Yat Siu, co-founder and executive chairman of Animoca Brands, discusses the importance of culture to the economy and growth of the open metaverse
Bitcoin is now having its own NFT moment, some five years after the Ethereum network and CryptoKitties brought widespread attention to NFTs and sparked a revolution in digital ownership. Ordinal Inscriptions, which are assets “inscribed” on the lowest denomination of a Bitcoin (BTC), are, effectively, NFTs for Bitcoin. At Animoca Brands, a number of our portfolio companies have already embraced Ordinals, most notably On Chain Monkey and Yuga Labs.
Just as strong interest in NFTs overloaded the Ethereum network starting back in 2017, demand for Ordinals today is causing disruptions on the Bitcoin network, leading to spirited debate about the value and applications of Ordinals.
Disruptive change forces innovation, and the introduction of Ordinals is reason for enthusiasm for the future of Bitcoin and all crypto. This disruption is leading to new innovations and network effects, whether in marketplaces, games, or other aspects of the decentralized world.
Put simply, the Ordinals introduced by Bitcoin finally give the most valuable crypto community (by market cap) something it needed to expand meaningfully: a way to store not just digital value but also digital culture.
The interplay of NFTs and culture has been very close to my heart for years; I have often remarked that while Bitcoins are stores of value, NFTs are stores of culture. I am now forced to revise that statement, since Ordinals allow denominations of Bitcoin to serve as stores of culture.
If you’re not familiar with Ordinals, read all about them in this primer by Decrypt. In this essay I would like to focus on the importance of culture to global economies and, by extension, to digital economies as well. By digital economies I mean not only metaverses and virtual worlds like The Sandbox, but also Layer 1 networks such as Ethereum and, more recently, Bitcoin.
Culture, ownership, network effects, business creation
Culture, meaning the various expressions of our collective identity, creativity, and customs, is an often underestimated force in both the metaverse and the real world. Culture is a key contributor to the development of prosperous societies and represents an important segment of any economy. Culture is also intrinsically connected to ownership, for example as in the attribution and commercialization of intellectual property.
We’ve discussed at length the importance of ownership and how NFTs can serve as the foundation for true digital property rights, providing a framework in which actual digital ownership becomes possible. Ownership over something gives us corresponding economic freedom over it: the ability to transact and use as it you please. Ownership also allows us to partake in the network effects related to that ownership.
Consider all the businesses that exist solely due to our ability to own things - any things, like cars, houses, or phones. Take the car example: the network of businesses connected to car ownership (such as insurance, spare parts, sound systems, seats, rims, rentals, ride sharing services, Uber, Lyft, etc.) forms an ecosystem much greater, more valuable, and farther reaching than the automotive industry itself.
As a result of these network effects, the utility of owning a thing like a car becomes significantly enhanced, making the entire experience of car ownership more valuable. Each new business or service that attaches itself to something we own adds to that thing’s network effect.
Another powerful effect of ownership is that owning something can contribute to our identity – to culture – in a manner that is distinct from the object’s utility. Take your fashion choices, your home, the vehicle you drive, a family heirloom, your wedding ring - the ownership of such items can carry deep embedded meanings that are shared only within a small community with no immediate economic expectations, but that nonetheless shape our entire identity, legacy, and story.
Stores of digital culture in the open metaverse
NFTs serve as stores of digital culture because Web3 enables true digital ownership, finally allowing digital items to carry personal meaning. Given that we spend a significant portion of our lives online and that for many of us our digital existence is potentially as valuable and important as our physical existence, the discussion of culture and digital ownership in the metaverse is incredibly relevant.
A lot of people raise their eyebrows at NFTs and Web3 because of the prices they see on the higher end of the spectrum. They look at a Bored Ape (Bored Ape Yacht Club is a project of Yuga Labs, one of the portfolio companies of Animoca Brands, which also includes Forkast Labs) and say, “How can that be priced higher than my Birkin bag which is an actual real item I can use in the physical world?”
