The metaverse and Web3: The next internet platform

Amidst the hype and criticism of Web3 and the metaverse, leaders should work to cut through the noise by exploring and experimenting with the underlying solutions. If they wait too long, the landscape could shift underneath them. With a new wave of metaverse and Web3-native disruptors, the future of the internet could be shaped by a grassroots movement that directly challenges Web2-era business models. As Deloitte’s Eamonn Kelly and Jason Girzadas have shown, technologies like Web3 and the metaverse are poised to drive revolutionary advancement and technological breakthroughs which could shape new forms of communication, innovation, prototyping, and community formation – and new business opportunities.² The metaverse and Web3 are powerful ‘winds of change’ that will likely propel us into new and challenging future ‘worlds’ that business leaders will navigate. To reap the benefits of this new internet platform, businesses should collaborate to build its foundation through metaverse and Web3 initiatives.

The metaverse is emerging from our digital behaviors

Today, people often socialize through global networks, modifying their appearance with augmented reality filters that can see and respond to faces, wrapping themselves in avatars, buying virtual clothes, and attending concerts in massive game worlds.³ Businesses hold face-to-face meetings remotely and virtually, and can don VR and AR headsets to train, visualize, and collaborate. Generation Z ranks playing video games as their favorite form of media and entertainment.⁴  Even before the nonfungible token (NFT) boom, some game worlds were running out of virtual real estate to meet the demand of players.⁵ Remarkably, one poll found that over half of people in nine markets prefer to spend their time online rather than in the real world.⁶ Several generations have become accustomed to digital interfaces, software and interactivity, and global connectivity. We immerse into the digital and increasingly draw it out across the physical world. Amidst the hype and critique, it is these behaviors and uses that are invoking Web3 and the metaverse.

Many technology, media, and telecom (TMT) companies have enabled and responded to these accelerating behaviors, laying the foundation for an interoperable metaverse. Telecommunications providers have extended advanced connectivity into businesses, households, and hands, enabling more interaction, immersion, and collaboration. Technology providers have established hyperscale platforms that have greatly empowered innovation and operations, while delivering new generations of hardware that continue to support and amplify larger and more complex tasks. Media and entertainment companies have leveraged technology and telecommunications to advance content and storytelling towards richer, more interactive, and more social experiences to audiences around the world.

Many of these capabilities need more room to grow, could be rearchitected to better meet our evolving uses and enable next-generation capabilities, and require addressing the side-effects that have emerged with scale. There is a desire to enable much larger shared immersive experiences; to enable an economy of digital goods and ownership; and to establish digital identity solutions that give more control to users. In essence, Web3 and the metaverse could bring these capabilities to the internet. Critically, this layer extends both into the digital internet while enabling digital information and content to exist in and be drawn from the physical world.⁷ And it is being architected with learnings from 40 years of connectivity and digital interactions.

Enabling seamless movement across the metaverse

One of the more common promises of the metaverse vision is the portability and interoperability of identity, data, and digital assets. For example, if a consumer buys an exclusive digital item for their avatar from one service, like a piece of virtual clothing, they can go to a second service that will recognize their ownership of the item and render it effectively. For the enterprise, a similar use case might involve being able to invite users across a partner ecosystem into a shared immersive collaboration. This might mean reviewing the 3D assembly of a prototype vehicle or inspecting a digital twin of a factory for performance enhancements.

This capability may require new ways of organizing identity, ownership, and even storage. Digital identity is often fragmented across services, with multiple logins and passcodes. Likewise, digital assets such as personal avatars and virtual clothing are designed to work in the service providing them, not for portability elsewhere. Currently, only the service knows you “own” the asset, and only the service can load and render that asset. This concentration of user identity, data, and ownership within a given service is what is referred to as “centralization”.

Web3 can enable blockchain registries that bind a user’s identity to the things they own. NFTs offer this ability.⁸ Instead of being scattered across services, identity could become a persistent element of the blockchain internet: physically decentralized across the many computers mirroring and managing the blockchain but logically centralized as a registry.⁹ This would enable any service to read the “state” of the user and the goods they own. Identity, data, avatars, and 3D objects could become portable across services.

Interoperability of 3D goods is another challenge. There are many 3D modeling solutions that use different formats with diverse ways of specifying objects and materials and their behaviors.¹⁰ An object that works in one will not typically work in another. While there are very successful game world marketplaces selling virtual goods, for example, there is little to no interoperability between them. Enabling consumer interoperability of digital goods will be critical for the evolution of retail in the metaverse.¹¹ Users that buy virtual branded sneakers, for example, will likely want to wear them across different immersive experiences. However, this could require secure, peer-to-peer storage solutions.¹² Although identity and records of ownership can be secured on a blockchain, the objects themselves—those new virtual sneakers—are still often stored in common databases.¹³

Enabling portability and interoperability in the metaverse will likely require significant effort and collaboration among providers. There are technical challenges, like increasing the rate of blockchain transactions and reducing energy requirements.¹⁴ It may be harder to shift business models built on user data, but such efforts could add value to users, their data, content, and digital goods by making them more persistent and transferable across platforms. Leading businesses have been very successful and may not see immediate incentives to share control of key assets like identity and user data. Such considerations tug at the interplay between centralized and decentralized solutions.

