Introduction to the Metaverse

Definition and motivation

Broadly speaking, the metaverse refers to a network of shared 3D virtual worlds and augmented reality environments forming an extended reality universe. In this universe, people can be represented by digital avatars and may move around and interact with one another in real time.

The metaverse may allow people to engage in various online experiences in a more immersive way, through the use of devices such as virtual reality (VR) and/or augmented reality (AR) headsets. Compare, for instance, traditional remote working today with what remote working could look like in the metaverse. Work meetings in the metaverse could allow for more natural social interactions and better collaboration between colleagues. Similarly, remote education in the metaverse could allow for a more engaging experience, as students could feel as though they were in the same room as their classmates. In addition, VR or AR environments simulating things from historical cities to mechanical systems could expand the horizons of the traditional classroom learning experience. In the future, the metaverse may play a role in many major aspects of our lives.

History and future development

The idea of a shared virtual world is not wholly new. Notably, Second Life, an online platform that allows people to create an avatar and interact in a virtual world, was launched back in 2003. Over the past decade or so, however, several key developments have contributed to a general rise in interest in the metaverse. Technological improvements have allowed for better graphics and more realistic physics in gaming, as well as a rise in games like Fortnite or PUBG in which many players interact with one another in a single match. Consumer adoption of virtual reality headsets has become more widespread. In addition, the COVID pandemic has spurred an increase in remote working and education, as well as online social events. In April 2020, more than 12 million people attended Travis Scott’s Fortnite concert.¹ On the back of these developments, many technology companies, such as Meta, Apple and Microsoft, are developing products and services related to the metaverse.

The metaverse is still an emerging concept, and it remains to be seen what form it will eventually take. The 2018 film Ready Player One depicts a single virtual world that is shared by everyone on Earth, in which people can socialize, go to school, go to work, attend events, play games, etc. We are, however, very far from such a version of the metaverse. Advances in areas such as computing hardware, digital infrastructure and extended reality technologies including VR headsets will be critical in paving the way forward.

Blockchain and the metaverse

What does blockchain have to do with the metaverse? Virtual world platforms like Second Life or Fortnite are owned and operated by a centralized entity that has significant control over content and user assets on the platform, as well as the governance of the platform. Blockchain technology offers a way to decentralize aspects of virtual world platforms and give more control to users and creators.

A notable example is Decentraland, a virtual world platform that uses a public blockchain network (Ethereum) to keep track of user asset ownership. Ownership of virtual land parcels and other in-world assets, such as digital wearables, in Decentraland can be bought and sold by users as blockchain tokens called NFTs (non-fungible tokens). In addition, Decentraland uses Ethereum as a basis for its decentralized governance model. In Decentraland, it is the owners of land parcels and the in-world currency who have the right to make and vote on governance proposals.

There are potential pros and cons to both approaches.² For example, the organizational structure of centralized platforms may allow them to be more efficient in terms of operations or development. However, decentralized platforms may mitigate censorship concerns, may promote better interoperability across different platforms, and may allow for more value accrual to users and content creators relative to centralized platforms.

Many well-known brands have already ventured into the metaverse, whether by partnering with centralized platforms or acquiring land on decentralized platforms. For example, Forever 21 and Nike have partnered with Roblox to create virtual experiences on the platform, while brands including JP Morgan, Gucci and Adidas have bought virtual real estate as NFTs.

How to invest in the metaverse

The metaverse is still in the early stages of development. The future form of the metaverse, the extent of its centralization/decentralization, and the role it will play in our daily lives remain open questions. As Web 2.0 and smartphones did over the past two decades, the metaverse may radically evolve our digital experiences. The potential market opportunity has been estimated at over $1 trillion in yearly revenues,³ and many companies are increasingly engaging in this space. For example, Meta spent around $10 billion in 2021 on Reality Labs, its division focused on the metaverse.⁴

Given that the metaverse may be the next iteration of virtual experience, it may represent a significant investment opportunity. Fidelity Total Metaverse Index ETF and ETF Fund provide investors with exposure to companies that are expected to drive the construction of the experiences, capabilities and economy of the metaverse, in one convenient product that leverages Fidelity’s vast global network and research capabilities.