May 24, 2024

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Understanding the Metaverse Economy and Its Investment Potential

4 min read

The metaverse is an emerging area of immersive virtual and augmented reality technologies, offering companies vast and captive audiences. It holds tremendous promise as an innovative business strategy tool.

The three physical components of the metaverse include compute, network capacity and consumer hardware – each of which has experienced exponential advancement as evidenced by Moore’s Law and Nielsen’s Law.

1. Economies of scale

Businesses looking to make the most of the metaverse economy must understand its drivers – including economies of scale and diseconomies that affect investment potential in this space.

The metaverse is an online virtual environment designed to offer immersive and engaging experiences such as gaming, social networking, business applications and enterprise solutions. This immersive environment relies on an intricate digital infrastructure; for instance, running a metaverse game requires servers capable of processing large volumes of data quickly as well as consumer devices such as VR headsets/AR glasses/computers/mobile phones with sensors, cameras and handheld controllers/haptic gloves for gameplay.

Operating these infrastructures incurs fixed costs that diminish consumer experiences in the metaverse. For example, supporting an NFT economy requires expensive servers, memory, and network capacity – costs that directly reduce value derived by consumers from engaging with it.

These costs can be mitigated through reducing fixed costs associated with supporting the metaverse, such as consumer hardware pricing. As Figure 1(b) shows, reduced input costs increase consumer participation rates while simultaneously raising utility for each experience in the metaverse.

2. Digital identities

Digital identities are at the core of metaverse technology. They determine who can be trusted and who will benefit from experiences within its realms, from current forms of authentication – like driver’s licences, national insurance numbers or social security numbers, passports or retinal scan data – or from data such as an online banking password or bank account details; it could even include user profiles in virtual reality like usernames or avatar names as well as product codes, website addresses or business registration data if applicable.

Establishing the metaverse requires significant investments to make it work. There are fixed costs such as providing server infrastructure to support massive information processing and graphics rendering tasks required for virtual world creation, along with network capacity necessary to deliver this data at near real-time speeds to consumers. Furthermore, immersive hardware such as haptic gloves or bodysuits or high-resolution VR displays could also be needed for immersive experiences.

Metaverse survival depends upon a stable real economy; should any form of financial distress or even just panic selling occur in real world markets, this would cause value reduction for metaverse assets and currencies as businesses were forced to reduce trading activities or stop altogether, creating ripple effects throughout its existence affecting people and communities who use it.

3. Monetization

Digital assets in the Metaverse can be monetized in various forms, from virtual clothing and accessories, gaming in-app purchases and social media engagement with brands to virtual real estate ownership – giving businesses access to build, develop and monetize digital assets within its marketplaces. Digital goods can then be sold and traded between each other with NFTs (Non Fungible Tokens) providing verified digital ownership and provenance of these assets.

Operating the Metaverse requires both physical and digital inputs, including consumer devices (VR headsets or AR glasses) and software development services, which add up to significant fixed costs per participating consumer, depicted by shaded area C in Figure below.

Increased participation reduces fixed costs while increasing the percentage of consumers who experience net benefits from participation and thus expands monetization potential of the Metaverse Economy. Many large technology companies and traditional industries are investing in this space because it represents an economic opportunity that will make them more cost-efficient in existing markets while opening up access to their services more easily at lower cost for more consumers.

4. Collaboration

The Metaverse Economy will require both physical and digital inputs for its operation. These may include consumer devices (VR headsets/AR glasses, computers or mobile phones, sensors, handheld controllers/haptic gloves/cameras and power networks) which all add cost while detracting from consumers’ experience in the metaverse.

Video game makers have already established large user bases in virtual worlds and compete for social media revenue; but in order to truly dominate the Metaverse Economy they will need to step up their efforts. Other entertainment and technology companies, including Nike’s “Nikeland” virtual world and social networking giants Facebook and Instagram with their own branded metaverses are also entering this market.

Investing in the Metaverse Economy is a long-term bet. But for its true potential to be realized, its technology must mature quickly – specifically its ability to deliver high fidelity graphics with low latency at affordable price points.

Lawton reported that experts interviewed by Lawton stated that, with proper implementation, the Metaverse can increase teleworker collaboration and collaboration, speed up training programs and decrease office space requirements. It may even help businesses address real-world challenges via immersive virtual experiences – for instance diving into a virtual ocean to understand why and how marine ecosystems must be protected.

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