The metaverse is a hot topic. Connecting the physical and digital worlds, it is revolutionizing the way we work, live, socialize, spend and consume entertainment. It marks the next evolution in social media engagement, where people can create digital versions of themselves in the new virtual environment.

Worth close to $39 billion in 2021, the global metaverse market is set to grow to approximately $47.5 billion this year. From VCs investing into funding rounds for metaverse projects, to everyday users making payments to interact with content on platforms, adoption will only continue to grow. With it will come new avenues for growth across industries and the tokenization of economies.

It’s an innovative new arena but the metaverse is also unchartered territory. So it is crucial to address the potential risks for participants in order for it to deliver on its transformational potential. 

The tokenization of economies

There are multiple ways to participate and, according to Gartner, 25% of people will spend at least one hour a day in the metaverse. Participation can be motivated either by speculatively investing in the future price appreciation of a token – or by utility. As an example of the latter, users playing a game on the Sandbox platform acquire SAND to do so. Similarly, Decentraland allows users to create and monetize content and experiences on a decentralized platform.

The metaverse lends itself to advancing blockchain technologies, which underpin everything from online gaming and e-commerce to the crypto assets market. In a virtual economy, there will be increasing use cases for NFTs and tokens, where goods and services can be traded and avatars created solely within that ecosystem. This will flow into the physical retail sphere through e-commerce platforms, pushing cryptocurrency more into mainstream adoption.

Major brands including Nike, Gucci and Adidas have already entered the space, allowing consumers to buy and sell in the metaverse in increasingly immersive ways, supported by cutting-edge AR and VR technology. We’re also seeing the emergence of virtual real estate, with plots of land growing in value (in the form of tokens) within metaverses including The Sandbox.

Importantly, blockchain-enabled tokenization holds significant opportunity for a more transparent new financial system, with greater speed and cost efficiencies. It can break down barriers, making the financial marketplace more accessible to all, including those in developing economies. De-risking participation is vital to cultivate a transparent, responsible, and sustainable market.

Addressing the principal risks

There are new social and financial risks as users enter a new, unknown space. Users must consider the ‘tokenomics’ of a given metaverse project, as well as supply dynamics (how much the developers are holding and potential for dilution). Many retail investors are unfamiliar with the deeper intricacies of such tokens. People should do their own research about projects before becoming involved. 

Further, given that some of the technologies that facilitate the metaverse are still in relatively early stages, there is potential for compromised data or human error. Users need to be vigilant to ensure that their funds are secure, and double double-check the intended destination of payments (i.e. the correct wallet address). As transactions take place on the blockchain, it is impossible to reverse them.

The metaverse is predominantly on the Ethereum blockchain and based on smart contracts. A key strength of the blockchain is that it is architected to be trustless, and tokenization can bring higher levels of traceability and verification to transactions. On the flip side, depending on the platform, anyone can now create a metaverse, so users should avoid anything by an anonymous developer and look for proper security audits.

With more data than ever before being shared and available within these new virtual worlds, the potential for cyber attacks grows, as does the need to instil more rigorous data security and privacy measures. The decentralized nature of the metaverse creates a challenge for regulators in trying to ensure a trusted financial ecosystem. We have a whole different model, which is not controlled by any central authority, has no censorship nor a single point of failure. Regulation of the space is therefore highly complex, with many moving parts and cross-border legislation to take into account.

A more comprehensive regulatory framework needs to emerge to encompass the many elements of the metaverse. This requires a deep level of collaboration to agree a set of standards and ensure proper supervision, between regulators and those already leading the space, including tech giants such as Apple, Meta and Google. From a regulatory standpoint, the biggest challenge – and where most attention will flow for now – is with consumer issues and protection.

While regulation evolves, it comes down to ensuring the right education is available so that participants and investors have the knowledge they need to conduct due diligence and make informed decisions. The token economy has not yet seen enough maturity, and the metaverse – still in the development phase – poses a learning curve for all. However, given its growing applicability across industries, it is vital to put strong foundations in place now to help participants navigate the risks and amplify the benefits of an extraordinary new concept that will only continue to expand in its global significance.