But that is an error in thinking. People don't buy a hugely expensive Birkin bag just to put stuff in it. Pure utility is not the point. The value of a Birkin bag comes from the network effect generated by all the people who consider Birkin bags to contribute value to their social identity. The bag’s pure utility is a distant second. It’s about owning a story and being part of a culture and community that become integrated with one’s identity.
The same is true for digital culture in the open metaverse today: ownership, identity, and the related network effects are often more important considerations than pure utility. In a sense, social identity has emerged as a new utility for digital items, just as occurs in the real world for physical items like Birkin bags or high-end fashion in general.
This evolution of digital items is perhaps the most fascinating aspect of the open metaverse, which is based on developing new virtual economies within the new ownership framework enabled by Web3. Consider that users all over the world already spend billions of dollars on virtual goods for Web2 video games and virtual worlds, where their purchased items are not actually owned but merely licensed. Skins and cosmetic items have no specific utility but they enable users to express their culture and identity. That allows these items to generate tens of billions of dollars a year and, according to a report by Credence Research the virtual goods market is estimated to grow to more than USD 200 billion by 2028.
Culture TVL: powering the real and virtual economies
In the real world, culture is already a major economic contributor, both in terms of job creation as well as consumption and acquisition of goods. Every day all of us interact with aspects of culture in various manners – emotional, economic, utilitarian, or otherwise – and these interactions drive a significant portion of the economy.
Without culture there would be no entertainment. Without entertainment there would be no TVs or cinemas or video games. Without video games (and digital culture in general) there would be no PlayStation, Xbox, Nintendo, or gaming PCs. Without advances in game tech we would probably not have the graphical processing technology that has empowered other industries. Display technology is a good example of how cultural demand gave us better tech: in a few years we went from cumbersome and limiting CRT displays to flat/curved panels and the miniaturized wonders found in mobile phones.
In the US, one of the world’s major exporters of culture, culture – including the arts – contributes significant value to GDP. In 2021, the arts and culture made up more than $1 trillion of the US economy, growing more rapidly than other sectors. This should not be surprising, because culture drives consumption and therefore affects almost all aspects of trade and retail.
Source: Arts and Cultural Production Satellite Account, U.S. Bureau of Economic Analysis (BEA) and The National Endowment for the Arts (NEA).
Think of an aspect of culture and imagine if utility was its main driver of consumption - in many cases that just doesn’t work. We could choose clothing that only serves the purpose of covering our bodies, and yet that utility is a distant second to the cultural aspects of fashion. People make fashion choices based on who they are and who they want to be. This individual need for expression explains why there are so many fashion choices.
Cultural expression isn’t limited to fashion; it translates into other real-world purchases, whether it's cars, property, jewelry, or even "skin-deep” purchases such as tattoos and piercings.
Because culture is already a highly significant real-world driver of the economy, creativity, and innovation, it has a similar impact on the open metaverse, which is forming around us every day thanks to the proliferation of Web3.
To put it in crypto terms, culture in the real world represents one of the major TVL (total value locked) of any economy. The same phenomenon of culture as TVL is already occurring in virtual worlds: the purchase of skins or cosmetic items in your favorite games is the metaverse equivalent of fashion purchases in the real world. Culture is the driver.
NFTs store digital culture and, given the economic power of culture, it is easy to see why NFTs are driving adoption to Web3 in their myriad forms including avatars, video games, education, music, and many other industries. Culture is a key pillar of the economic growth and sustainability of the new virtual economies being created in the open metaverse.
The open metaverse
Unlike its mainstream cousin, which emphasizes interface technologies to access proprietary “walled garden” experiences, the open metaverse is based on ownership and culture. Despite the crypto chill and various macroeconomic woes, the open metaverse remains an incredibly exciting space. NFT sales totaled $4.7 billion in Q1 2023, which is remarkable in itself but even more so for an industry that was supposed to be “dead”.
But that’s only the tip of the iceberg, because we’re still in the early days of property rights for goods in the virtual world. According to McKinsey research, the metaverse has the potential to generate US$5 trillion in value by 2030.
As Web3 continues to become more established, more popular, and easier to access, the all-important impact of culture will manifest itself in ever more powerful ways in the open metaverse, driving demand, consumption, and utility as we truly enter the age of digital ownership.