Building the Open Metaverse

The Future of Web3 with Yat Siu

Yat Siu, Co-founder and Executive Chairman of Animoca Brands, joins Patrick Cozzi (Cesium) and Marc Petit (Epic Games) to discuss why Web3 is pivotal to the metaverse and what the future holds for this industry.


Yat Siu
Co-Founder and Executive Chairman, Animoca Brands; Founder and CEO, Outblaze
Yat Siu
Co-Founder and Executive Chairman, Animoca Brands; Founder and CEO, Outblaze






Today on Building the Open Metaverse.

Yat Siu:

We have associations with our skins. We have associations with gaming avatars that go beyond what is it worth, because they're priceless. We have so many things that we collect in the physical world that mean this to us, but we can't do that in the digital world. That's a particularly human quality that we have.


Welcome to Building the Open Metaverse, where technology experts discuss how the community is building the open metaverse together. Hosted by Patrick Cozzi from Cesium and Marc Petit from Epic Games.

Marc Petit:

Hello. I'm Marc Petit from Epic Games, and my co-host is Patrick Cozzi from Cesium. Hey, Patrick. How are you?

Patrick Cozzi:

Hey, Marc. I'm doing well. Look, I think we've learned a lot on this podcast so far about the metaverse, and coming from graphics, I think we've had a lot of guests who want to talk about graphics.

Today, I'm very excited to be educated about Web3.

Marc Petit:

We're super excited to welcome Yat Siu to our show.

Yat is the co-founder and executive chairman of Animoca Brands, one of the largest players in the gaming and blockchain ecosystem. Certainly, one of the most active investors in the space  . I think I heard 380 investments to date. We'll talk about it.

Animoca is focused on advancing digital property rights and contributing to building the open metaverse. We're so happy to have you with us today, Yat.

Welcome to the show!

Yat Siu:

Thank you. It's an honor to be here.

Marc Petit:

Let's start with your journey to the metaverse. You actually come from a family of musicians?

Yat Siu:


Marc Petit:

At one time, you studied music, then at some point, you pivoted into tech and created Outblaze, one of the first internet messaging companies in Hong Kong in 1998.

Now you are the head of one of the largest blockchain companies in the world. How did that happen?

Yat Siu:

Well, I guess just talking about that  makes me feel really old. I'm a child of the '70s. My parents basically were Chinese immigrants, you could say; I grew up in a time where nobody thought, at least the ones who left China, that they would ever return.

They were both studying music in the '60s. There weren't that many Chinese people, and there still aren't, in Vienna, so they found each other. It was literally like two unicorns in the middle of a stack because it's like, "Oh, another Chinese person, let's go hang out."

Then they had me. I guess everything you've read about Asian tiger parenting , it's all true.

I was forced to study music, and I was okay at it, but compared to my mother in particular, I was nothing, really. She still had this great dream that I should become this incredible musician. I went to study at the Music Conservatory eventually, where all I really learned at that time was how humbling an experience it is because everyone else is just so much better, and raw discipline. That's what I think I took away.

How I got into really the tech world was I basically, at that point, had an Atari ST, which is a computer that had a MIDI port and I had a keyboard. I wrote one of the very first, I guess, shareware MIDI pieces of software that I ultimately uploaded on CompuServe.

It was really the music composition equivalent of a calculator, and if you remember anything of the '80s, even a calculator was forbidden in school, nevermind this is notation software.

My teacher was not impressed, but the small community on CompuServe, which was like a pre-internet service that maybe had a sum total of just a couple hundred thousand users total, appreciated it and started sending me checks in the mail.

Back then, with Shareware software, you would put your address because privacy be damned. People would basically just send you money if they liked the software; I didn't do it because I thought they'd pay me. I was a kid, really. I did it because this is bragging rights. Everyone just does it, right?

Eventually Atari, this was the original company, well actually many iterations in, but I guess to me it was Atari at the time, they reached out and said, "Hey, we like the software you built. Would you like to come in and have a chat?"

I walk in as this sort of kid, and they're like, "Who are you?" And I still got the job. What was really fascinating is that I was a minor and I was a minority in a country that clearly I would stick out, but I still got a job.

It all happened because of virtual reality.

Of course, it was all tech space, it was acoustic couplers, and, later on, sort of really bad modems, but it didn't matter. I got this opportunity because of that, and it just led me to that path. It wasn't like I had a plan to use a computer or I wanted to study that or something. It was just serendipitous. That's how I entered the space and fell in love with that environment.

I made friends online, entirely text-based.

In the late '80s, I started getting very active in multi-user Dungeons, MUDs. I bought my first virtual item, I think it was an '89 or '90, which was a really complicated affair because I had to send a check, they had to clear the check, then, once it was cleared, we would meet in the equivalent of some seedy pub and basically exchange the item.

It's all text-based. Those were the days where you had to literally type “go east” and “go north.”

But it was amazing as I built real relationships, even though it was text-based. The emotions and the sort of feelings I had for a text-based game were as real as my physical relationships at that moment in time. To me, there was no distinction.

Before I skip a bunch of years... Or one other thing that I think is a point of interest is that when Atari sent me to the US to study computer science, because I didn't have formal training in this, halfway through my studies Atari basically just disappeared in the form that we knew it to be.

What happened then was we ended up forming a new company for all the people who were stranded because they didn't have support for their Atari computers. We basically then pivoted our multimedia experience into providing 3D modeling for what was then called VRML for SGI. VRML stands for Virtual Reality Markup Language.

This is basically the VR version of HTML, but it was '92, '93, at that point it was worse than Tron line graphics. Everyone was saying, "We're going to be shopping online with VRML." Of course, it didn't quite work out this way.

I think that they had the right idea in some ways, you could say, even though maybe the term metaverse wasn't coined yet; it was already a kind of metaversal experience and hope to do that.

