Is Digital Scarcity the Key to the Metaverse?

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For years the dream of a persistent virtual world has been touted as a unique future form of human experience.

Since Facebook rebranded to Meta and doubled down on early billion-dollar investments into virtual reality, such as headset manufacturer Oculus, has the vision been hyped as a unique future form of human experience.

The economic and business promise of a persistent virtual world – so far only basic and disconnected virtual spaces exist – is in part based on the concept of digital scarcity,

In the physical world, items derive their value from scarcity and they are scarce because there is a cost to producing them.

In the digital world, items are made up of information that can be copied and distributed easily. As we’ve seen, copyright protections don’t matter a lot in the Internet where hundreds of different Country’s laws make it almost impossible to enforce.

Before blockchain technology was invented, creating scarcity in goods—making them unique or hard to duplicate and allowing for transfer of ownership without an intermediary such as a bank—was necessary if they were going to have value.

Computer games, like Second Life, created their own unique intra-game economy almost two decades ago. Software company Linden Labs insisted that Second Life is not a game, but a place of role-play escapism for users that control their own unique destiny.

However, this really wasn’t a “metaverse” since Linden controlled all the assets and there was no way to remove them.

In 2009, Bitcoin was the first application of this concept, where for the first time in history, you had a digital commodity with natural scarcity.

After Bitcoin, the next huge innovation was in 2018: the creation of a standard for non-fungible tokens. This took the concept of scarcity to the next level.

As an extension to that concept, there are important ideas that will underpin the metaverse economy and non-fungible tokens (NFTs) play a key role.

The first is that in future metaverses, digital worlds will be interoperable and digital assets or representations—like avatars—can be taken from one world to another.

NFTs are unique digital identifiers that are encoded on blockchain and cannot be altered. As such, they can be used to demonstrate property ownership and provenance—or ownership history—of digital assets. That makes them easily tradeable and allows them to be transported from one digital world environment to another.

The digital tokens known as non-fungible tokens (NFTs) would allow people to efficiently and reliably display their value in the metaverse. This is similar to how an object’s specialness underlies its value on Earth, but signaling will be more important than ever before in a virtual world where everyone can create anything they want

This is even more important in the artwork world, which was almost destroyed by images of everything being copied onto the internet. Anyone could have their work copied from a website and then “stolen” overnight.

Digital artwork is a digital object. It’s not the same thing as a physical painting, because it doesn’t exist in the real world. But it is still something that can be owned, and can be sold or traded for money or other goods.

When someone makes a digital artwork, they don’t have to worry about whether or not their work will be stolen or lost—because it isn’t really something that can be stolen or lost. Digital art doesn’t have to be stored in a vault somewhere; it exists on the internet and can be accessed from anywhere with an internet connection.

NFTs are a solution to digital scarcity. By tying ownership of natively digital artwork to an entry in a public, immutable ledger, the artwork becomes collectable. There is now a clear, verifiable way to distinguish the actual owner from those right-clickers who happen to have a copy on their hard drive. 

The philosophical debates over whether this is a significant distinction – equivalent to that between Kenneth Grffin and those with a saved jpeg of Interchange, for instance – are ongoing. But for digital artists, the practical consequences have been immediate and transformative.  Since NFTs allow the artist to track who owns their work, as well as enable them to assign ownership of it at any time.

Yet, there are some issues with this. Artificial scarcity is when a resource is limited in an effort to drive up demand and value. It’s the idea that if you make something hard to find, it will be more valuable. But what happens when that becomes reality

Real estate, like all assets, is a reflection of the opportunities and constraints it faces.

When real estate is located near infrastructure, services, and other people, it becomes more valuable because these urban things create efficiencies that make your property more valuable.

Investors balance out the higher cost of land by increasing density and building tall buildings. Tall buildings are costly and expensive to maintain, so there are limits on how many can be built in an area.

However, arrtificially scarce assets are likely to behave in a way that is different from genuinely scarce assets. For truly scarce assets, prices are likely to be set by a market mechanism driven by the value of access. For artificially scarce assets, however, prices may be limited because there is an infinite supply of “scarce” assets available.

As the price of an artificially scarce resource increases, demand for that resource will also increase. Prices for artificially scarce resources are generally set by supply and demand, but this can lead to unexpected consequences.

For example, a company may discover that it can create more artificial scarcity by lowering its price on a limited-edition product. This forces other companies to do the same thing in order to stay competitive, which drives down prices even further. As this happens, consumers are less likely to feel like they need to purchase the limited edition product because there is no way they will be able to afford it at its original price point.

Let’s take a simple case example: imagine a world with about one million passionate gardeners. A virtual land system or NFT membership tokens that only support 100,000 members is likely to leave a lot of people on the outside.

Currently, the end state of many different online communities built around virtual land or non-fungible tokens (NFTs) doesn’t appear to be very different from how the internet functions now.

We have millions of websites and online communities. Many of them use membership fees or other tools like participation metrics to sort and filter genuine contributors from lurkers and freeloaders. Do NFTs solve this problem better than any of these other methods? Not everyone thinks they do.

Either way, blockchains and the metaverse will be here for a while, but it seems some more brainstorming is needed for the digital scarcity ideas to work beyond a few niche collectors. While people are naturally collectors, there is still nothing preventing people from making copies of these products using screen shots, recording software or even making similar items for other worlds. When it comes to “land” in the metaverse, there needs to be also more of a value proposition than just owning something cool or new, because that will wear off after the 100th or so metaverse colony is created with land for sale.

The Metaverse should be an immersive experience where users can do anything they want. If you want to own land, you should be able to buy it and build whatever you want on it—but that shouldn’t create a new problem where only the rich can afford it. The goal should be making things as accessible as possible so everyone can have fun without worrying about money or time constraints.

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