Policy, Ethical, Social, and Environmental Considerations of Web3 and the Metaverse

WEB3 AND THE METAVERSE, AND THEIR CURRENT STATUS First, what exactly are Web3 and the metaverse? And are they already here? As I have briefly explained in the previous issue, Web3 succeeds Web 1.0 and Web 2.0 and is the decentralized internet and the next phase of the Internet’s evolution. While centralized social networks have dominated Web 2.0, Web3 is expected to foster more open environments with decentralized technologies based on blockchain, such as decentralized finance (DeFi), cryptocurrencies, and nonfungible tokens (NFTs). Web3 is already finding growing numbers of users and applications in diverse areas. One estimate suggested that Web3 will have 1 billion users by 2027.2 Some current Web3 applications include DeFi, NFTs, play-to-earn (P2E) games, and decentralized autonomous organizations (DAOs).[3] DeFi protocols are run by smart contracts to connect lenders and borrowers, which eliminate intermediaries, can increase yields and returns. In 2021, over $250 billion worth of digital assets were assigned to DeFi protocols (https://tinyurl.com/ku5m4p59). Thanks to blockchain, Web3, and smart contracts, many content creators, such as artists and musicians are directly selling their works to global consumers without relying on labels, streaming services, or other intermediaries.[3] These technologies have allowed artists to control their pricing, earn royalties in secondary, tertiary, and higher order market sales, and connect with their community (https://fortune.com/2022/04/27/music-nfts-web3-snoop-dogg-crypto-artists/). For instance, many African artists are minting their arts’ NFTs and making them available to consumers worldwide (https://tinyurl.com/cxmbhd56). Thus, these technologies have created a global market for products and services. Regarding the use of Web3 in the P2E gaming industry, according to a report published by Lithuania-based data acquisition and analysis company DappRadar, which tracks decentralized applications (dapps) across multiple blockchains, and the Blockchain Game Alliance, which promotes blockchain in the gaming industry, blockchain-based P2E games, such as Axie Infinity, Splinterlands, Crazy Defense Heroes, Pegaxy, Arc8, and Aavegotchi led the dApps sector in the first quarter (Q1) of 2022 (https://tinyurl.com/2p9de3rm). As of February 2022, the biggest P2E game Axie Infinity had more than 2 million daily active users (https://tinyurl.com/2yjtdb9c). Among the most transformative applications of Web3 are DAOs, which are self-managed organizations that are run by blockchain-based smart contracts and have their own bylaws and rules of procedure. According to DAO stats platform DeepDAO, as of April 1, 2022, there were 4157 DAOs with a market capitalization of $24.8 billion (https://twitter.com/AragonProject/status/1509912050201468930). An example of a DAO is PleasrDAO, which was formed to bid on works created by high-profile digital artists. Among its purchased assets, the group bought an NFT affiliated with the whistleblower and activist Edward Snowden for 5.4million.PleasrDAOalsoboughtthesolecopyofAmericanhiphopgroupWu−TangClan′sOnceUponaTimeinShaolinalbumfromtheU.S.governmentfor4 million. The album was originally purchased by pharmaceutical executive and hedge fund manager Martin Shkreli. When Shkreli was convicted of securities fraud in 2018, he was ordered to forfeit more than $7.36 million as part of his criminal sentence and U.S. marshals had seized the album along with other assets (https://tinyurl.com/3kfwwy9c). A system of token-based on-chain voting will decide how the assets will be managed. For instance, the DAO’s members can vote to exhibit them in a show or create NFTs and sell them to the public.[4] While Web3 focuses on ownership and control issues on the Internet, the metaverse is about the user experience aspect (https://tinyurl.com/bdz8nhb7). The metaverse can be viewed as a shared, 3-D virtual reality environment featuring avatars, digital objects, and functioning economies.[5] More generally, the metaverse is an online space with an immersive environment that creates an illusionary experience, and the user feels part of the environment (https://tinyurl.com/2p983csf). Just like the case of Web3, users and applications of the metaverse are also rapidly growing and it has already become an integral part of the lives of a large number of people. For instance, in February 2022, the gaming platform Roblox in which independent developers create games popular with children and young adults, had 55.1 million daily active users, who spent 3.8 billion hours on the platform (https://tinyurl.com/yxtt97nj). While the most well-known metaverses currently are in the gaming sector, technology companies are developing metaverses focusing on diverse areas, such as fashion, virtual concerts, and performances. For instance, according to management consulting firm McKinsey, in 2021, users spent $110 billion to buy digital goods in the metaverse and about 30% of that amount went on “virtual