When there is blood in the streets
Decentraland is building on four different trends; Digital Collectibles, Virtual Reality, Online Gaming and Open Blockchains. Development timelines, governance and scaling remain the open questions for the project. I have spent about 20 hours researching the project over a week.
Decentraland came on my radar on 23rd of March when I read that someone had paid $170,000 for one, 10m x 10m digital parcel of land in the Decentraland Metaverse. Until then I had assumed that the low latency needed for functioning VR would be incompatible with the currently ‘slow and secure’ open blockchains. At the time the total market cap for Decentraland was about $100m. Most land purchases were in the $1-2k range.
Scope of this article
To get a sense for why someone thinks this plot of virtual land is so valuable, I’ll have a look into the Whitepaper, Second Life, The VR and Gaming Market and the ‘Speculation before Scale’ thesis. I will assume that readers know the basic ideas behind virtual worlds and the best known working example of an open VR space, Second Life. If not, this research paper or the Second Life wikipedia page is a good introduction to the economics of existing open VR worlds.
Disclaim and Disclose
As a disclaimer, I’m new to VR and not a developer, so I’m not assessing this project from a technical or historical point of view. My analysis is based on what I have learned from the economic output of previous VR worlds combined with what is new about Decentraland. This is not investment advice
Disclosure: While researching this project I bought some $mana in order to purchase 1 of the cheapest plots of land. The process is discussed below.
Decentraland White Paper summary.
The White Paper begins with the core the focus for the Decentraland team, which is to avoid the mistakes made by centralized platforms and allow the community itself to manage the ‘Metaverse’. This youtube video conference, further highlights where the inspiration for the project came from. The white paper goes on to explain that specific districts of Decentraland will cater for different use cases:
Section 1.5 suggests ‘games, gambling, and dynamic 3D scenes’, as some of these uses. Rare Pepe’s seem to have inspired a focus on the potential for Digital Collectibles. The recent partnerships with Ethermon and OPSkins furthers this claim, with Education, therapy, 3D design, and virtual tourism listed as other possibles. Proposals for districts were subsequently submitted and are discussed further below.
Crowdsale and mechanics
Smith and Crown have a good summary of the crowd sale mechanics here so I won’t go into detail as my focus is on where the project is going. ‘The content of the virtual world will be distributed using IPFS, The ERC20 token, MANA, will be burned to purchase LAND. Each parcel of land is represented by a non-fungible digital asset called LAND.’
There is multiple mentions of IPFS and Filecoin in the whitepaper with a brief mention of Lightning as another potential scaling option. It’s very hard to say in a Whitepaper that if scaling doesn’t get solved, the project is doomed. But as this is the case for almost all cryptocurrencies I won’t dwell on it as a novel problem.
What Decentraland has I believe, is a novel solution as to why users might wait for scaling while still using the platform. That is, the familiar real world idea of land speculation combined with the new ERC-721 standard for non-fungible digital assets.
Much like the pre-games that loaded before the commodore 64, buying scarce land, before it is fully usable, may keep users occupied with a more interesting version of platform emerges. This is well summed up by Decentralands most well known investor and proponent
Terraform event pricing
Land price heatmap
As I had missed the terraform event, it took me a while to get any sense of why one parcel of land had sold for more than another in the initial sale.
Proximity to the Genesis Plaza, (where users will enter Decentraland in the centre) adjacency to a main roadway, or locating in a particular district, seem to be the 3 primary drivers of price, with the first 2 being the main drivers at this early stage.
Having said that, listings vary wildly in price and I suspect some early buyers have just set a very high price with the intention of not selling until Decentraland is more fully developed and prized land is theoretically increasingly scarce.
Proposals were accepted from the community on github for districts and this article lays out which were the most popular in the terraform and sale event. I would expect this to change if and when real development takes off. The Red Light, Fashion and Vegas Districts could potentially do well as some of the more popular use cases of Second Life.
Real or Artificial Scarcity?
One concerning element is that the foundation has said they plan on issuing additional MANA at a target rate of 8 percent a year. From the Smith and Crown article: “A DAO will manage future issuance of MANA tokens, though it’s unclear who would hold the voting powers of the DAO.” It is not clear if further land will be added. Clarity over the ultimate scarcity of tokens and land itself would seem to be an important element that hasn’t been clearly addressed. Over the long term, in theory the valuable land will be that which is best developed for users irrespective of how much land inflation there is. Inflating MANA tokens might have the effect of simply weakening their value as against BTC.
The other unclear element of the project is what exactly each parcel will represent. It seems that you may be able theoretically use each parcel to open a separate game or world of your own, which would s imply that the parcels are more of a display space for entry into a seperate world. Interested to hear more on this.