SGI WebForce wanted to really go to town against Sun Microsystems because, at that point, they were the internet machine. Since I was the only Asian on the team, of course, that was the business plan back then, the Asian guy goes to Asia, having never lived there before.

So I went to Japan, I went to Taiwan, then I ended up going to Hong Kong. My dad's from Hong Kong, and I ended up getting permanent residency.

I couldn't get my CompuServe because I didn't have a node, so that's when I started one of Hong Kong's very first internet service providers, I think it was in '93, '94, called Hong Kong Online. That basically started my formal Web1 journey. For those who are of my generation, I was using Mosaic browser and then eventually started  using Netscape.

For those of you who don't know, maybe because many people who listen to this podcast are too young to know, that was actually Mark Andreessen's first company before he started something else, and then afterward, began Andreessen Horowitz.

Yeah, that sort of dates me, but I was a big proponent of open source. I think a few experiences, and as we go to how we think Animoca Brands in Web3, shaped my thinking.

Certainly, open source definitely shaped my thinking around that because we were using open source prolifically—the first big net PSC, then free PSC, and eventually Linux users.

But in the '80s, my mom, as an artist, used to work at the Komische Opera, which is basically on the eastern side of Berlin back then. This is before the fall of the wall, so she's on tour as well and she has to work there. I would visit her and get to see East Germany. I would cross and witness true communism. Then, of course, living in Vienna, we would also go to Hungary; that's actually where you buy some cheap stuff and bring it back. But again, you see real destitution and a totally different set of circumstances.

That gave me that impression. Of course, Europe is generally socially democratic; then I went to the US, which is very capitalist; then I came to Hong Kong, which is capitalism on steroids, Milton Friedman's dreamland at that point. So, I ended up sort of witnessing all these things, including all the problems. That ended up shaping my thinking around Web3 as well: a collection of my personal history as well as the technological evolutions.

I guess the final thing, not talking too much about cloud computing, Outplays, which was sold to IBM, skipping a few years, I think one pivotal moment for us was when we were one of the biggest mobile game developers in 2011, because we adopted mobile gaming very early, Apple completely de-platformed our apps in 2012, which I think your firm has some empathy to.

But we were a much, much smaller organization back then. It was a bit of a shock to the system because the open web, that Web1 was, with free information and open source, somehow became a closed web, and it kind of blindsided many of us. The worst part of that was the censorship that came from it because we were unable to talk about it for fear of not coming back. We ended up basically restricting our own freedoms because of the tyrannical action of someone who just decided on a whim.

They never called us, they never did anything. That gave us a different kind of appreciation around that until we basically ended up discovering NFTs with CryptoKitties because our studio in Vancouver ended up actually having a hand in building CryptoKitties.

The co-founder of that company sort of ended up becoming a co-founder of what became Dapper Labs; we became investors in that. This was in 2017; it sort of mapped out our first journey into NFTs.

We were not interested in crypto as in Bitcoin. We saw it, but it wasn't for us because it felt very Wall Street and financial in nature. It wasn't an area that spoke to us, but when we saw NFTs, it actually awakened us to the idea of digital ownership as true ownership, and actually something that we could really build upon. At that point, we coined the term of content as a platform, which was our hope that through ownership, through our own personal ownership, we become platforms, content becomes assets, and therefore platforms. We can sort of move away from centralized platforms, which were the form of discovery at that moment in time. That was kind of the vision.

Then we start, obviously, evolving it and building that out from 2018 onwards.

Patrick Cozzi:

Let's pivot a bit into Web3, maybe kicking it off from the consumer's perspective. How significant is giving them digital property rights?

Yat Siu:

The attraction for Web3 and how we define the core of the metaverse from our perspective starts with digital property rights.

Digital property rights often get confusing because what is it that you own, right? An NFT, ultimately, is a certificate of ownership. It's not the asset in and of itself, but I think the thing that we sometimes forget is how does physical ownership work?

Well, physical ownership works because we have a government that enforces it. We have a judiciary, we have a democratic framework that ensures the safety of ownership. In America, you have the constitution. All these things safeguard your property rights; we take them for granted in many cases as a result of that system. But that's why you can buy a house or can buy something, and you are assured of that ownership.

But on the other side, my parents, when they actually left China, there weren’t property rights. There was no guarantee of ownership. I mean people, maybe they don't remember or even know, South Korea, in the land of BTS and K-pop and sort of, I guess global culture, you could say in many ways in gaming as well, actually had no property rights up until I think it was the '80s. It was a military dictatorship in South Korea, and of course, North Korea, we don't have to talk about too much. That hasn't changed at all, right? That part of the world in many other places never had these rights because even if I give you a certificate of owning this property as we have with the contract, if your government changes, if it's overthrown, all your property is gone anyway, right?

The key point about property is the assurance that you have a system that can give you ownership and the assurance that ownership can be respected.

The problem with digital assets is that you don't have a way of owning it; you can't construct any sort of these additional network effects because of the fact that they're not owned by you.

What NFTs do is, they don't necessarily take care of the enforceability, but they do take care of the fact that you actually owned it, this was your asset, it verifies that, and then that authenticity is what allows you to build on top of that.

In old societies of the hunter-gatherers, the societies were never more than 100 or 150 people, and that functioned because if I owned a cow, everyone else in my community knew you owned that cow, so I wouldn't be challenged. If someone stole the cow, everyone's like, "That's not your cow." It's very clear. 

When we became communities of 1000s of people, we couldn't do that anymore.

You had to have a written record. You had to go to someone like a king who said, "Yes, you own that cow, or I could take that cow away from you because I am the king. I control the record." Old forms of property rights were ones where someone would carve their ownership in stone and then passed it down from a higher authority. That's basically what NFTs present.

