn on CNBC for more than an hour and not hear the phrase “Metaverse” bandied about. But how many of us really even understand what the word means, much less what it might mean to our portfolios?
There’s nobody more relevant to that discussion than venture capitalist, researcher, and writer Matthew Ball. He, among other things, is the brains behind Ball Metaverse Research partners, which publishes and maintains the index behind the Roundhill Ball Metaverse ETF (METV). Matthew was kind enough to sit down with me and disabuse me of some of my less-grounded notions about the Metaverse, what it is, what it isn’t, and how it’s likely to influence our portfolios whether we like it or not.
You can follow Matthew on Twitter at @Ballmathew and on the old, creaky internet at MatthewBall.vc.
Note: This interview has been edited for clarity, and was conducted prior to the recent hack on Axie.
The Metaverse: Not Just VR
Dave Nadig: Let’s start with some scoping. I know we’re both big fans of Raph Koster, who wrote one of my favorite books about why games are so awesome: “A Theory of Fun.” His current writing has been very much focused on the virtual world experience, talking about clients and servers and how we interact with imaginary spaces and immersive digital experiences. Your work is much more expansive than that when discussing the Metaverse. Is there some conflict between the two? Does Virtual Reality (VR) suck all the air out of the Metaverse discussion?
Matthew Ball: That’s an interesting question. The truth of the matter is it may. But it’s not something that I think a lot about. Why? Because, to start with, across the many companies investing in the Metaverse theme are many different theses. VR is important to some, not to others. VR is important but secondary to AR (Augmented Reality), XR (Extended Reality), or just traditional screen or touchscreen-based interactivity. I don’t think any of those companies, not least of all the visionary ones, are being swayed by the public obsession, the venture capital obsession, or the Meta platform’s obsession with VR.
Dave Nadig: My gut tells me that the most interesting piece of this is actually the instantiation of the digital world over the real world — AR or Mixed Reality — and the virtual worlds piece of it seems like abstraction. I keep coming back to 2016 and the summer of Pokemon Go, right? Taking the physical world and connecting a digital experience to it. What do you feel like the state of the art on that is?
Matthew Ball: Personally, I’m a fan of [Pokemon Go Developer] Niantic Lightship, the technology, mandate, and mission that they’re working towards. At the same time, I don’t think that there’s yet much evidence to suggest that consumers, and the market at large, see much utility in it, or at least the ways it’s been applied thus far. There are a few different case points there.
First and foremost, the AR feature is not particularly popular with the user base, nor is it a requirement. The location-based element had an interesting use case during the pandemic. For obvious reasons, it was turned off, but of course, the game was more popular than ever. That’s partly because we were playing more games than ever, but it seems counterintuitive that a game based on augmented reality and location-based experiences would perform better when neither of those are used or options.
All of that suggests that it’s actually Pokemon and the gameplay dynamic that made the title so popular. That’s a perspective partly reiterated by the fact that most or all other games developed by Niantic were using similar functions, such as the Jurassic Park title Universal released, weren’t popular. Then, after the pandemic, when Niantic started turning those features back on, the user base was in an uproar. They did not want the location-based requirements back. They wanted the ability to spoof a location, and ultimately, Niantic had to concede to doubling the distance before a location-based experience was involved.
Dave Nadig: So, in that case, the game is the game. But there’s a ton of big-money development going on in the space, right? Is that really industrial use cases?
Matthew Ball: When you’re asking about AR, I think this industrial question is fascinating because you could argue that the MVP, or minimum viable product, is very different. For AR and VR games and experiences, it has to be better than the alternative. The alternatives right now are a dedicated PlayStation 5 with a far larger user base and a much larger library of titles. That’s still pretty hard for a consumer VR headset with significant technical constraints, significant content limitations, and a much smaller user base to compete with.
In AR and VR for industrial applications, it’s not a question of competing against something. It’s about adding to what exists. Johns Hopkins just did its first-ever live patient surgery using AR. The physician who used AR described it as being like using GPS for the first time.