NFTs and Buying land
Buying and selling digital land is an easy thing for the average user to conceptually understand and it is much less CPU and bandwidth intensive than decentralized gaming using a blockchain.
The process of buying through Metamask is still a significant hurdle to mainstream adoption. An integration with one of the big wallets or a more user friendly UI than the current marketplace would be a big step forward for the early speculation phase. Even the mobile integration of Toshi, Cipher and Trustwallet is still clunky. This is a wider problem in the Ethereum token landscape and so I don’t see an obvious solution in sight. The current path for someone who is new to the space is probably the following:
A Beginners guide to buying LAND on Decentraland :
1. Buy Bitcoin on Coinbase.
2.Try to buy Mana and realise it’s not listed.
3. Find out what exchange lists Mana for Bitcoin and realise the main exchanges aren’t taking more signups.
4. Sign up with a smaller, risky, low liquidity exchange and figure out how to transfer Bitcoin between exchanges.
5. Buy some Mana on this exchange and try to send it to Decentraland, realising you need a Metamask Wallet. What’s that?
6 Install Metamask and realise that you need to transfer Mana to that address. And here comes the most unintuitive part.
7. You need to register the MANA token ‘standard’ on Metamask. The token (confusing name, should be ‘token registration code’ or ‘token standard’) itself is confusingly similar to the public address you have on Metmask. It can be found on Etherscan.io
8. Send your Mana from the exchange to your metamask account.
9. Login to the Decentraland marketplace and figure out how to register and verify yourself ( not obvious you need to click on the Fox Icon Browser prompt in the toolbar AFTER you have ticked the confirmation boxes).
10. Go to the marketplace and see what land you want. Probably buy one of the cheapest plots to start.
The decentraland website has a helpful guide but needless to say most people will give up well before this process is complete. Only a Coinbase integration with the mana marketplace would allow users to buy easily. I suspect this is a long way off.
Governance & Adult Entertainment – Lessons from Second Life.
We know that Second life was and is used for role play, gambling, online dating, religious meet ups and many other use cases. Like all online communities it suffered from ‘technical, moral and legal issues’ FOOTNOTE: Footnoteand moderation/governance will be a challenge for Decentraland. Second life banned gambling in line with Federal laws to major protest from Users.
There will no doubt be criticism as the debate over land use heats up, once developpement gets going. I would see this as a positive sign that people are willing to get excited about defending their use of the land. Github has a list of the early suggestions here. How different plots will ‘line up visually’ with each other is one of issues being questioned. The blog post discussing the design of roads get to the heart of this problem . From the Decentraland Team:
“The closest relatives to Decentraland are Robloxs, Second Life, Minecraft, and the various MMOs, MUDs, and Farmville-genre virtual worlds, all of which differ from Decentraland in their centralized control. In these worlds, rules are designed to increase immersion and enhance gameplay. Because Decentraland is both a protocol and a place, our rules are less clear.”
The worst sign would be an over moderated experience that results in anger and subsequent apathy from users. Once Decentraland chooses its level of censorship (obviously darkweb trading won’t be allowed) I expect other platforms to launch catering to use cases that are less censored (e.g. more pornography and violence or more censored if Decentraland can’t control bad actors in the space.). In 2014 about half of all the most populare sims on second life were adult rated.
Making Money on Second Life
Extract below from the 2007 Book – Entrepreneurs Guide Second Life
As highlighted in this Vice article, Second Life was the first successful attempt at allowing people create their own worlds as opposed to the fixed, centrally designed worlds that preceded it. Allowing people to enjoy the world while keeping in line with existing laws in the real world. If Decentraland can keep a light touch approach and manage community expectations, it may capture a percentage of the Second Life market.
The fact that ERC 721 tokens has temporarily solved the lost inventory problem that plagued Second Life is another plus for the platform. FOOTNOTE: Footnote On the flip side to this, the vulnerability to attacks, and uncertainty surrounding Ethereum’s development roadmap make this new standard less appealing. It would be great to see an NFT standard emerge on top of Bitcoin as a hedge against this problem.
As a novice programmer I admit I fell down pretty quickly trying to get through the documentation. I was never going to be building anything complicated but I wanted to try and create a basic scene. Between NPM, Python and IPFS I couldn’t get the dependencies right and after an hour of google error searches I gave up. This is almost certainly due to my own inability but I would love to see a guide for beginner programmers from someone more technical.
Both of the founders have experience in previous ‘blockchain’ projects but neither has come from a VR background. While this may not seem to be a major issue, the scar tissue earned from mistakes that have been made in other online worlds are likely to have been useful. The tradeoffs between centralized worlds and more open worlds like Second Life are complicated and probably need to be navigated with a clear vision for which early tradeoffs to make.
