The Economic and Social Equilibrium of the Metaverse: Balancing Openness and Closeness

Introduction

Recently, Apple launched the Vision Pro: an extended reality goggle with advanced sensor arrays that blend virtual and augmented reality. This groundbreaking device serves as evidence of a new industry-wide trend: the exponential growth of the metaverse. Initiated in 2021 with Facebook’s pivot to develop the first overarching Metaverse, the virtual realm has seen investments by tech giants like Google, NVIDIA, and Microsoft. As devices like Vision Pro continue to blur the lines between the virtual and physical worlds, they underscore the Metaverse’s growing influence on our daily lives — from social interactions and business meetings to the very structure of our economy.

However, the shift towards the virtual economy has its challenges. As the Metaverse becomes increasingly entangled in our lives, it could increase existing social and economic inequalities. Those without the necessary access or skills are at risk of being left behind, widening the gap between the privileged and underprivileged. The Metaverse, as an emerging technology, has the potential to reshape how we interact with the world. However, its long-term viability and sustainable development depend on navigating between openness and regulation. This paper argues that a balanced approach, which combines the freedom of an open system with the security of regulations, is essential for creating a Metaverse that is both economically sound and socially equitable. This paper aims to explore the complexities of the Metaverse’s rapid development. It will delve into the economic and social implications of both ‘open’ and ‘closed’ Metaverse systems, using case studies like China’s virtual economy and VRChat as illustrative examples. Finally, the paper will propose a balanced approach to Metaverse governance that aims to foster an inclusive, sustainable virtual environment.”

Metaverse Foundations

For many, the term “metaverse” conjures an image of a virtual construct accessible through a chip in one’s brain or VR goggles. In the context of the paper, the Metaverse is where the “physical and the digital worlds converge into an experience, augmenting both the virtual and the physical worlds” (Ng 192). Our phones could be considered a small but significant form of Metaverse, a window to the internet encompassing work and leisure. Similarly, China’s virtual economy encompasses e-commerce, online services, virtual currencies, and digital entertainment. It represents a fusion of the natural and virtual worlds, where traditional economic principles are applied within a digital framework. These examples show that the Metaverse can be conceptualized as a continuum, with one end representing the pure real world and another signifying an entirely virtual environment. Forms of the metaverse lie in a spectrum between these two extremes.

The development of the Metaverse into a fully digital world is inevitable, given current economic and technological trajectories. A report by the PWC estimates “that VR and AR have the potential to boost GDP globally by up to $1.5 trillion in 2030, up from a projected $476.4 billion in 2025” (Rijmenam 34). The rapid growth of Metaverse technology will draw investment from venture capital firms and angel investors, serving as a catalyst for growth. As the technology improves, more people will join due to the networking effect (the phenomenon where the value of a service increases as more people use it). This phenomenon, seen in social media platforms like Facebook and TikTok, suggests that the metaverse will follow a similar exponential growth. More growth will attract more capital, overall creating a positive feedback loop that fuels the trajectory of the metaverse to remarkable growth.

Understanding the current state of the metaverse is essential in understanding future regulations. Currently, the Metaverse is “confined to specialized fields in the healthcare and education industry” (Tlili 269). Despite exploding in popularity in 2021, the technology is still in its infant stage, expensive and primarily accessed through research. Despite the technological immaturity, traces of aggressive investment have already formed. Meta has “invested 10 billion dollars in the metaverse directly and 250 billion investment in [related] metaverse technology” (Henz 4). Significant investments into the technology signify a trust in the potential revenue and value even though most revolutionary technologies take decades to fully mature. The high development cost means the first commercially viable Metaverse will take time to exist. However, given the attention by investments and firms, we will most likely see a future where the metaverse dominates our lives. Given this landscape, the Metaverse’s exponential growth makes the consequences of inadequate regulation increasingly severe.

Before examining the effects of open and closed policies in the Metaverse, defining these terms in the context of virtual worlds is essential. An “open” metaverse system refers to a virtual environment with “a large variety of completely open, permissionless platforms,” where “permissionless” means “anyone can join at any moment.” Conversely, a “closed” metaverse represents “digital space … [with] its own rules, created, monitored, and enforced by its founders, owners, the community, or the wider organization” (Rijmenam 56). These two approaches have distinct implications for the development, accessibility, and governance of the Metaverse, which will be explored in the following case studies.

Case Study 1: China’s Virtual Economy — a “closed” metaverse system

The Metaverse, a multifaceted and complex system, presents challenges in forecasting the outcomes of policies and regulations. However, we can examine past precedents of virtual worlds, such as China’s virtual economy and social platform VRChat. These platforms exemplify “closed” and “open” metaverse systems, respectively, concepts that will be further expanded in the subsequent section. By analyzing these systems’ economic and social effects, we can infer the dynamics of virtual spaces and how different regulatory approaches may shape them.

