Coinbase co-founder Fred Ehrsam: Virtual reality will be the killer app for blockchain

The author of this article, Fred Ehrsam, is the co-founder of Bitcoin exchange Coinbase.

I recently spent a weekend talking to 10 executives from some of the largest virtual reality (VR) companies about creating the "Metaverse"—a reference to the immersive virtual reality world described in Neil Stevenson's 1992 VR novel Snow Crash. The idea is simple: If people start living in VR, then the rules and systems of that virtual world will be just as important as those of the "real" world.

To explain this, imagine if everyone lived in a virtual world like World of Warcraft or something Facebook is creating. People's social lives, assets, and jobs would be tied to this world. This means that the central company responsible for running this world would need to adapt to the world at its whim.

This is where a lot of the plot in the recent popular novel Ready Player One comes from. The novel is being adapted into a movie by the famous Hollywood director Spielberg. The novel describes a virtual world called OASIS, where people spend most of their lives, and a company called Innovative Internet Industries (IOI) owns and operates OASIS. As a result, people compete to find a treasure in this world. People need to defeat IOI's employees and find the treasure. The setting of this book is very interesting, because IOI owns and controls the servers and databases of OASIS, so they can do whatever they want: delete other people's existence, access all information, change the rules of this virtual world, and issue their own unlimited currency.

So, obviously, a single company cannot control the Metaverse — otherwise that company could take all your stuff, change your identity, or even delete you.

Blockchain could be the answer to many of these problems. If you store assets on a blockchain, no single operator can take them away from you. If you put your identity on a blockchain, your existence cannot be deleted. Perhaps most interestingly, just as Bitcoin provides incentives for the world's computers to run the world's largest computing network - a network with more computing power than 500 Googles or 10,000 of the world's fastest supercomputers - what if the servers that host this virtual world are also decentralized or all the computing power in the world is poured into this virtual world?

If that sounds far-fetched or futuristic, World of Warcraft has 12 million players spending an average of 22 hours per week in the game world—and that was in 2010! Once you’re in, people are hooked: 90% of players spend more than 10 hours per week in World of Warcraft. For better or worse, I speak from experience. These virtual economies are real. At one point, more than 100,000 people made a living by earning and selling in-game gold (the game’s currency).

When people think of a “virtual world,” they often think of an immersive visual experience. In my conversations with VR company executives, a “virtual world” is defined as “a scalable network of complex virtual worlds that are visually immersive and can be used by multiple users simultaneously.”

However, this visually immersive part is not the most important part. The most important part is the shared data layer between these interconnected virtual worlds. Without this shared data layer, you in the virtual world cannot travel seamlessly in this virtual world. It makes sense that people will react more crazily to the visual experience than the data layer. However, I believe that the shared data layer is the root of the virtual world. And this shared data layer will be based on the blockchain.

When you look at it, blockchain is a shared version of reality. So whether it’s a fully immersive VR experience, augmented reality (AR), or even real-world Bitcoin or Ethereum as a shared ledger for our “real world,” we will all come to trust blockchain as the foundation of our reality. The lines between these virtual worlds and the “real world” will blur very quickly. If someone creates a p2p lending app on the blockchain, people can borrow money from the US to Brazil. If the blockchain for that app is the same as the blockchain for the virtual world, then the app can be used in that virtual world as well, instantly. We already live in a massive digital world. Our identities are becoming a function that can be used on the web.

It will be interesting to see how virtual worlds develop. I would not be surprised if some start creating closed worlds, especially large tech companies with large private databases and entrenched network effects, such as Facebook. Just like the walled gardens created by AOL and CompuServe in the early days of the Internet, maybe they will work for a few years, but will eventually be torn down by the open world, just as AOL and CompuServe were torn down by the open web. If so, starting with an open mindset will bring about a huge opportunity.

I suspect that the successful virtual world business model will be based on the blockchain token model. The second largest crowdfunded project in history was a virtual world project, Star Citizen, which raised $140 million. In the last year alone, blockchain projects have raised over $250 million in crowdfunding. Developers can raise funds to develop virtual worlds in this way, provide token incentives for people to join their worlds, and use native tokens for governance.

After our weekend conversations, I realized that virtual worlds will be one of the first killer apps for blockchain. I suspect that blockchain will be the skeleton of virtual worlds — the currency system, assets, identity, and even governance provided by the blockchain — just like in the real world. That’s where I think we’ll end up in the real world.

Thanks to Coinbase CEO Brian Armstrong, Barry Schuler, Mike Capps, and others for their help with this post.