Long Take: Virtual communities and digital worlds are the difference between Finance Incumbents, Fintech, and DeFi

Hi Fintech futurists --

This week, we look at:

  • How the medical reality is accelerating remote work and digital commerce, including the success of buy-now-pay-later companies like Affirm and Klarna

  • The emergence of virtual worlds and video game environments that generate $ billions in revenue and have millions of participants, with examples of Zwift, Fortnite, Tomorrowland, Roblox, Genshin Impact

  • How to connect digital environments to digital communities and their economic activity, including through mechanisms like non-fungible-tokens in Rarible and Async Art

  • Advice for shifting thinking from manufacturing financial product, to starting with the customer, to leveraging the community

If you benefit from our writing, consider subscribing to the premium tier. It includes additional analysis 12 frontier technology developments every week, a podcast conversation on operating fintechs, and novel food-for-thought essays.


Long Take

Here in London, we are coming up on the second spike from COVID-19. Back in the States, the country is dealing with the third wave. I remember looking at the numbers in March and having an urgency about trying to understand it. Say something about it. Now, I just look at it with exhaustion and resignation. What can we do about the waves coming in and out? Give or take a million.

No alt text provided for this image

Well, we can wear a mask and wash our hands. We can be kind to each other. We can stay at home.

And let's be clear -- all of humanity is going to spend much of the fall, winter, and spring staying at home. Offices will be closed, and work will be remote. And here's the other side of the coin. Our communities and networks have become increasingly digital. This is not a temporary change, but an acceleration of an underlying trend in adoption and bandwidth.

No alt text provided for this imageNo alt text provided for this image

The data pipe of the Internet is expanding logarithmically according to Nielsen's Law in the chart above, an analogue to Moore's Law for computing. There is literally more stuff we can put into our digital worlds. And second, over 50% of the world's people are now Internet users. That means that our physical communities are also our digital communities. This is an obvious and trite thing to say when confronted with Facebook or TikTok. But it still is an important thing to say as it relates to commerce and financial services.

People are not buying some abstract reductionist notion of "products", they are economically participating in communities with counterparties native to those communities.

Thus Shopify, Instagram, and Alibaba are profoundly interesting as commercial community platforms in a world where we are increasingly at home. They are venues and marketplaces. Thus the current Fintech obsession with Buy-Now-Pay-Later companies like Klarna and Affirm (going public), which lever up these marketplaces with credit. See analyses by Mark Rubinstein here and Rohit Sharma here (whose value chain image we quote below).

No alt text provided for this image

Note that little red bit about "integrated into checkout". That's really saying "integrated into the Internet marketplace". The checkout is a gate into the economic activity within our digital networks. It is the monetization mechanism, implemented through a financial instrument, on top of the relationship between a billion digital consumers and a hundred million digital merchants hanging out in the same digital venue.

Emerging Worlds

Something about virtual worlds is shining through the noise this week. Instead of building up the argument from scratch, let's pull on the best data points we can find.

No alt text provided for this image

First, the Economist writes about how computer generated realities are becoming ubiquitous. The image above is a screenshot of a concert held in video game Fortnite (made by Epic, owned in part by Tencent) attended by 12 million people. This immersive event let players interact with an artfully rendered experience populated by both performing artist Travis Scott, as well as his community. Another COVID concert that pushed the boundary of the possible was Tomorrowland, which rendered 280,000 digital people in the crowd.

Next, check out this fantastic essay from Matthew Ball, a commentator on media and frontier technology, about the emerging opportunity in audio (music, podcasts, etc.).What stuck out most at us was the monetization growth in virtual worlds. While other media have seen volatility in industry revenues from the emergence of digital platforms, consumer spend on video games has grown to $100 billion. By comparison, music had peaked at $25 billion and is now at $10 billion, and video is at $225 billion.

No alt text provided for this image

Unlike the revenues of most social networks, which are the measure of how much an advertiser is willing to pay for attention in order to sell a product, the above chart measures aggregated payment for value experienced by the actual consumer. That consumer may be choosing a rendered world as a narrative for entertainment (playing a game, watching a show). But increasingly they are also purchasing a social aspect that is available only in some particular digital universe. They are paying for community -- admission to a roller-coaster ride with their friends. Or a chance to make friends.

A few examples. Consider Zwift, the cycling virtual world that has just raised $450 million. Its users are engaged in the virtual world for community connection and relative social status around fitness.