China’s virtual economy, a digital platform with transactions and interactions, serves as a great case study for understanding the implications of a “closed” metaverse system. The country has seen massive transformation in shifting services and products into the virtual world. Almost all payment is done through two government sponsored platforms: Alipay and WeChat Pay. Entertainment platforms like TikTok have exploded in popularity. China’s virtual economy is the largest form of a preliminary “metaverse” to study.

China’s strict control over the virtual economy is driven by tighter control over the citizens, standardization of services, and continuous growth of the economy. To achieve this, China seeks to “integrate the virtual economy with the real economy” and “set strict GDP goals in the five-year plans”. According to research by Shang, China has been notable in being successful at integration as the two economies have a “91.7% correlation based on the cointegration and unit root tests” (Shang 4). Although a virtual economy backed by the real economy seems like an economic success, setting high GDP goals is unrealistic and results in a financial crisis due to inflation. Based on the “history of world economic development …the frequent outbreak of financial crisis is always closely related to the excessive development of the virtual economy” (Shang 2). In a closed metaverse like China, the risk of forming bubble economies (sectors of economies inflated or boosted by overinvestment) is high due to the challenges to discern when a bubble forms in the economy.

The tight control exerted by the Chinese government over the virtual economy has a few implications. First, the concentration of wealth in specific sectors could lead to sudden crashes if investors believe that the sector is overvalued. This could lead to an economic crisis which increases social inequalities as opportunities could decrease drastically for non technical products. Second, the focus on specific sectors limits innovation on technology related to the metaverse, making the economy less attractive from foreign investments. Having less funding means less research and development budget, which could lead to ethical concerns such as companies stealing intellectual properties to compete. Finally, the government’s pressure on companies to meet ambitious economic goals may encourage deceptive practices, like faking progress to show compliance. This creates an unstable metaverse system in the long term.

It is essential to acknowledge that China prioritizes national security and stability in the country. Therefore, many policies are highly regulated. However, having stiff control of the Metaverse ultimately presents a very high risk of economic crisis, which is disadvantageous to the world.

Case Study 2: VRChat — an “open” metaverse system

VRChat, a virtual reality platform that allows users to interact with each other through avatars, offers “unlimited avatars and worlds, enabling users to express themselves and socialize regardless of physical distance” (Ortiz 53). VRChat is designed to have minimal rules and censorship, representing a great case study for an “open” metaverse system.

While the minimal regulation and anonymity foster greater freedom of expression, the “lack of regulation and anonymity” results in “virtual crimes such as sexual misconduct, harassment, and virtual fraud” (Ortiz 60). The platform has seen numerous cases of virtual sexual harassment through reports and critical reviews of the platform. The trauma caused by virtual crimes affects individuals profoundly, making it difficult for them to recover in jobs or education. Additionally, Dr. Adriana Zenteno, a psychiatrist, discussed how “dopamine produced by committing crimes in the metaverse translates into a desire to commit them in real life” (62).

The open nature of VRChat, where users do not require identifications, and regulations are sparse, allows for an environment that breeds financial crimes like money laundering and fraud. As Chamber-Jone notes, “digital currencies provide an ideal money laundering instrument because they facilitate international payments without the transmittal services of traditional financial institutions” (Chamber-Jones 109). Because digital financial activities are difficult to monitor, the ease of exchange from virtual assets to real money allows for easier laundering. Additionally, the lack of regulation provides legal ambiguity which makes it challenging to judge activities in the digital world. Ultimately, the lack of regulations and identification of users makes it easy to commit crimes and create chaos within the society’s economy.

Although VRChat aims to be an inclusive platform, the lack of regulations could unexpectedly make it exclusive. Established organizations may use this regulatory void to set rules that limit accessibility for newer, smaller entities. The platform’s openness allows such established organizations to gain an unfair advantage, thereby inhibiting the growth of newly formed groups. VRChat still has a long way to go to provide an inclusive environment that supports individual needs.

From analyzing case studies, it is clear that both case studies present significant challenges that could represent the complex dynamics of a larger metaverse. Having too “open” or “close” of a metaverse will steer the economy and social development clear of growth. The following section will explore theoretical frameworks and policy implications to navigate these complexities and approach the design of an optimal Metaverse.

How to design a balanced metaverse that supports sustainable economic and social development?

Throughout history, humans have been replicating the real world into virtual worlds, making the real world a great indicator of what is going to happen in the metaverse. Today, complex virtual worlds form with “populations that exceed that of small countries” (Fuchs 2). With a large population, the mechanics and structure of these worlds are highly complex, modeled after the economic structure in the real world. Even in virtual worlds like Pradus, there are “entry and exit barriers” for virtual entrepreneurship and labor within which serves as an accurate model for real world economics. As we transition into the metaverse, we can draw what already works in the real world while maintaining the fundamental structure of the metaverse. A big focus is going to be balancing having too much regulation and little to no regulations.