When you have property rights, you have the safety and assurance that you can build on top of it. The fact that I own a house and can truly own it means that I can have a bank give me a loan for 20 or 30 years means that I can invest in it. If I have a restaurant and own this property, I can make it look really cool. I can make all sorts of investments because I know that I can build something for the next few decades, but if I can lose it at any time, I'm not going to invest years of capital into it.

I'm going to just invest a minimal amount because I can only make so little.

Those are just some examples. Ownership economies create network effects. For instance, we think about the ownership of cars, which we often give as an example, that actually birthed things like the creation of baby seats and Uber and Lyft and people who make all sorts of electronics for cars. That entire ecosystem of the automobile industry is far greater and employs far more people than the people who actually make the cars. What it does is also inform of the value of the car. The car is more valuable because it has all these services.

What are these services? Their network effects are created by third parties who can work with people and do business with people who own a car, but you never have to go to the car company to say, "Am I allowed to do so?"

This, by the way, is the engine of growth of anything. The fact that you own an iPhone is why you can have cases, why you can have headphones, why you can have all these cool little things that you don't have to go to Apple and say, "Am I allowed to make headphones? Do I have to pay you 30% every time I sell that?" This goes for anything that we own in the physical world. That was what we think will happen in the digital world. If you have a   piece of digital property, the center of experience then also comes into the assets.

Take one of your biggest games, if not your biggest game, Fortnite. Imagine if your skins were on the blockchain. Well, in the traditional model that you have, it can only be used in Fortnite, but in a Web3 construct, what you would be able to do is some other company around the world would say, "Oh, I'm going to open Fortnite fashion Week. All you guys, all you players who happen to own some skins, come over for this event. You can show off your fashion and do whatever you want and experience it." And that company does not have to talk to you to say, "Am I allowed to use that?" They can just do that in a paradigm of ownership as we do in the physical world.

Of course, that's harder to do because there could be a flight of customers, and in a traditional Web2 model, that doesn't work.

But in the Web3 model, you get to continue to share in the transaction revenue. Therefore, you can tax that, which also increases the prestige of the original creators of that asset, which then generates more traffic and more revenue. It's a slightly different and more collaborative way of growing.

It starts with a principle of ownership because now you can actually participate, co-create and share in the network effect. That's really why we think digital property rights, or general property rights, but in this case, digital property rights, are so fundamentally important.

Marc Petit:

Not playing devil’s advocate, but I mean these are fantastic concepts, but by choosing to invent on the blockchain, you choose a very permissionless model, which is good, but at the same time, it comes with issues around regulation.

It feels like technology was built to escape governance rather than to support it.

Do you think the blockchain can be regulated to a point that it reaches mainstream adoption? Because right now, we've seen scams; we've seen a lot of things.

Yat Siu:

Sure, of course.

Marc Petit:

So, we do value property rights, but does it have to come with the permissionless system and the blockchain?

Yat Siu:

First, in terms of the birth of blockchain, it’s generally attributed to the birth of Bitcoin. As a result, it started off as a financial instrument of some sort, and that obviously does have elements of regulation, but that's not the only use case obviously of, broadly speaking, the blockchain.

I would also say that I don't think that sort of blockchain, and particularly in this case, crypto, was actually created to escape regulation. That wasn't the birth reason for Bitcoin; the birth reason for Bitcoin was a protest of the financial system, which was the dollar, or the currency, was supposed to be sacrosanct. We can agree or disagree. Are you on the Friedman camp? Are you on the Keynesian camp? Whichever, right?

They were inflating themselves out of a recession; the people who were behind Bitcoin said, "Enough of that. We disagree that you're devaluing a currency. We think it's wrong, and we created our own system." That's really the birth reason for that.

Again, whether you agree or not, that's the reason behind it. It wasn't so much to escape governance, it was a protest of the current financial system, which has caused problems time and time again. That's the history and root of that. But when it comes to non-fungible tokens, the regulated framework is actually not that complex because it's owning your digital assets. It's no different from owning Pokemon cards or forks and knives. It doesn't have to be valuable necessarily, right? That's what that represents. The other thing when we say NFTs is not to look at it as something that must have deep value in terms of its commercial value.

I often give the example of a wedding ring. A wedding ring isn't valuable in and of itself. It's very fungible when you buy it from a place like Tiffany's. However, the moment you buy that wedding ring, it becomes special just to you, and it's non-fungible to you. If you do something, sell it or something, then it either signifies something very different or you're in trouble, but it has a legacy that's attached that's deeply meaningful to you regardless of, let's say, embedded utility.

We have that with our relationships with digital items as well. We have associations with our skins, we have associations with the gaming avatars that go beyond what it’s worth because they're priceless. A wedding ring is priceless, right? You can't put a price on love, for instance, but it's symbolized by that, and it means that. We have so many things that we collect in the physical world that mean things to us, but we can't do that in the digital world.

Maybe you and I have a sword that does the same thing. It's no different than you or I having the same tennis racket, but my tennis racket is more special to me because it's the racket I use to play or win or do whatever.

I think we could feel the same with our virtual items or with our digital assets. They have the same stats; They could look the same thing, or they might do the same thing, but through the uniqueness of it, you know that that’s yours. You build a relationship with it. That's a particularly human quality that we have because we are storytellers to ourselves. I mean, gaming is storytelling. We build our own stories on everything. Our relationships and our cultures, are all built on that, and it comes from the ability to identify with it. And so if everything is the same, and everything is basically a copy of each other, then you can still build a unique narrative around it.

If you know uniquely it's yours, it's something you can pass down. I think digital ownership and blockchain enable that.

Now, coming to the topic of why use a decentralized model.

Decentralization is important from our perspective because it ensures that you can't have centralized abuse. Really, when we think about centralized, we don't mean such decentralization that it's anarchy and chaos. It just is the ecosystem, a system that says you own it, and the custody of the asset is truly, truly yours. It sits in your wallet; nobody can take it away from you, except if it's stolen. That's another topic altogether. Whereas in the rental model, which is obviously the current model for almost all the games out there, you don't own it. Instead, it's a terms of service agreement, and, as a result, can always be altered and changed,   not just in stats but in all of its utility.