Dave Nadig: So, I get what happened with Pokemon Go and Niantic, and yet, as somebody who’s trying to keep a broad spectrum on this stuff, I think back on that wet, hot Pokemon summer when people were running through Central Park trying to chase down Squirtles, and I have to say: Something interesting happened then — an interesting, very human experience.
Matthew Ball: I think nuance is important here. My broader point is that there is not yet evidence, at least to me, that the outstanding popularity of Pokemon Go, which does a billion-plus per year in revenue, has grown in, I believe, each of the past four years. Its current success does not seem to be a result of AR.
However, you’re absolutely right to say that you can see the potential in gameplay mechanics and societal impacts in its launch. I interacted with people and had many joyful moments during that launch. But one could actually make the argument that the fact that there was no true AR at the time [had an impact]. It does have true AR now, and the fact that it was not actually key to the gameplay is actually proof of the potential in AR and LBE as opposed to a counter group.
A Fourth Age of Computing
Dave Nadig: I mean, you mention nuance, and we’re only talking about a single product in a single timeframe. One of the challenges of a word like “Metaverse” is that we mean many different things coming together that are enabling new kinds of interactions. From somebody looking at this from an investor’s perspective, is this one of those things that we simply need to be aware of to understand the context? Or do you believe that there is a fundamental economic shift going on?
Matthew Ball: Great question. The right way to think about this is the Metaverse as a successor state to today’s mobile and cloud computing paradigm. We generally recognize there as having been three eras or waves thus far.
The first was the mainframe era of computing and networking. That began in the 1950s and ran primarily through the late 1970s. It was succeeded by the advent of the first personal computers, Apple in the late ’70s, Microsoft in the early 1980s, alongside IBM. That era ran roughly until the mid-2000s and coincided with the rise of TCP/IP in 1983. This third wave began around 2005–2008 when the iPhone and Blackberry really took off.
What’s critical about those three waves is the following: They represented trillions of dollars in new market value, leading to an incredibly large number of new businesses being formed and growing. We also saw the old guard change.
The broad expectation is that the Metaverse will lead to precisely that. Some market leaders will grow. Others will be displaced. New ones will emerge. Almost every category will be disrupted in one way, shape, or form.
What we’re seeing in this proto-Metaverse year is exactly that same disruption. Communication networks are being displaced by the likes of Discord, Epic Online Services, Roblox’s Social Graph. Then, of course, we’re seeing the cryptocurrency movement, whether we’re talking about specific bitcoin or ether or the services such as Coinbase and FTX. An investor needs to understand it in precisely that context.
Dave Nadig: Fundamentally, that seems like innovation investing for the last 40 years: Understand who’s being disrupted, who’s doing the disruption, what existing players are likely to end up on top, and what new players are likely to survive the horrible chaos of being entrepreneurial, right? Like Fiber Optics in the 1990s?
Matthew Ball: I think one of the interesting things with the frame of reference on VR is how VR is just a potential experience in the Metaverse. It is likely to be an access point. But when we focus on VR, we actually don’t look at the fundamental technologies here. Those technologies make it a worthy comparison to the internet and personal computing overall. We’re talking about, for example, graphics-based computing, which was a fundamental premise upon which video was founded in the early 1990s. Jen-Hsun Huang [Nvidia co-founder and CEO] believed that graphics-based computing would be necessary to solve queries that traditional computing could not.
Computing is ubiquitous. We’re within it at all times. Today, we primarily reach for it when we need it. When we think of data transmission and networking, it is primarily asynchronous transmission, which is somewhat latent. But what we’re talking about is the overhaul of networks and protocols to move to synchronous, two-way, and continuous connectivity with ultra-low latency.
These technological shifts actually allow us to very plainly understand how it’s different from prior waves. Mobile is a little bit easier to mentally understand because you just say, “Well, it’s going through the air rather than through a tube,” and, “The computer isn’t in our living room but in our pocket.” It’s harder to think about synchronous connectivity or ambient computing, but those distinctions allow us to understand that it’s new. That will bring alongside new devices and new use cases. We’ll be able to solve new problems. We’ll use the internet in new ways, in new places, and so forth. That’s where we start to get fundamental disruption in most categories.