The balance between total anonymity and strict identification requirements is important to consider. Too much anonymity, as showcased in VRChat, can lead to environments ripe for crimes and harassment, which makes for an unpleasant and unsustainability environment for users (Ortiz 67). On the other hand, excessive identity verification is time consuming and not necessary. In order to provide safe access to metaverse, a new framework should be developed that ensures just enough data to verify an identity without impeding on the user’s privacy. This ties into the idea of data privacy. In order to prevent data from being concentrated in large corporations. It is essential to “allow users and developers to fine-control the privacy” through “privacy enhancing technologies” like encryption (Fernandez 2). Corporations should adopt a “data minimization” approach, collecting only the data essential for providing services. Any additional data collection should be transparently communicated to the user, fostering trust and ensuring that sensitive data is not misused.

Additionally, virtual assets should be made more stable without limiting its potential. In the current stage, virtual assets like cryptocurrency and NFTs have huge volatility which makes for an unstable economic environment. Control over the virtual economy necessitates stability. Assets within the metaverse should have a stable valuation and limits on volatility to encourage investment and trading, ensuring a balanced economic structure. As Shang notes, “stability in virtual assets is crucial for economic development in both realms” (Shang 2). Therefore, it is important to devise economic policies within the metaverse that focus on asset stability, rather than speculative profits.

The Metaverse poses unique opportunities and challenges for social structures, particularly social groups. In the virtual world Pradus, a simulated reality representing society in a futuristic setting, the main reason for this higher equality is the smaller fraction of poor players in alliances: while “79% of the total population and 92% of the richest 10% are alliance members, only 28% of the poorest 10% are’’ (Fuch 5). This disparity echoes real-world phenomena where social capital — networks, relationships, and the trust that arises from them — often plays a pivotal role in economic mobility. Just as elite social clubs, prestigious educational institutions, and professional networks can gate keep opportunities in the real world, social groups in the virtual world would push people to do the same. People who are isolated could be further divided if the metaverse is closed. In a closed system, access to crucial social and economic networks could be restricted to those who already have the means to enter, thereby perpetuating a cycle of inequality. An open system can democratize access to opportunities, leveling the playing field for individuals regardless of their real-world social or economic status. However, some level of regulation and closedness is essential to prevent the kind of chaos and exploitation that can arise in entirely open systems.

As the paper explores different aspects of metaverse design, the metaverse still stands in many challenges. It is tempting to simply make the metaverse completely decentralized to provide “unparalleled freedom”. However, from our case studies in VRChat and China, complete decentralization can create legal gray areas, making it difficult to enforce laws and regulations. The absence of a centralized authority can lead to the proliferation of illegal activities and create an environment that is hostile to users. Conversely, an overly centralized system can lead to restricted access, thereby perpetuating social and economic inequalities. In order to design a less “extreme” metaverse, it’s important to derive a new framework.

A promising solution lies in “modular governance, a flexible yet structured approach that combines elements of both centralized and decentralized systems” (Fernandez 2). A modular system allows for adaptable processes that can be customized to meet specific needs. At its core, modular governance sets universal standards that act as the backbone for all Metaverse activities, ensuring compliance and ethical conduct. Organizations wishing to participate in the Metaverse would be required to adhere to these universal standards. Enforcement could be effectively carried out through decentralized code processes. This hybrid approach offers the best of both worlds: it respects individual freedom and data privacy while providing a layer of security and ethical oversight. Through modular governance, we can accommodate the complex array of activities that the Metaverse will host, developing a new space accessible to all.

Conclusion

The Metaverse is set to revolutionize the digital landscape and our daily lives, from how we work to interact socially. The future success and sustainability of the Metaverse depend on striking a delicate balance between openness and closeness. This paper aims to provide a roadmap for sustainable development in the virtual economy by examining the economic and social implications of both open and closed metaverse systems. While the rapid rise of the Metaverse presents challenges that can seem overwhelming or even chaotic, the intent of this research is not to instill fear but to guide thoughtful development. History shows that every technological leap — from the Industrial Revolution to the advent of the internet and smartphones — has been met with conflicts. However, each has also offered opportunities for societal advancement. The Metaverse is no different; it holds the potential for transformative good if approached with thoughtful regulation and ethical considerations.

Given the complexities involved, ongoing dialogue is crucial for shaping the regulatory landscape of the Metaverse. Policymakers should consider implementing pilot tests involving more miniature metaverse worlds. These testbeds can serve as controlled environments for understanding the economic and social dynamics, thereby informing the design of a larger, more stable metaverse. Regulatory frameworks should also be flexible enough to adapt to the rapid technological advancements that characterize this space. While this paper provides a comprehensive analysis based on current trends and policies, it is essential to acknowledge its limitations. The future is inherently unpredictable, and the Metaverse is rapidly evolving. However, we can make informed predictions and recommendations by scrutinizing existing data and case studies. Further research is needed to delve into the nuances of economic models within the Metaverse, the ethical implications of its development, and the long-term effects of various regulatory approaches.

Work Cited

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