I want to quickly just touch on the topic of scams, because that's obviously what people associate with crypto.

The biggest issue is the scams that we see with things like FTX. Those are centralized scams. These are companies that have actually taken customer assets, hidden them, not put them on chain, and, as a result, they were able to get away with it.

If they were actually on chain and decentralized, they wouldn't have been able to do that. The DeFi protocols function just as intended. It's the CeFi ones, the centralized ones, that failed.

Then the other issue obviously is theft, and I think that's the biggest issue. If you have assets of value, you have gaming items, then if someone steals it, then how do you solve for that? I think right now, the best solution is if someone steals your item, then you have to report it; you basically banish that particular item until it's returned.

When you reduce the utility, and when you isolate it in due course because it's non-fungible, you can easily identify it, then people will stop stealing. It's like how art theft is not very common anymore because it's not fungible.

If someone stole the Mona Lisa, good luck in trying to monetize that, right? The whole world will go after you; this is the benefit of blockchain because every item and NFT has a unique hash, and I could make a copy, it doesn't matter. That’s the one that's the original, and, as a consequence, if someone stole that, I will always know that. So we see that happening, and in due course will solve itself that way.

There is also this element of knowledge around the space, obviously, around how to keep your assets safe. That's another topic, but it is something that needs to be done as well.

Marc Petit:

You covered why you think gaming is going to be such a driver of the adoption of NFTs, because gaming is where we have that relationship with our digital assets, and they have the most value.

You are an early investor in Axie Infinity, a monster h unter, a kind of Pokemon game on the blockchain. You make the news because it really helped people in the Philippines make money.

Now, in early 2023, how is Axie Infinity doing?

Yat Siu:

Axie Infinity is doing pretty okay. 

It is not doing a billion dollars like it did in the bull sort of period in 2021, but it's still a business that's worth hundreds of millions of dollars in terms of economic activity. It's not doing badly at all for a company that, in terms of staff count, would probably be considered indie.

I think Axie has been unfairly treated in many ways because it's been sort of the subject of attacks because it was represented as sort of the play-to-earn and now what they call the play-and-earn movement. 

Let me just quickly address this part because Axie, essentially through YGG, had sort of the play-to-earn movement. It was possible because of ownership, it wasn't because Axie did a marketing campaign in the Philippines and grew that business. It was actually what became YGG, Yield Guild Games.

They actually owned a lot of Axies and said, "What happens if I rent those Axies to players in the Philippines?" It was supposed to be a social enterprise. Then it started to generate reasonable revenue and turned into a business that effectively became an Uber for Axies.

Of course, because it's an open competitive marketplace, all the other guilds started forming and saying, "Hey, YGG can do this, I can do this too," and then created the market. Now the criticism is obviously that in the case of Axie, the value rose a lot and then dropped. While people can still make money on it because the type of dollars, which may only be tens of dollars, is still valuable in the Philippines.  At one point, people were making hundreds of dollars, which is significant money in some of these places.

People didn't have banking access and couldn't do anything because of COVID.

The criticism here is not so much the fact that people say it's a Ponzi or something; it's actually because the Axie team has a very Milton Friedman Libertarian view of the world. In other words, they are non-market interventionists. They take the perspective that volatility and speculation are market forces.

We can agree or disagree on this one, but there will be a group of people who say, "That's what we think is right," and there'll be another group of people who say, "That's rubbish. That doesn't work."

The other way to deal with this is to flatten the curve. You intervene in the market as a central bank does, and you basically manage the market, which is what they did not do intentionally.

So the  market effects that you're seeing may look very much like defects, but is really a feature of its philosophical political thinking of what Axie is. The people who are playing it have that perspective. Now that is lost because it's not often discussed this way, and, frankly speaking, there are a lot of people who don't like Friedman economics.

Now, where does the value come from? This is where tokenization is really powerful because, as you know well, the conversion in gaming is a single-digit percentage. It's not like 80% of your gamers pay. It's like 1, 2, 3%. If you get to five plus %, you're a really, really good game.

Now, why do they pay?

Because it's fun; because they're playing with the 95 to 99% of the players who play for free. What tokenization does is it translates that value by saying, "Oh, these 100 players basically earned us $1000 of revenue because five players paid $1000," as an example.

Instead of me taking all the value, I'm rewarding or offering to reward those other players because of their activity that helped make a paying player pay.

Is it worth $1 or 1 cent? That depends on the economics and the demand and how you deal with it. But that's the value shift. It's not really money from nothing. As a result of that, with Web3 gaming, you have transaction revenues you can charge, which Web2 gaming companies do not have, so they don't have that revenue stream.

If they did, then maybe that would be a sustainable model as well to sort of pass that on.

That's one of the paradigms of play-and-earn that you can earn because we can analyze and realize what that value is. Whether you choose to, that's up to you. Web2 gaming companies  offer value to gamers, anyway.

They don't give it in dollar values, they give it in virtual value. Here's a new skin, here's a treasure chest, and here's some extra currency that you've earned. The only difference is you can't cash it out, but it's still a form of reward that you give that comes from the fact that they have done an activity that has helped the network effect of that game.

Marc Petit:

We talked about play-and-earn. The other thing that I think is good and getting an update in early 2023 is land ownership, The Sandbox, interesting play betting on low-code game creation, land ownership, and you were talking about engagement earlier.

Virtual land needs to be populated to be valuable. Do you think a platform like Animoca has multiple of those platforms? How do you get that-

Yat Siu:

That's right.

Marc Petit:

Can The Sandbox pull it off? Can you get that amount of population so that the land gets the value? I mean, how do you look at this?