Dave Nadig: The challenge that I have with that, as I start looking around, I worry it’s all going to be co-opted. That’s what I wrote about in my first look at Axie Infinity. It’s all walled gardens and money-making. Why will Roblox ever allow an item from their world to exist in somebody else’s? Why is Fortnite ever going to let an unlicensed skin into their game? I have a hard time figuring out what this brave new world is without focusing on standards and interoperability. What am I missing?
Matthew Ball: A few different things, and I think some are just the right frames of reference. The others are a reminder of some of the history we’ve forgotten.
For example, from the 1970s into the 1990s, the consensus was not that we would have the internet. It’s that we would have many competing networking protocols and standards. TCP/IP was established in 1983, but no one thought that Comcast, IBM, the European Union, and DOD would all have a common networking standard. That was actually quite a contrarian.
We see this, in fact, with globalization. Of course, as the economy has become more globalized, we have increasing standardization around the language of business: It’s predominantly English. Countries that are not English-as-first-language who interact with countries that are also not English-as-first-language, identify English being their preferred language for exchange by a 3:1 margin!
We have standardization around currency, predominantly USD and Euro, as well as around units. That’s metric, for the most part. We even have other conventions, such as the intermodal container format.
Your question about Roblox is a good one.
First of all, Roblox has already started open-sourcing some of its software and is interconnecting with third parties. They actually federate their identity into multiple other identity networks. That’s a requirement, of course, of operating on key devices, such as iOS. Epic is even more interesting — they’re building plumbing that is premised upon it. They have “Epic Online Services,” which uses the Fortnite-built identity system for game-to-game communication, game-to-game payment, social graphs, and asset interoperability. So if you and I, Dave, want to build a game, rather than ask every user, “Hey, make an avatar in our game,” we can tap into the 2.5 billion player connections in the Epic network to access the goods people have already purchased.
Closed, Open, and the Messy Middle
Dave Nadig: But it’s still a walled garden, no? I’m not arguing Epic isn’t building something unique. I think they are making something absolutely amazing. I’m just not clear what it’s doing, other than co-opting many developers who are just going to be like, yeah, I’m developing on Unreal. I’m going to use EOS because it’s the easiest thing to do. Then they end up in the same position as an indie developer who is leaning hard on Steam and is now taking huge commission hits.
Matthew Ball: No, I think that the comparison is unfair, and there are a few different ways in which you can look at that. First and foremost, the policies that are being used are actually very unique.
Let’s take a look at two specific examples. One: Epic changed its end-user licensing agreement a few years ago, such that you have an indefinite license to a specific build of Unreal under the terms in which you signed it, which is to say, if you license Epic’s Unreal Engine 4.1.3, they can never change the user agreement. Now, if they update it to a subsequent release or UE5, they can, of course, change the user agreement. It would be impractical to say, “In perpetuity, no matter what we do, build, and enhance, we can never change our terms,” but the result is, if you build on their engine, they cannot legally change the rules on that. You might have to take on more of the burden of customization, but that’s typically how a licensor uses Unreal.
Two: Epic changed its End-User License Agreement in late 2019 or 2020, such that they no longer have the right to terminate a developer license, even if that developer violates the terms of service or fails to make a payment. Instead, Epic needs to go to the courts, get an injunction, and then receive additional legal action to force the collection of payment and force the user off. That’s important because what they’re doing is deliberately relinquishing control over their developer agreements and the tools they’re licensing, under a belief that we need to do a better job replicating the way the real world works.
Unreal is effectively the same as a landlord giving a lease to a business that’s going to operate a storefront. We expect that that landlord cannot say, justly or unjustly, I’m locking you out tomorrow. They cannot burn your things. They have to go to court and receive the right to do so. That’s essentially what Epic’s given up.