fashion” (https://tinyurl.com/a923zyp3). According to a survey conducted by information technology research and consultancy company Gartner, by 2026, 25% of the world’s population will spend at least one hour a day in the metaverse for activities, such as working, shopping, attending schools, socializing, or consuming entertainment (https://tinyurl.com/mttyy3wn). The global bank, Citi, estimates that by 2030 there will be up to five billion metaverse users and the metaverse economy will reach between 8trillionto13 trillion (https://tinyurl.com/5dnt2y5p). NATIONAL POLITICAL AND GLOBAL GEOPOLITICAL ISSUES Web3 and the metaverse are being debated as a major national policy issue in some countries. In April 2022, the Japanese Government’s NFT task force recommended that the government should create a position for a Web3 minister, who would handle Web3-related issues. The recommendation was that the Web3 minister should work closely with the NFT task force as a part of the leadership team. One of the envisioned roles of the Web3 minister is to reform regulations and tax-related hurdles in NFTs and related areas (https://tinyurl.com/25xmzx6v). Moving to a different issue, a key policy concern for nations is that Web3 can also create challenges for modern states in a variety of tasks they perform, such as enforcing laws and collecting tax from sales. For instance, website takedown notices cannot be issued. There are no corporate CEOs, who can be approached to enforce regulations.[6] Likewise, if the metaverse replaces the current online market, regulators may face challenges to track those transactions and tax them.[7] At the international level, Web3 can also potentially change the relative power of nations and hence the current geopolitical dynamics. For instance, Web3 is more likely to benefit nations that value democracy and personal privacy. It is likely to force authoritarian states, such as China to address their weaknesses. If these nations fail to make adaptations to meet the requirements of Web3, they may fall behind. Some nations can no longer realize the advantages that are currently offered by Web 2.0. For instance, the Web’s current framework has allowed countries, such as China to gather large amount of data to power their artificial intelligence systems for political and military activities. Due to Web3’s decentralization and personal data control, authoritarian regimes, such as China, may find to harder to maintain data dominance.[6] There have also been concerns that enemy states may engage in a new kind of cyberwarfare using the metaverse to attack each other. For instance, adversary states may target biometric data, financial information, and other digital assets. Some have also pointed to the possibility of the emergence of geopolitical dimensions in the metaverse, such as the emergence of western and Chinese metaverses.[8] Since some nations and nationalistic hackers have shown a tendency to engage in cyberwars against nations that are viewed as adversaries,[9] the metaverse has the potential to take the cyberwarfare to the next level. ETHICAL, SOCIAL, AND ENVIRONMENTAL ISSUES There are also a broad range of ethical, social, and environmental issues that can be anticipated in the development of Web3 and the metaverse. For instance, its proponents have touted the metaverse as a potential solution to address ethical issues facing the gaming industry. A major criticism that has been made against online games in the Web 2.0 era is that they have been run as sweatshops (https://tinyurl.com/ywexf4zv). However, games in the metaverse have their own ethical issues. Concerns have been raised regarding the exploitation of young game developers and game players. For instance, Roblox is reported to pay a game developer only 28.1% of the revenues associated with the game (https://tinyurl.com/2p9dsr7k). On the positive side, the metaverses’ P2E games are reported to help many people in developing economies earn their living. For instance, the crypto metaverse P2E game Axie Infinity had 2.5 million daily active users in February 2022. According to SimilarWeb, which provides traffic-monitoring data, four of the top five countries in terms of the number of Axie Infinity players were developing countries: Philippines, Venezuela, Argentina, and Brazil (). Players can earn Axie’s native token Smooth Love Potion (SLP), which is an Ethereum-based ERC-20 token. In July 2021, the average Axie player was reported to earn 4500 SLP a month (https://tinyurl.com/534zw6dk) and the SLP had the all-time high price of SLP was $0.399727 in that month (https://www.coingecko.com/en/coins/smooth-love-potion). This translated to a monthly income of $1799, which was significantly higher than an average Filipino worker. However, a negative aspect of such games is that cryptocurrencies, such as SLP are highly volatile. For instance, on April 3, 2022, the value of 1 SLP was 94.2% lower than in July 2021. Naavik’s Blockchain Games report of November 2021 reported that Axie Infinity players’ earnings were below the minimum wage in the Philippines (https://tinyurl.com/fuzusnje).