Yat Siu:

When we think of the economic activity on Sandbox, it's economic activity is the size of a very, very small island nation. It's basically supported by a population of about 250,000 players. That doesn't seem like a lot; however, because of the true economic nature that happens when you have actual property rights and capital formation, you can measure it as an imperfect society but still a virtual society that mimics more of a town or a city or an actual economy than a virtual one.

If you actually take 250,000 people and put them into a town, then you're talking in terms of economic activity, thousands of dollars of value, and that's what's happening with The Sandbox.

The reason why we've invested so broadly in the space, I mean we have over 380 investments, of which one-third are in the gaming space, is that you can make a sustainable game with just tens of thousands of players because the economic activity in the capital formation allows for the ARPU equivalent or economic activity to be sustainable, which in free-to-play gaming in Web2 is just not possible. You need millions of gamers to actually have a sustainable game or at least break even whereas in Web3 gaming you could be fine with just tens of thousands.

That's the first element. We think of these sorts of metaverse-like societies and cities, and we think they'll be populated with many cities; it won't just be one. Because they're open, that's the other thing, because they're open and you can move your assets around, and people can create network effects, they derive value outside of your ecosystem.

For instance, you can take land on Sandbox and get a loan for it. That loan might be 60% of the value of the land because there is a market on the other side. That's incredible, and we didn't build that; someone else did it because they saw a financial value that they could offer. That network effect is an example of how things like The Sandbox build value. It's not that different when you think about creator economies. That's what Sandbox does, but these creator economies build on top of third-party systems that are outside of The Sandbox and make it interesting.

Another example is the fact that you can trade it on OpenSea. That's a marketplace that is not related to Sandbox in which you can trade these items. It becomes another form of discovery that's not measured inside the index of The Sandbox, but actually adds value.

Now there's probably a dozen meaningful marketplaces in Web3. Each of them trade these items and they become discovery channels for people who might try the assets and so on. That's kind of how that ecosystem actually works and develops. I think it's hard to say, "Is Sandbox going to be a game that has hundreds of millions of users?"

I don't know, but it doesn't have to be is the point.

In a economy like this, if Sandbox hits an actual sort of MAU of 10 million users, it's going to be an enormous monster in terms of its income because of the fact that the economic activity that takes place is going to be so sizable because it mimics that of an actual economy, because of all the trade activity. For instance, people in The Sandbox, the metaverse architects are actually building on The Sandbox as a real livelihood, as a business. Now this, by the way, isn't unique.

Remember Second Life? Second Life is still around. It's sort of nominal GDP equivalent is over $600 million in 2022. Now it's been around for what, 23, 25 years? I don't know. How many games or virtual communities can we say are still thriving and growing after so many years? By the way, EVE Online is kind of the same and no, not huge numbers by any stretch, but lots of economic activity and the principle is ownership.

Marc Petit:

That's interesting because we had Philip Rosedale on the podcast talking about how his economic model was relatively simple, the equivalent of the property tax, the equivalent of a VAT, and some currency, even convertible currency.

They had the form of digital property rights, but not-

Yat Siu:

I think the reason why it was harder for Second Life to, let's say, become the size that it is, is because they were a closed economy.

By creating a closed economy, they were unable to allow more network effects being built. It's the equivalent of a country that is not part of the WTO; it doesn't have any trade outside of it, and, as a result, is limited in this economic activity relative to other places.

Patrick Cozzi:

All your explanations have been really helpful.

I love all the analogies you're bringing to the physical world. I wanted to shift the conversation a bit to ask you about DAOs. Maybe a two-part question. One is just for those of us new to that world, could you give us a tutorial and then two, we've heard that you believe they could become the future of work, and if you could maybe go into that as well.

Yat Siu:

So DAOs, Decentralized Autonomous Organizations, are basically a framework that, with on-chain dynamics, you can run an ecosystem through governance that is entirely on-chain.

First, let me sort of explain the mechanism because why is that even possible? Well, when you think about something like Ethereum, because of smart contracts, isn't just a currency. It's an actual living computer that essentially doesn't die because of the fact that as long as you have nodes that are out there, you basically have a decentralized computer that you can run code on forever and ever and ever. Now, if you think about it, it's somewhat a scary concept because it also means that when you publish content on Ethereum, it's not like you can go, "Oh, whoops, we made a mistake, let's go and MVP this." You have to literally launch a new program altogether because of the fact that whatever is launched is basically out there and live.

It's like a living computer, if you will, that you can change, which has many, many implications that we can go into later.

The thing about DAOs means that because you have a living sort of computer infrastructure that doesn't die, you can have governance that can exist entirely in a digital construct.

For instance, if you want to take a vote on a decision, or give out a grant, for instance, of tokens that are in its ecosystem, you can do that in an entirely decentralized fashion. You basically have a community vote on it, and then it releases the token without actually needing to have an escrow or an agent or someone in between.

That's sort of the extreme example that would be popular. One other version of this, although it's not a DAO, is, for instance, the existence of digital items.

At the end of the day, if all the assets were published on the blockchain, then even if the game were to die, for instance, and doesn't run 'cause it isn't sustainable anymore, you would still have the millions of customers own their assets. This then allows someone else to say, "Oh, let me make a game for all those basically stranded customers, whether it's the same or a version of that because now I can reach these customers because they're on-chain."

What excites us about DAOs is that blockchain is not just a purely technical system. The fact that it's a decentralized ledger is fine. Obviously, it is critical, but as a database, it's obviously not as efficient any MySQLs. That's a common criticism that people have around it.

The crux of this is that what it introduces is a political system, a societal human system that basically allows people to have this decentralized database that cannot be altered, cannot be changed; it's lack of efficiency comes at the price of enabling democracy, if you will.