Those sorts of structures do not mean that there cannot be gatekeeping. They do not mean that there cannot be rent-seeking over time. It does not mean that, in 2030, they do not begin to co-opt some of their strength, but it is very different than the systems we see from Steam, as an example. Steam means that if you sold your game through Steam in 2004, they are permanently entitled to 30% of all follow-on revenue. The only way you can shift out of that system would be to deprecate all consumer purchases, for which no one receives a refund, for the user to lose all of their entitlements. These are small but important policy differences.
Dave Nadig: Maybe I’m just an old hippy, but I do worry that right now, especially with the introduction of crypto into the conversation, it just becomes pure, unfettered capitalism driving everything, and that honestly worries me. It ends up concentrating power, no?
Matthew Ball: I don’t believe that the free markets solve for everything. I’m far too Canadian for that, and I certainly believe too much in the regulation of the big tech companies. My point is that market principles are likely to drive greater interoperability because the expanded network effects and utility of virtual goods incentivize most parties to do so, at least those that aren’t in pole position. That’s actually very easy to chart over time, even as these tech companies have become larger.
That’s separate from whether or not we need significant regulation and very different from whether or not the ultimate outcome is negative.
Dave Nadig: Isn’t part of the “solution” here what Axie is theoretically trying to do? Buy selling you not a game, but an NFT that you can use in a game? I mean, I’m a skeptic, but that’s the pitch, no?
Matthew Ball: I would say that Axie is not a balm for that. If you take a look at how Axie, which is a specific instantiation, Axie gives you rights to the NFT, but they actually have in their user agreement the right to alter the utility of that NFT. It’s basically property rights by another term. It would be like Ford saying, “Yes, when we sell you the car, it’s yours, but we have the right to change the max speed to 40 miles an hour.” That’s not really property rights.
They also have it so that you don’t have the right to use that intellectual property in other environments. That would be like Ford saying, “We can change the speed limit at any time, and you can only drive it on a Ford-operated road.”
Play-to-Earn and the Real World
Matthew Ball: What we are contending with here is the problem of decentralization in an environment in which many things remain centralized. There was that early rush of claiming play-to-earn would help solve income inequality globally or at least bring higher-paying jobs. Most people in the gaming community, and many economists, thought that that was obviously absurd. Raph Koster has talked about this: Open economies doubtlessly crash.
The right perspective here is as follows: Anyone who has a basic understanding of economic theory would recognize that when you have a class of labor that requires no skill; also has no marginal cost (in a sense, you need to purchase no equipment, you just use the computer you already have); has no onboarding cost (which is to say you’re never hired, you never go through the stickiness of payroll processing); and can have labor fluidity down to the minute, which is to say, you’re waiting for your mother at the bus stop, you are doubtlessly going to end up with below minimum wage averages, and that’s what we’ve seen.
Dave Nadig: You end up with literally the lowest cost of labor on the planet, right? You’ve created no constraints, and it’s the lowest possible cost provider.
Matthew Ball: Yeah, I mean, we’re basically seeing… Many of the things that make producing anything in the digital era or distributing anything in the digital era so profoundly profitable, which is to say, no marginal costs, don’t really work when you’re talking about a labor market under the premise of supernormal wages. It can’t go both ways.
Dave Nadig: Right. Do you think that play-to-earn has a real future? I mean, I’m very skeptical, obviously, but I am willing to accept the counterarguments.
Matthew Ball: Not under the structures that we typically see today, which is to say, we will have to see it reinterpreted in one way, shape, or form. Let’s take the following: When you provide labor that has utility, you should be compensated for that. When you create something in Roblox, be it an item or a world, you’re compensated for that. That’s a virtual labor. If you want to be a virtual tour guide through a virtual Iceland, you should be paid for that. If you’re going to resell an item that was difficult to unlock, there’s value in that, as long as someone values it. These ideas are mainly being converted into play and earn, which means there should be value if people recognize it in the things you make or provide in a virtual world. I absolutely believe in that. To disagree would be to disagree in any of the economic potential of virtual worlds or the Metaverse.