No alt text provided for this image

Or consider Roblox, a platform for a community to make games which can be played together. According to Ball, over 50 million games have been built, of which 20 have more than a *billion* plays, and developers will earn $250 million from the platform in 2020. Like me, you likely have not been paying attention. What makes this project tick for its audience of under-18-year-olds is the user generated content and emergent social network. People are happy to interact with digital experiences and purchase digital goods when they create positive feedback loops in their lives.

No alt text provided for this image

Last, consider Genshin Impact, a Chinese open world game, which is now wrapped up in the narrative of the Tech Cold War (i.e., China can make technology without reliance on the West). Pre-registration reached over 20 million people, and generated $60 million in revenue in its first week on mobile, against a development and marketing budget of $100 million. Previous titles from the developer earned over $750 million. All this for a "free" digital experience, where people pay for rendered markers of social status reflecting their personality.

We touch on these developments to anecdotally highlight that digital worlds hold both value and community, and that within the COVID environment, both will both grow and become more valuable.

Anchoring to Economic Scarcity and Finance

You didn't think we are just going to talk about video games for nothing!

Relying on some of the data from a recent post from Our Network, we can start identifying how economies, communities, and blockchain-based assets come together and overlap. Our core hypothesis is that active and empowered communities are the main difference between Finance, Fintech, and DeFi.

  • Incumbent finance comes at economic problems from the perspective of a factory -- how to make a thing, and push it down the assembly line to a customer? The questions are always about the costs of customer (or AuM) acquisition.

  • Fintech comes at the same problem from the perspective of a customer with some particular problem (i.e., the Silicon Valley view) -- how can we reverse engineer where the customer is, what they need, and how we can meld into that experience?

  • DeFi starts from the place of community -- what can we contribute to a group of developers and users, who are often the same people, to drive adoption, remixing, and growth? These are community engagement questions. They are questions of *play*.

When looking at virtual worlds and their assets, we are seeing the slow but persistent emergence of NFTs (non-fungible tokens). These are scarce digital goods that are unique and can be owned. For example, Christie's just sold multiple pieces of art related to blockchain code for $130,000, where one of the components was a programmed NFT tied to a physical object -- only visible when during daytime in the time zone where the physical work is located. It is easy to imagine more melding of physical and digital goods in the future, especially as NFTs can be tied to large multiverse worlds of Fortnite, Roblox, or Genshin Impact.

Projects like Async Art are bringing this to fruition by allowing communities to own different layers of a blockchain-based artwork. The visual piece is inherently social, because different people have control over various parts of the images. The result is a sharing experience in ownership and creativity.

No alt text provided for this imageNo alt text provided for this imageNo alt text provided for this image

Financial volumes are still quite low when compared to the full revenues in the art market. Blockchain-based art is at about $1 million in monthly volume, most of it passing through Rarible -- assuming a 20% long-run commission suggests a $200,000 revenue pool. But remember the $15 billion of revenues in the traditional art market, as well as the billions of revenue in digital world collectibles. Crypto art is just starting to build the software chassis to engage with those opportunities.

As another example, a decentralized file storage project called Filecoin, backed by Protocol Labs, launched after two years of development and a $200 million token offering. The market capitalization reached as high as $1.5 billion and now floats around $500 million. The protocol functions by (naively speaking) having participants that acts as miners host files, earning network rewards. A community is generating the product of file storage for financial reward. This is a necessary leg of the stool to connect the virtual worlds we have described running on traditional cloud to the financial machines of DeFi.

Takeaways for the Financial Industry

We fast-forwarded quite a lot here.

The main bits of the argument are that (1) the shift from physical to digital communities is being accelerated by the COVID environment, and (2) this has led to the acceleration in adoption of virtual worlds, events, and economic activities native to those environments, (3) and blockchain-based market systems and venues are emerging to attach these developments to financial systems. Alternately, the virtual worlds themselves are embedding financial technology features into their offerings as monetization.

The recommendation we have for both entrepreneurs and financial practitioners is to rethink their formula. Rather than just building a particular marketing funnel, try to think about how to leverage your potential audience in creating content and stories on your behalf, and engaging with the tools you provide to make new and more powerful solutions. That might mean giving things away for free that you thought you would sell. It might mean setting up bounties for creativity and conversation, instead of Google ads. It may mean expecting one thing and getting another. You just might end up as YouTube, instead of another dead cable channel.

If you benefit from our writing, consider subscribing to the premium tier. It includes additional analysis 12 frontier technology developments every week, a podcast conversation on operating fintechs, and novel food-for-thought essays.