In the physical world, our democracy is inefficient versus a, let's say, autocratic system, which is very efficient because you want to build a road or destroy a couple of houses in between, let's just go do it, whereas, in a democracy, you have to vote, you have to decide something, you have to discuss the common good. Is this something you want to do? Who gets hurt? Who loses? That kind of stuff. It just takes longer as a result. That's what blockchain is. We have to build a consensus. The biggest example of this is when Ethereum moved from proof of work to proof of stake. To me, it's amazing that an infrastructure that houses hundreds of billions of dollars of assets had a transition to a major technological framework more smoothly than Y2K.

Okay, I'm showing my age again. But the point is that it's possible to do that in a framework where people voted on those decisions.

I'm on something called ApeCoin DAO as well. I'm currently a council member. It was birthed through the Bored Apes, but it's essentially its own foundation and completely independent. It's a grant foundation where people who want to build an ApeCoin ecosystem can basically ask us for support, but it's entirely community-voted.

If I happen to own ApeCoin, then I can vote and can stake. We just went through an election and elected three new council members from the community. It was hotly contested. It was  a great example of democracy in action. What excites us about DAOs is that it introduces a governance framework within a game or any technical framework.

I also think what it then ends up doing is reinvigorating the democratic muscle, which we don't get to exercise much because we don't typically work in a democratic company, right?

We don't normally exercise democratic values. Broadly speaking, we don't go to school in a democratic way. Teachers don't have you vote on stuff; The teacher says and you do. Then we only get to really do big democratic things and build consensus every once in a while. With something like a DAO, you actually get to do that all the time, and with ApeCoin, we're basically passing proposals every week.

Now, why do I think it could be the future? I think DAOs are going to be bigger than companies. Now take ApeCoin, which is a fairly newly launched DAO. It's a $5 billion ecosystem at one year old. I mean, that's bigger than most companies that would've emerged with much longer periods of time. There are many others I think you could point out that are big and powerful this way.

One of the reasons is that the community that owns a token has a stake in its success.

That means they're no longer just a consumer. They are a stakeholder in the ecosystem. The success of the ecosystem is their success. We feel this in gaming as well. People want Fortnite to do well, for instance. But the success of Fortnite doesn't translate to the very gamers who have made it successful except for the personal glory and status that they enjoy. That is the basic difference between that, if you have property rights in this, then you should have a vote. You can have a vote, you can measure a vote because now you have a way in which you can do that because you can see the assets in question, and it also gives you power, it gives you financial power.

If someone doesn't like something, you can vote with your dollars, you can sell your tokens, or you can do things that you would do in the physical world that you can't do in the digital world, which means that there is a different tension now, but between the ones who are maintaining it, say the studio and its customers because now they have economic power in their hands.

This is a scary thought, perhaps, for some game studios, but I think it's very empowering for the players because the players, as we've seen with ApeCoin, don't make ridiculous decisions. If you inform them and if you talk to them about it, they will generally make the right decision because they care about the communities that they're in.

You just have to spend the extra effort to do so, which actually then brings everything closer together.

I think what's happened with ApeCoin is amazing. We have amazing new council members that the community voted in, and they're all great, and they're all hardworking. I think this is the future of our digital existence, but there will be resistance for sure because that's not how most companies work.

Marc Petit:

It feels like a big relinquishing of control.

Yat Siu:

It is. But this relinquishing of control has already happened over time.

If you think about our history, starting all the way from the strong man, the kings, the monarchies, then we went over to democratic frameworks or representative democracy. We're evolving through that course of action because, at the end of the day, even though there's inefficiencies attached, it's actually what we desire. I think it's also how we protect ourselves.

I think this is the other thing, and there're some interesting examples, even in corporations, that have experimented. I think it's a Spanish company, I think it's called Mondragon. Mondragon is an example of a company that is a capitalist organization in the sense that it makes money, but is also community-owned. All of their employees have a stake and say. If you become a Mondragon employee, you actually become a stakeholder in the ecosystem. You're not just a cog in the wheel. So it has happened in the physical world, and I think Mondragon is one of the biggest corporations by revenue in the world to do this.

Patrick Cozzi:

When you think about adoption for Web3, where we are, and where you think we might go on the curve in 2023, what are your thoughts?

Yat Siu:

I'm not sure if I said this, but close to $78 billion was invested in Web3 games just last year.

As you know better than almost anyone in the world, it takes time to make a good game. Those games that have been developed have been funded, many of them coming from great studios in Web2, and are about to launch in the coming years, some of them by the end of this year. I think that will be one of the first big triggers of broader adoption because those games actually have the elements of fun and entertainment at the center of it, which is what most gamers would look for.

They may not necessarily even think that they're playing a Web3 game. They just love the game and will see some of the benefits of, "Oh, I have ownership, I can do stuff with it, and I can extend beyond that." That's actually what we think will happen.

Our prediction, in the next 18 to 24 months, is that we're going to see hundreds of millions of users enter Web3 because of gaming. That's our hope, certainly, and our prediction. Gaming will lead the way.

Marc Petit:

The gaming industry is $200 billion right now, give or take. If this phenomenon gets an acceleration of growth; how big does it get?

Yat Siu:

It will be a tens-of-trillions dollar industry because of Web3.

Now let me sort of articulate that thinking process.

In a rental economy and with the conversion rates you have, there are two ways to take it. The first one is just what happens when you take a rental economy into ownership. There is a capital appreciation that happens in terms of its value. That means that something that might cost $5 is now $50 in value, and so just that increase will create economies that boost it from hundreds of billions of dollars to at least trillions of dollars.

There's the other thing, of course, which is that in the paradigm of ownership, every one of your customers, as a player, will ultimately have some level of ownership. It's what happens in the physical world as well. Now, how do you double your industry? You double the conversion rate, which really is just 1% or 2% of conversion.

It's actually not hard to imagine what happens when you actually take your game and have 20% conversion.