What I don’t believe in is that there is likely to be a healthy and thriving economy unlocking code that we have chosen to bury, specifically for the purpose of labor, right? When we take a look at some of the least-savory labor globally, low-cost computer electronics assembly, or mining, or any resource collection, certain parts of society come to these terms of, yes, we don’t like how little foreign laborers are being paid, but there’s an economy that they’re supporting. That t-shirt doesn’t exist, lest it’s actually milled and loomed. That resource is never pulled out of the ground. I don’t believe there’s a healthy economy for similar work based on thinking out something that we chose to put in there. It makes no rational sense.
Dave Nadig: I like the way you put that. That’s good. Then is it just World of Warcraft gold farmers in a new wrapper? I mean, is that really what we’re talking about? Paying people to get you stuff in a game because you value your time more than the next guy. We’ve been doing that since the dawn of video games, pretty much.
Matthew Ball: Yes, and most of it’s been weeded out for precisely that reason, which is to say, the operator of said platform has no incentives for that sort of behavior to go around, for several reasons. Number one is it’s terrible for optics. Number two is that you shouldn’t make a game that people don’t like. Number three is their revenue model is typically premised upon the direct sale or authentic peer-to-peer transactions. If you look at World of Warcraft as an example, gold farming went on for quite a while, but that’s because it took time to figure out the solutions to what was then a novel problem. But it is not anymore.
Dave Nadig: But is the solution just making the game itself the only vendor? The only one allowed to trade virtual goods and services?
Matthew Ball: Many game publishers have their primary revenue model organized around direct sales to the user or commissioning within-platform sales. It’s not that difficult to actually create new economic models premised upon interoperation or sale outside of your system. There are a lot of technical difficulties there. Who manages the product? How do you ensure payment? What’s technological standardization? Ultimately, if users deem that function as having value, we will obviously figure out mechanisms through which to monetize that.
That actually ends up being one of the reasons why many in the gaming ecosystem see NFTs as a potential solution: You start to avoid the revenue leakage problem. The general fear was, “If we sell you a thing, and then you only use it elsewhere, or it appreciates in value, we capture very little of it.” Through NFTs, you have some sort of programmatic pathway to continue to collect value as it’s used.
There is a large contingent of people who believe in the importance and premise of interoperability in the Metaverse but don’t really consider the interoperability of virtual goods particularly interesting, which is to say, look, most people get enough value out of having their iMessage account or their iCloud account used to access most of their applications. You can use your own PayPal wallet in most different e-commerce sites.
That may end up being the most essential thing in the Metaverse, which is to say, what we really need is continuity of identity, communications, data, payments, rather than the ability to wear a banana costume in Call of Duty.
Identity vs. Access
Dave Nadig: Hah. Right. It’s about me, not my stuff.
Matthew Ball: If Facebook, which is the most popular identity system globally, wants to say, “As part of your Facebook ID, everyone else can also import your Facebook avatar,” then that’s actually pretty easy standardization because that’s just everyone saying, “Let’s go to the thing people want,” which is, “Dave just wants to look like his Dave avatar,” okay, plug in. That’s not pulling a complex history of your boots, hats, and lucky charms. It’s just saying one identity system.
Dave Nadig: Right, so from that model, then… in crypto, this idea of wallet as ID keeps coming back. I’m curious what your thoughts are on how that evolves. Are we working towards a world where we have 40 different identity validators talking to my MetaMask Wallet, and that’s what I’m presenting when I show up at a game?
Matthew Ball: I think many of those theses are to be determined. This is a somewhat adjacent way to think of your question, but we typically start every new computing platform trying to simulate what preceded it or trying to simulate reality as we most know it. The classic examples here are the early App Store apps.
Your Notepad was yellow, lined paper. Your diary had literal, simulated stitching, as though it were threaded with a needle and thread. Then, of course, Game Center was a blackjack felt table. Eventually, we realized that none of these things have utility. I tend not to get very excited about, “What if our Zoom meeting was in 3D, and we sat around a conference table?” I understand why we think that, because our reference point is reality as we know it, a rather minted idea, but it will change much more over time.