Philip Rosdale, the well known founder of Second life is now working on High Fidelity project is using a permissioned blockchain to allow for faster transactions. This tweet exchange sums up the challenges that Decentraland face.
Barry Silbert believes that people want to speculate first and build second. Philip wants a less volatile coin that can be used for trade on the platform. From this Bitcoin Magazine article on Rosdale:, Rosedale explained that HFC (High Fidelity Coin) is designed to have a stable value for trade, so it is different from other cryptocurrencies. “[It] doesn’t make sense to hold it for the expectation of future gains,” he said. “We are working on an algorithmic strategy to increase the money supply automatically as usage of HFC increases, probably using an oracle monitoring the exchange rate. Again, the goal is price stability, not speculation.”
My guess, although I would be interested to hear Rosdales thinking is that latency, currency fluctuations and scalability were major issues for Second Life and he believes that the current scaling solutions for Blockchains won’t work. I’m sure the Decentraland team are aware of these issues but I haven’t heard any public discussion as to what trade offs they will ultimately make. Silbert is betting that speculation will trump scaling problems for the time being.
Who will build on this speculative land?
At the moment the Roadmap only has 2 phases highlighted with no dates attached, The Iron Age, and the Silicon Age. This article seems to imply that 2018 will be the Iron Age and 2019 will be the Silicon Age. I think the project would benefit from an overly pessimistic timeline on when elements of gameplay will be implemented. If land speculators collectively feel that project timelines aren’t being met, a crash in expectations is easy to envisage, whereas investors at this stage are likely very early adopters and willing to be patient even if guidelines are very long term. Once of the co-founders Ari Melich does go on to say in the article that “Desktop and Mobile, will probably be how most users experience the world over the next few years, until VR becomes better and more widely available.”. I think it would be useful to feature this more prominently on the website.
Development so far has been limited as the team is still creating the programming environment. They said recently that: “ We’re in active conversation with a lot of gaming development teams. We wish many Chinese developers will join this exciting journey with us.”
In discussions about land use, there was a reference that showed the Decentraland team ‘hoped’ that users on the outer roads wouldn’t use all of their 10m x10m space, allowing for other land holder on the inner parcels to be seen and accessed in come capacity.
This is the kind of critical, difficult decisions that Decentraland may have to centrally make soon. Voting on these topics will take a long time and all votes are prone to sybil attacks.
General interest metrics
In spite of the fact that VR may be the trough of disillusionment at the moment, general interest hasn’t fallen off dramatically.
General interest in Decentraland seems to be relatively small (4k Reddit subscribers) but growing. If you compare the redditmetrics.com rank to Highfidelity it paints and interesting picture.
Currently Barry Silbert is the best known advocate for the platform. DCG is one of the largest investors in the cryptocurrency space. While it has been mentioned by prominent crypto traders I won’t include them as good signals for the longer term merit of the project as their time horizons are unknown. Silbert mentioned that his interest was long term in an interview with I am now struggling to find. DCG recently released a slide deck with a summary of their views.
It wasn’t easy to find any but one of the best I could find was the Voices of VR with Kent Bye, a well known commentator in the VR community. This was recorded before the Terraform event. It would be great to see more of these. After the podcast I got the sense that the team are looking to slot different pieces of crypto together in a novel way. Kebase.io might be used for identity. Ethereum and ERC-721’s for smart contracts and NFTs. Filecoin, IPFS and A- Frame as mentioned previously.
I’m encouraged that the platform is agnostic in this way. If they decided that value transfer was so efficient on the lightning network, they might switch to this.
The idea of multiple areas of governance discussed on the show is an interesting one. They seem to be willing to rely to the governance standards worked by the likes of Aragon as needed. I’m not really clear on how this would work.
Governance by Fork?
The only governance technique that has been proven to work so far in the Cryptocurrency space is Governance by Fork. I wonder if and when the first Decentraland Fork will occur? I would see this a positive thing if it happened, allowing decisions to be decided by those investing in the land and codebase alone. Decentraland Classic is the real Decentraland, OK?
Market Size – Second Life but bigger?
In 2015, Second life had a GDP of $500M with $60m cashed out by users that year. In this MIT review article in 2007 the follow numbers were disclosed.” In the second quarter, we facilitated the exchange of over US$20 million worth of our Linden dollars. The average sale transaction is about US$200 dollars, and the average purchase transaction is about $20. We match about ten buyers to one seller, and charge about a 5 percent fee to facilitate that exchange. Second Life residents can use their proceeds from the exchange in two ways. They can use it to pay their fees–probably 45 to 50 percent of the proceeds from Lindex sales are used to pay land fees, buy more land, or pay maintenance fees–or they can cash it out.”