I mean, that's an insane number in Web2, but in Web3, is not insane at all, which is, as a result, why we have these smaller game economies in terms of users having more revenue than Web2 games that have literally 100 times more users. If you can translate that effect across all of the gaming audiences in the future, then the effect won't be a 10 or 20% increase; it should be 30, 40, 50x in comparison. Also because third-party network effects will be built on top of that.

When you have lending protocols or when you have all these other things being built on top of this, then your financial gaming will have some kind of financial construct and some kind of ownership of properties, which amplifies its value and potential. That's why I think the gaming industry will become much, much larger.

Marc Petit:

Fascinating. I think it's a very interesting prediction.

Let's switch gears from games to brands. I think we're seeing that brands look at Web3 as a way to disintermediate owners who should remain unnamed from the big Web2 platform. We know who they are and engage their customers more directly.

Right now, it's a bit eerie because it's very quiet. Look at CES, I mean, there was a lot of car news, but there was not a lot of metaverse news. It was a bit of XR news.

It feels to me that brands are hard at work understanding Web3 and doing experimentation. Is this something that you were seeing across your Animoca Brands portfolio?

Yat Siu:


Chief Metaverse Officer is probably one of the most common new titles that we're seeing amongst these companies out there. I think it's very analogous to how people were building websites in 1999, '98 where everyone's like, "Oh, we need to have a website!”

There was a little bit of that inflation as well; for those of you who remember, it was a million dollars to build a website. Those days are obviously gone long, long ago, but it was because there was a scarcity of talent, and people didn't know what to do. Generally speaking, I think there's a similar type of situation where people realize that they need to be in Web3 or they need to be in the metaverse, however that's defined. They basically have to sort of develop on top of that.

You have lots of investments with the brands. And what's interesting is that brands, particularly the luxury brands and the consumer brands, get it because what they're selling ultimately is a form of experience. What the metaverse presents is an experience of a certain type that reaches a certain kind of audience.

Again, I would say that they understand it conceptually better. Look at Nike buying Artifact or Adidas doing things with Web3 or Gucci, Balenciaga, and Prada. All these companies are already selling millions of dollars worth of digital items and assets. See, this is the thing that Web3 enables much more than Web2 does; you can monetize that ownership.

When Snoop Dogg launched his experience on the Sandbox in a Web2 environment, he would be doing a show, and he'd basically drive traffic to the game, and he might be paid an artist's fee, but in the Web3 version, which is Sandbox, he built an experience, sold his membership NFT right out of his mansion, and generated $7 million of revenue, which is incredible because he's generated revenue directly from the community rather than building someone else's community and being paid some kind of fee.

If he was an artist and sort of promoting the Sandbox, maybe he would've been paid a million dollars. By actually launching inside The Sandbox and engaging the community, he made much more money because he got the fairer value because he monetized it.

That's the other thing. One of the reasons why fashion brands and brands, in general, are going into the space is that there's a revenue model today, which isn't necessarily true for many other new concepts, but certainly for Web3 metaverse. Again, it's different from, let's say, if you purely look at VR or AR, the possibility to make money isn't quite as obvious. The model isn't quite there. Are you going to build another Pokemon Go? That's tough. Are you going to build an incredible VR game experience that drives meaningful revenue? Who knows? It's really making a game.

When you launch something in Web3 inside the Sandbox or inside Decentraland or anything else, you have an audience that's going to buy stuff and generate revenue. It's a big pragmatic decision. It's not just, "Oh, we need to be cool." It's actually a straight revenue source.

Marc Petit:

You mentioned some very established existing consumer brands. Do you think we'll see the emergence of metaverse-first brands?

Yat Siu: 

Yeah, look at Yuga Labs with Bored Apes. That's a metaverse-first IP. It's a brand franchise that's worth $4 billion and is barely over one and a half years old or something.

There's many more where that came from. Some are bigger or smaller, but you have Cool Cats and Doodles. Sandbox is a brand in and of itself if you think about Sandbox as a multi-billion dollar brand that you could say didn't exist before.

To me, again, some metaverse-first brands are really exciting. One thing about the metaverse-first brands, like in what you see with Bored Apes, for instance, is that you own the actual commercial rights to the particular ape that you have that's non-fungible. That's the reason why you have Bored Ape Whiskey and Bored Ape Wines and Bored Ape Cafes and burger joints.

What happens again is in the spirit of decentralization and ownership. Because I own the economic rights of my ape, I have an incentive to basically start promoting it.

That means every owner of an ape becomes your agent because he is tied to it with a benefit. In China, the Li-Ning, which is like a sports brand, bought a Bored Ape because I guess it had some kind of image there.

Since they bought that Bored Ape, Macy's created a fashion line of that particular ape because they owned that and started selling that, and they owned the commercial rights to that.

This has another effect, which is that particular look of that ape, because of the fact that it was now in fashion,  is more famous could sell for more.

The floor price of a Bored Ape now is about 80 to 85 ETH, which is $130-140,000 dollars. That seems really expensive. It is expensive, but when you think of the economic possibilities that come just from owning the ape, maybe it's not that crazy anymore. You can realize its economic potential in a thousand different ways.

Marc Petit:

We've covered a lot of things, and we want to keep the length relatively short, but some countries and even some platforms are kind of banning NFTs.

Do you see the web and web browsers as viable alternative distribution platforms, particularly for games, and if so, how do we get there?

Yat Siu:

First of all, I think WebFirst H5 gaming obviously is getting much more traction as a result of the fact that Web3 gaming has come about because of the fact that it is economically viable.

I think non-platform-dependent game launches, like our Phantom Galaxies title that we launched, was delayed because Steam had banned NFTs. They had to basically build their own launcher so they could come out. But Phantom Galaxies itself launched, they gave first some free NFTs that traded millions of dollars of value, which basically provided value to the players through an ecosystem. Then basically did their first asset sale, only one asset sale, and generated $23 million from that, and it was all outside of any kind of platform.