Shifting the balance of power: Understanding centralization and decentralization

Web2 has been marked by hyperscale platforms and two-sided marketplaces that have aggregated very large numbers of users and built their businesses using identity and user data. Web3 protocols were developed specifically to challenge this control.¹⁵

Increasingly, these winners may feel burdened by managing and securing identity and data, contending with customers and adversarial third parties that have learned to exploit their services, and reckoning with regulators concerned with market dominance and consumer protection. A recent Deloitte study found that data and security were the largest issues causing anxiety for technology executives in the United States, and that many expect regulation to become much more disruptive over the next three-to-five years.¹⁶ If business leaders are to guide the historic shift to Web3 and the metaverse, they may need to shed some of their Web2 norms and embrace more decentralization.

For the metaverse, decentralization applies to the premise that internet users should control their identity, their data, their digital goods, and more, and that these can move with them between services and experiences. With Web3, a user’s avatar and digital goods, for example, can become more easily portable across different services. Or users can specify different properties for different services. For example, one’s personal avatar may be very different from one’s avatar for work—just as one’s dress style may be. Users could use smart contracts that determine how third parties may or may not interact with their data. In this model, businesses can still own and control metaverse experiences, but they would negotiate for access to users.

This condition has some interesting nuances. Businesses may give up direct control of user identity and data but could issue tokens that incentivize users, offer fractional micropayments in exchange for contributions to the service, and give them a stake in the success of the business. Users could be similarly incentivized to share their data and accept advertising. Consumer and enterprise businesses could potentially implement rules to enforce appearance and behaviors within shared immersive spaces: a form of virtual-geofencing. Overall trust in digital systems could become much more robust with decentralized identifiers (DID), peer-to-peer storage systems, and secure and compliant third-party data trusts.¹⁷

Today’s metaverse and Web3 disruptors

While leading platforms and service providers increasingly bend their strategies towards the metaverse, more nimble disruptors are drawing large amounts of capital to build the next generation of Web3-native metaverse experiences. These young businesses use Web3 protocols to create strong networks of users and owners all incentivized toward shared outcomes. They’re issuing tokens, generating funds and membership through NFT virtual goods, and building immersive and interactive virtual worlds that offer entertainment, goods, and equity. Many are built on the Ethereum blockchain, enabling portability and interoperability across services.

Web3 and metaverse disruptors are often decentralized autonomous organizations (DAOs). DAOs use blockchains, tokenized incentives, and automated rulesets (smart contracts) to govern how the network acts and grows. In this way, blockchain-based organizations can operate towards shared goals as semiautomated tribes—they are both computers and social networks.¹⁸ However, leadership in DAOs can be distributed among stakeholders—literally those members holding the largest stake in tokens on the network.¹⁹ This again tugs at the nuances in the debate of centralization versus decentralization. The largest token holders within some networks can exert greater influence over the direction of the network, its services, and its business models.²⁰ Even now, growing Web3 companies are emerging as dominant marketplaces and gateways.²¹

Web3 may not fundamentally decentralize power and capital, but it can distribute it more evenly into smaller groups. As before, the next generation of the internet could be shaped by the eruption of small disruptors that can quickly capitalize on change. The boom-and-bust cycles of NFTs and crypto are enabled because much of the foundations of Web3 are present and functional. This enables innovation, scaling of new commercial applications, and with enough users, testing them in extreme market dynamics. Lessons learned in design and implementation can support the next growth curve.

Key risks and uncertainties

Many elements of Web3 and the metaverse are already unfolding, enabling innovations and opportunities, and revealing the risks and uncertainties inherent to this disruptive shift.

Successful blockchain implementation are advancing, moving from proof-of-concept to deployments to serving customers.²² But many Web3 solutions are highly technical, there are many vulnerabilities from immature implementations, volatility and asset inflation from investors and scammers alike, and a good deal of noise clouding the market.²³ There is fragmentation among crypto wallet and identity providers and a growing need for stability and liquidity guarantees in crypto markets. There’s also a need for coherent payment rails across crypto and fiat currencies, and thoughtful regulation to support innovation within an allowable framework. Additionally, high energy consumption from proof-of-work blockchains could slow adoption while raising operational costs and environmental impacts.²⁴ Energy use could be addressed by the pending shift to more efficient proof-of-stake blockchains, as well as an increase in green energy supply to power these protocols.

