Reed Smith Guide to the Metaverse

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As the metaverse is intended to represent a public good based on an open economy, distributed ledger technology (DLT) plays a key role in ensuring that representations of value and transactions in the metaverse are not controlled by any single actor and that they function in a transparent and permissionless manner.

Authors: Hagen Rooke

The role of DLT in the metaverse

DLT, which involves the registration and validation of transactions on a decentralized network, provides the operational foundation for various cryptocurrencies such as Bitcoin, Monero, and Ripple’s XRP. DLT also underpins protocols such as Ethereum, Binance Smart Chain, and TRON, which support smart contracts – essentially, pieces of code that, like automated machines, trigger or record certain transactions or information upon relevant conditions being met. DLT-based smart contracts have become a cornerstone of decentralized autonomous organizations (DAOs) and decentralized finance (DeFi) protocols, which are governed by transparently encoded rules that can only be changed by their users in a collective manner.

DLT therefore provides an ideal foundation for the exercise of self-sovereign ownership and user-directed exchanges of value. A prime example of this open economy is Decentraland, an Ethereum-based virtual world in which users can interact through games and activities, as well as purchase parcels of land they can use to build and monetize applications, marketplaces, and environments. Decentraland operates through a DAO, and transactions occurring in its virtual environment are smart contract-based. Users can employ a native token, MANA, to pay for avatars, wearables, names, and other items, and can hold unique parcels of land represented by LAND and Estate tokens.

Non-fungible tokens (NFTs)

While cryptocurrencies that are designed or used as a means of payment (for example, Bitcoin or Ether) are fungible (that is, fully interchangeable and replaceable), non-fungible tokens (NFTs) are a means of representing and certifying ownership in an item or content that is intended to be unique. For example, in the case of Decentraland, as referred to above, MANA tokens are fungible, whereas LAND and Estate tokens are NFTs.

While the technology that enables NFTs has existed for several years, NFTs have recently experienced a surge in popularity with the success of NFT-based applications such as CryptoKitties (which allows users to purchase, collect, breed, and sell virtual cats) and NBA Top Shot (which allows users to purchase and collect moments in NBA history, memorialized in video form). The vast majority of NFTs are based on the Ethereum protocol and use either the ERC-721 or the ERC-1155 standard, which ensures the uniqueness of a representation on the protocol.

Beyond the novelty value of being a digital, DLT-based representation of a unique item, some NFTs have use cases that add significant value to the process of transacting in and owning the item. Where NFTs are based on the Ethereum protocol, they can embed smart contracts that, for example, can trigger automated payments to designated persons upon relevant conditions being met. An illustration of this use case would be an NFT representing a piece of music or art that makes a royalty payment to the original artist each time the NFT changes hands. The programmability of NFTs therefore opens up a range of new ways of incentivizing and monetizing creativity.

Key takeaways
  • Distributed ledger technology plays a key role in ensuring that representations of value and transactions in the metaverse are not controlled by any single actor
  • DLT provides an ideal foundation for the exercise of self-sovereign ownership and user-directed exchanges
  • Exclusivity and ownership rights might not transfer in NFT sales and transfers
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