The evolution of payment methods in the metaverse and the new meta-economy are key concepts in understanding how tomorrow’s commerce will look: decentralized, secure, and fast. The metaverse is synonymous with innovation. And the biggest players in the market are already taking advantage of the new opportunities it offers.
The metaverse we know today is a set of virtual worlds accessible through technologies such as virtual reality (VR), extended reality (XR), and augmented reality (AR). Virtual worlds in search of technical standards and interoperability, aspiring to become one large and interconnected ecosystem where people can move freely and take their digital assets with them. This is facilitated by blockchain technologies, which enable decentralization, the transfer of control and decision-making from a centralized entity (individual, organization or group) to a distributed network, disintermediating relationships. Users become actual owners of the digital products they create, purchase or exchange in the metaverse, in the form of exportable tokens such as NFTs (Non Fungible Tokens). To date, not all worlds in the metaverses are fully or partially decentralized, but it’s through decentralization that the metaverses can best express their potential.
Whether in the context of real-life simulations like “Second Life,” virtualized working relationships, or gaming and entertainment experiences, economic and exchange relationships will increasingly constitute a crucial aspect of interactions in the metaverses. The growth of online and digital payments is not slowing down, and the large-scale adoption of the metaverse promises further acceleration and evolution. Physical products such as clothing, food and accessories, digital goods such as music tracks, skins in video games or digital artworks, as well as services such as virtual or physical entertainment events can already be purchased with direct deposits and without further authentication (“frictionless”), thanks to cryptocurrencies and smart contracts. This makes the role of financial intermediaries to manage and govern the transaction unnecessary.
The retail sector (both digital and physical) seems to have room for development with respect to the various potentials that the metaverse offers. These include the purchase of products through an immersive experience for the consumer that allows for 3D visualization and online trial. Industry players are setting up operations and opening storefronts in the metaverses, taking advantage of opportunities to develop new markets and competition. For example, one of the most renowned sports brands in 2021 created its own virtual world.
The metaverse also brings with it interesting news regarding means of payment for purchasing digital assets and conducting financial and banking business. For example, a US investment bank launched a virtual lounge as the first presence of a bank in the metaverse. Indeed, according to an estimate by the US bank, the metaverse would represent an investment opportunity of about USD1 trillion in revenue, with a transaction volume of USD54 billion per year. Payment systems have already been transformed. On the one hand, most online banks are growing, and on the other, branches and payment methods are being dematerialized, facilitating the transition to economic exchanges in fully dematerialized realities. In line with this trend, the issuers of the most popular credit cards also seem to be focused on ambitious projects in the metaverse and have filed some applications for new patents.
Technologies underlying the metaverse and the main legal issues: Smart contracts and tokens
The metaverse fits into the new paradigm of “Web 3.0,” the next stage in the evolution of the internet that introduces major changes to the previous paradigm (so-called Web 2.0) including:
- decentralization of infrastructure and use of new technologies (VR, AR, XR and crypto wallets);
- a new concept of ownership and generation of scarcity through NFTs, identity through avatars, and the ease with which transactions are completed; and
- use of cryptocurrencies as a medium of exchange and the profits made from activity on the various platforms.
In fact, the medium of exchange commonly employed in the metaverse is cryptocurrencies and NFTs. These cryptoassets, while making use of blockchain technology, differ in their fungibility: unlike cryptocurrencies, NFTs are non-fungible tokens and generate digital scarcity precisely because of their uniqueness.
Smart contracts, on the other hand, are software tools through which different contractual steps are automated and transactions are finalized, which, under certain conditions, can be defined as a legally binding agreement.
The main advantages of using smart contracts for transactions in the metaverse are the dematerialization of the payment method, the absence of intermediaries and the decrease in transaction costs. Smart contracts decrease the risk of default because of their inherent conditional logic and because of the automatization through which contracts are executed. In fact, they are activated only upon the occurrence of all contractual conditions predetermined by the users. The “self-executing” commitment not only relieves the parties of the need for mutual contractual trust, but also decreases transaction costs.
But there are still many uncertainties in the mass application of smart contracts. For example, the business transactions are difficult to change since smart contracts are embedded in the blockchain. In addition, it’s not possible to intervene during the contract execution phase. Therefore, the possible exercise of the right of withdrawal is problematic, as is dispute resolution in the event of a smart contract implementation error.
Regarding the right of withdrawal, a new NFT standard called “ERC-721R” has recently been published. It allows a condition to be included in the smart contract by which the user can exercise the right of withdrawal through a lien on the escrow, demanding its return before the expiration of the relevant term. For now, this standard does not enjoy widespread application, and its effectiveness in practice remains to be seen.
There are also several online platforms that offer a dispute resolution service in a blockchain environment, where a jury decides, according to the majority, the outcome of the plaintiff’s claim. These platforms provide a quick and immediate solution. However, they also generate several problems. There’s no judge who can adequately study the matter. There’s the excessive conciseness of the so-called statement of facts (the question that is for the jurors to decide). There’s the absence of true impartiality of the “tribunal.” There’s the economic burden related to the sums locked on the smart contract (so-called stake) that the parties are not always inclined to bear (especially for transactions of modest value). And there’s the interoperable infrastructure that allows the application of the decision on multiple blockchains.
Toward a meta-economy
The metaverse will constitute a true parallel economy (so-called meta-economy) – potentially unlimited and constantly expanding. Last year, USD54 billion was spent on virtual goods and skins compared to USD42 billion in the movie market and USD30 billion in the music market.
However, mass use of the metaverse will only come through payment methods that are not only fast and functional but also secure and interoperable. And this depends not only on technological evolution, but also on the adoption of harmonized regulations and technical standards that are still being developed and do not yet allow a sufficient level of consumer protection.
It will be interesting to observe how companies seize the unmissable opportunities offered by the meta-economy and how they will manage to juggle such an innovative (but still with pitfalls) environment.