Dave Nadig: Identity is a big deal in finance, obviously. Know-your-customer laws and anti-money-laundering have become household topics, certainly for any investor with significant assets or playing in the crypto space. Sometimes we want complete anonymity, and sometimes we want a hard identity. Do you have any thoughts on those layers of identity, from hard and secure to pseudonymous and disposable, and how we navigate that?
Matthew Ball: I mentioned earlier that we tend to think of this as “infinite interoperability of all things.” The truth is, only some things will interoperate, and they will only interoperate into some places, and that interoperation will be imperfect. I’m familiar, of course, with many of Raph Koster’s arguments as to why interoperable assets are difficult. There are a lot of criticisms there from a coding and data perspective. The truth is, a lot of those are fixable, right?
Look at the real world, right? We have many identity systems, none of which are uniform. In the United States, we use the social insurance number system even though we’re not supposed to. The passport system is actually a brilliant example because it’s decentralized yet centralized. We have more than 100 countries that are issuing passports. There’s one authority that manages them in each country. Every other country broadly accepts the validity of those passports. Still, there are limitations in those countries, even the originating countries, as to how you can do it.
I can use my passport to validate my identity at a bar, but I can’t use it to file taxes. I can use it to get into the office when I forget my keycard, but I need to use my corporate ID to get permission through. A passport is not written to your driver’s license. You still need your driver’s license. That’s before we talk digital identity!
What happens on your iPhone? You log in with your iCloud ID. By the way, your iCloud ID might actually be your Gmail address. Then, on your iCloud ID, you install Facebook. Then you log into Facebook with access from your iCloud ID, which is your Gmail address, and you might even download the New York Times, and the New York Times uses your Facebook ID as the login.
So you’ve got this really messed up stack of identity, and that’s even before we get into payment systems and services. This is the thing that investors need to understand: You actually don’t need to think of this Pollyanna version of perfect harmony in this parallel plane of existence. The fact that you can point out flaws does not eliminate it.
Dave Nadig: I mean, that sort of seems like the summary of all of this is, “It’s going to be messy, but that’s how it works.”
Investing in Disruption: Who Wins?
Dave Nadig: So, getting to brass tacks: As an investor looking at companies, what’s the right rubric?
Matthew Ball: I think there are two questions. One is always, who wins, and who loses? This gets to the investor question. Look, there’s going to be four categories of answers.
First, some companies thrive in the current era and are largely displaced or altogether displaced in the next, for which you can take a look at companies like Yahoo or MySpace.
Second, there’s another category of companies that successfully make the transition. We saw that most notably with Facebook starting in personal computing and fixed-line internet, moving and, in fact, growing into the mobile era.
Third, companies that are displaced in their core market and yet grow larger than ever due to growth in the digital economy.
Then we have this fourth category, which are the companies that don’t yet exist and will be the most significant. If we go to the fourth quarter of 2019, Roblox had a valuation of two billion dollars. Unity had a valuation of two billion dollars. Epic was around six billion dollars. Today, depending on the day, we’re looking at those companies worth between 50 and 80 billion dollars, brand new companies that have really come into their own.
Dave Nadig: And most investors’ interest tends to be on the unicorns, right? But they’re all in the mix.
Matthew Ball: What I’m interested in, and this is what will make running the Ball Metaverse Index so fascinating, is watching how it changes over time. There are many companies that remain private that we expect to pioneer in the Metaverse. We spoke about Niantic. Epic is a good example. It’s easy to imagine those companies going through the arc I just described with Unity and Roblox. Then, of course, companies like OpenSea could be a public company and reportedly considered as much. Dapper Labs, a multibillion-dollar NFT platform, and so, look, this index [and related ETF, METV] exists for that reason. There are four different categories of changes that, over time, are going to manifest, and the fun part is going to be watching exactly how that shift happens.
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