Establishing user-centric identity, asset portability and interoperability, and shifting to hybrid models of centralization and decentralization could take several years to scale. Or they could simply empower a patchwork of early adopters and disruptors building a new competitive flank. In the near term, there could be more change driven by disruptors as leading incumbents work to reinforce their platforms. This posture can help leaders defend their current business but could cause them to fall behind if they don’t jump in now. Ultimately, they will likely need to cooperate and build alignments to create the interoperability that is so critical to the metaverse.

Arguably, the early advancement of the metaverse has been hampered by too much hype and critique, unclear definitions, and a tendency to insist on VR and AR as a precondition. Like the web, the interface to the metaverse should be device-agnostic. With extensive use cases on mobile devices, for example, augmented reality has advanced without having achieved adoption of AR glasses.

Threats, complexities, and much more data

Business leaders face many challenges with cybersecurity, trust, brand reputation, and digital rights management.²⁵ Web3 and the metaverse may require new implementations across networks and partner ecosystems. This can expand the surface area of vulnerability and data risk for businesses that are already very concerned about these disruptions.²⁶ With added layers of complexity, malevolent actors may find new and more advanced ways to attack organizations.

Layered blockchains and bridges can be compromised. Crypto custody can be broken, validity of NFT transactions compromised, and a user’s real identity can be teased out of transactional data. Immersion and embodied digital interactions could create much more data about users, revealing new threats and security concerns. Organizations may need to advance security policies, processes, and technologies that cross between physical and digital domains, while evolving identity management, threat detection, consent and content management, data protection, and compliance. Yet, there are now many use cases and lessons to learn from, and a wide range of experiments to study that can help address the challenges.

Amplified challenges, blurring jurisdictions, and unexpected outcomes

Many of these challenges point toward the next generation of internet regulation.²⁷ There is an increasing dynamic of new cryptocurrencies and tokenized economies evolving at a faster pace than regulators can respond to. Scaling decentralized identity (“self-sovereign”) could introduce vulnerabilities, instabilities, and unintended consequences.²⁸ Data collection, transit, storage, and sovereignty could take on new shapes and scales. There are also unknown tax and compliance implications of decentralized organizations whose members are anonymous and potentially scattered across the globe.

Metaverse experiences could face much greater challenges with the scope of data collection enabled by advanced interface hardware while reckoning with new forms of content, speech, and reach. Social networks and immersive entertainment could become even more engaging and influential, potentially amplifying existing challenges. And unforeseen innovations, exploits, and the side-effects that come with scale could drive more discontinuities across society. There is a critical need to carefully consider how Web3 and the metaverse could exacerbate existing societal problems and enable new ones. If this next internet platform becomes as transformative as the visions suggest, then its architects will be responsible for how it impacts democratic ideals, human rights, self-determination, and the very real consequences of industrialization.²⁹

Building capacity for tomorrow

It can be hard to navigate so much change and discontinuity amidst all the hype and criticism surrounding Web3 and the metaverse. The foundations of Web3 are already in place and will continue to seek value and weed out the problems. Many metaverse capabilities and behaviors exist, inspiring the largest platform and digital lifestyle providers to mobilize enormous amounts of capital towards its success.

Leaders should examine their businesses and customers, looking for areas where Web3 protocols can create unique and compelling experiences, enable greater efficiency, and address regulatory pressures. Some may be able to productize virtual goods, extend their brands, or offer enterprise services through metaverse experiences. Some may need to build out their networks, cloud, compute, and storage capacity, while adding the talent necessary to execute on these next-generation capabilities.³⁰ If data is being generated exponentially by metaverse interactions, businesses may need new solutions in place to operate on that data continuously and effectively, while also adhering to evolving regulatory and compliance regimes. Additionally, businesses could leverage cryptocurrency and smart contracts to manage finances with much greater velocity, essentially automating capital and making their money programmable.³¹

Businesses may also be burdened by managing and securing user identity, reckoning with the complexity of so much data, and struggling to turn it into value. As threatening as it may seem, many leading businesses could be freed up by letting go of old approaches and working with partner ecosystems to build data management in a more holistic and agile way. To do so, business leaders will likely need to align more on standardization and interoperability that support entire markets—and communities—beyond the existing market leaders.

However, leaders should also carefully consider the pace of adoption and growth, especially for immersive experiences. Some things may move quickly, and others will take time. Business leaders should seek to understand how their capabilities and mission enable them to build in the near term, plan for the midterm, and prepare for longer horizons. Experimenting with Web3 and metaverse solutions for today’s problems can lay the foundations for new business models.

There is much more to understand. What changes will come with regulation, and how will use cases impact networks, semiconductors, software, and consumer devices? How might media and entertainment evolve? What is the role of artificial intelligence in amplifying these capabilities, and what is the future of risk and cybersecurity? Ultimately, this big shift responds to the demands of people, business, and technology to establish the next foundation for progress. However, such tectonic changes should be approached thoughtfully, with more societal considerations beyond the goals of business and the inertia of technology.