Using very rough estimates, with about 40-70 parcels of land being bought each day on Decentraland, at about an average cost of $1,000-2,000 dollars. About $50k of land was traded on 28th of March and about $80,000 29th March. This would translate to $20M+ of land being traded annually, that is before anything is built on it. It is not unreasonable to expect that daily volume might grow in line with the general interest in the VR market and Cryptocurrency market.
Addressable market size – VR, eSports, gambling and Digital Collectibles
The Decentraland market cap is currently floating between $70 – $140m. The combined addressable market for Decentraland is significant. Even if they capture a very small percentage of the global gaming market ($105Bn) porn market ($90Bn) gambling market ($40Bn) VR market ($2BN with one report putting the potential size of the VR market in 2021 at $215bn) Cryptocurrency ($300Bn). Digital Collectibles or DLC ($80Bn)
In 2007, Second Life was rumoured to be worth $1billion. It is not unreasonable to expect that the next winner in VR, be it Decentraland or not, will be worth 10 times or more than this.
Strong hands. Held up better than most in the recent downturn
Mana is currently down about 60-70% from all time highs putting it in the top tier of altcoins that have remained close to Bitcoins 57% retrace at the time of writing. The volume is still way down but unlike other tokens, MANA is trading for digital assets that can be easily mentally modelled and being held for the same reason.
Like all Blockchains that are not going after the money use case, MANA faces the same potential challenge that others face, which is that ultimately, most users may just want to use Bitcoin or whatever the money use case ‘winner’ is in crytpocurrency, to exchange value. Users could ultimately push for this if needed or denominate land, goods and services in Bitcoin if needed so I don’t see it as an existential threat.
The VR market itself, as previously mentioned on the Voices of VR podcast, is also in a trough at the moment. It’s impossible to say if and when either market will recover but if VR and Cryptocurrency investment begins to flow back, interest could ramp up. I wonder if the Decentraland funds might be attractive to developers who are struggling to make money at the moment.
Some deal with headset manufacturers would definitely drive short term excitement but I maybe the team are resisting this in the short term to avoid unnecessary hype, while the focus is on desktop and mobile VR. Ethermon and OPkins are early signs that the team feel the short term speculation opportunity is more important to cross the bridge beyond the uncanny valley.
Thoughtful internet analysis
I like the idea of this person, who posted this comment in December 2017 checking the land sales to realise that land bought for 1,000 MANA was now regularly selling for 10,000 MANA. Nothing is guaranteed with a new project, except trolling. To summarise some legitimate concerns I believe are the following:
Token or land inflation – Some guidance as to whether this will be flexible, decided indefinitely at a future date or in fact currently set in stone, would be good.
VR is 10 years away – We are obviously a long way away from a Ready Player One Scenario even in a Centralized scalable world like High Fidelity. With Blockchains it will be even more difficult with the slowness of transactions.
Governance/Moderation issues – As previously mentioned, I think a light touch and evolving stance is wise on smaller issues, but some big decisions need to be made in terms of a constitution, intellectual property rights and guidelines on what activity might be illegal, based on what jurisdiction the user is based. Simply saying that the users will decide, ignores some difficult questions that I think should be made early.
Dependence on ETH and ERC 721 –
I would like to see integration with the Lightning network and judging from Esteban’s profile and comments I think this will happen. In terms of NFT’s, Ethereum is the only show in town but it would be great to see a standard that emerged independent of Ethereum.
The project would further benefit from some guidelines about what will and won’t be allowed on the platform. Simply saying that it will be censorship resistant doesn’t address the dual issue of abuses by bad actors and illegal content being shared in conflict with local laws. This will ostracise the ultra libertarian free society actors, but ultimately create a space that will allow for long term projects to get going.
Conclusion – Speculate as you Scale
Ideological early adopters seem to have the strongest hands. While the word cult has a negative connotation, in this sense it means those who will hold and persevere no matter what the price. Bitcoin Core believers probably display this idea most clearly. Censorship Resistance is the primary shared belief. I’m not sure that this exists yet with Decentraland.
Letting users decide outcomes and hoping you can incentivise builders seems to be the high level vision at this stage. The longer term challenge is avoiding a Tragedy of the Commons and for a fully functioning society, a system of governance, similar in many ways to that of the real world would need to emerge.
The two biggest strengths that the platform has, is its focus on creating an open environment, and the provably scarce digital assets (land rights). As I continued to research, I realized that High Definition VR is less important than I first thought. FOOTNOTE: Footnote Some VR developers seem to think, 2020 is a significant breakthrough year for VR, Land speculation may or may not carry early users until then.
I have listed my trial land purchase for sale and I couldn’t resist putting a small premium on the list price. It hasn’t sold but I’m happy to wait and see what happens. Maybe I’m not the only one.
This is not investment advice