Look at Axie Infinity. Yes, they play on mobile, but they side-load it; they don't need Google Play. They built a billion-dollar business without talking to any platforms.

Frankly, if I was Google, I would be very worried about this because it shows that for users who want something, if the value is deep enough, it doesn't matter what the platform is.

I think, to some extent, as Epic, you're experiencing that yourself despite the fact that you can basically put Fortnite on any of these major platforms. People come to you because you offer great content and great experiences, and maybe you could do more if you were on those platforms, but you've got a fan base, and you've got a player base because of the quality of your product.

If the value is there, content is still king. Consequently, the platform doesn't really have that much influence. It's just where the paradigm shift is at in Web2, you need the heft of a group like yourself to resist that.

But in Web3, you don't. An indie game studio can be independent without being on the platform, and that is empowering. You can imagine that thousands of these companies are now existing in a decentralized fashion outside of the platform, which means that consumers have choice outside of the platform.

That's the other thing. The reason we're now stuck to the platform isn't that they're convenient or they're cheaper or better, it’s because it's the only way to get them because the other ways don't make sense. Once you have a feasible way of doing it because it's economical, which is what Web3 can offer, then you can have other ways to do it. That's actually when real competitive pressure happens because that's when Apple and Google, for their own business reasons, have to then start to maybe change their fees or offer a different value.

When Apple started charging 30% in the App Store, one of its biggest benefits was discovery; people were very happy to pay the 30% because it was an incredible marketing arm. Today, we know that the App Store gives us almost no discovery but still charges you 30%; now, it's 30% just for permission to be on the platform. That's too expensive. Unless Apple can go back and give you discovery for which you would be willing to pay, it has to reduce the fees.

That's a crux, obviously, of your legal arguments and the fight here, but that's the point. People are not going to be giving up their economic activity. Imagine if you have ownership of your assets. Are you going to be paying 30% of that to any platform unless you get lots of value for it? You're not going to do it.

Marc Petit:

One last question, because it's an important topic. Do you think change will come from regulation or from market pressure?

Yat Siu:

Change typically comes from market pressure. Regulation typically comes in to clean up a little bit, and it also will come with crypto first because of everything that's happened. It's not going to come necessarily with NFTs or gaming items.

Now the other thing we have to understand here, and again, there's a different narrative group between the west and the east, but the one other thing to understand is that one of the reasons why many countries in the past didn't regulate is because the moment you regulate, you give it validity. Like, that's the other thing.

A lot of people look at regulation from a negative perspective. They say, "Oh, it's regulation; they're going to restrict it." But no, when you give regulation, you're giving credibility. You're saying it is something we need to regulate. It is here to stay, it is valid, and so the resistance that many jurisdictions had around this was they didn't want to give validity.

That's why they have these confusing narratives. Oh, we have to stop it. But actually, if we do put rules in it, then we're actually saying it's real, but actually, we don't want it to be real.

You have these cycles that come around because of that sort of dichotomy that they have. That's changing now. I think almost every country in the world has now said this is here to stay, and therefore regulation is coming. Regulation then will provide safer frameworks and will actually sort of help build it out. But it doesn't change what businesses will do.

Companies like us will still, hopefully, thoughtfully and reasonably push the envelope as we need to push the industry forward. You do this as a business as well. You push things forward and grow as an ecosystem and do what you think is right to correct the course, and do other things that are necessary. All that change is typically driven by market forces. Regulation can either stifle it or encourage it further. It doesn't come because the regulation says, "Hey, these are the rules now. Follow the rules, and you can innovate." I mean, that's typically the other way around.

Patrick Cozzi:

I want to thank you for educating us on Web3 and inspiring us about what the future could be.

We have a bit of a tradition to round out every episode where we’d love for you to give a shout-out to any person or organization.

Yat Siu:

The shout-out and the inspiration that I draw from is a lot from philosophers.

I draw a lot of inspiration from Kant, Rawls, to some extent, also John Locke, and Adam Smith. I feel like it's given me a lot of perspective. These are people, by the way, who have thought about these problems.

Frankly, if you think about Kant, his perspectives on reality have really changed sort of how we think about reality, generally speaking, which I think has impacted sort of how we think about virtual reality, or the concept of natural property rights and the rights of man. With John Locke, for instance. Generally speaking, the idea, and I guess this is where I draw some optimism, is the idea for most philosophers out there that we still strive for good despite all the problems; despite everything that's out there inherently, we do want to do good things.

There are some who don't, if you look at Niche or whatever, but there are others basically who inherently believe that we are good people and we want to do good things. That's where these philosophies come from. I think if we end up learning some of this more deeply, it can actually inform our moral thinking and ethical thinking, which I think is very, very important because we create products that impact millions and millions of users; in your case, hundreds of millions of users.

There is an ethical framework that comes in. There is a moral framework, there's a philosophy that's embedded in this. I think the financial world would look very different if we actually made philosophy mandatory reading for everyone who goes into finance. We don't do that, obviously, but what would happen if you did that?

Yeah, I would say I give a shout-out to all of the classics and philosophers that have inspired humanity.

Marc Petit:

You'll have to come back to talk to us about your educational endeavors. That's something that is very fascinating. It could be the topic of a whole e pisode.

You’re the Executive Chairman and co-founder of Animoca Brands; your DAO’s hopefully building momentum around Web3. Thank you for this very thought-provoking conversation. We know Web3 gets caricatured quite a bit.

You helped us and many of our audience to think more deeply about it.

Thank you very much for your contribution. I know it's late in Switzerland, so I wish you a good evening. 

Thank you.

Yat Siu:

Thank you so much. It was a real pleasure.

Marc Petit:

And thank you to our audience. Please keep on talking to us, letting us know what you want to hear about, and we'll be back with another episode of Building the Open Metaverse. Thank you.