By Bronwyn Howell

Earlier this week, Politico’s Derek Robertson revisited the question of whether “crypto is going to be foundational to the metaverse.” Robertson pitted the case that cryptocurrencies are “the only way to guarantee digital property rights,” as embodied in non-fungible tokens (NFTs), against the crypto-skeptic view: “Why use blockchain for record-keeping or fundraising, for example, when DocuSign and Kickstarter work just fine?” The latter view, he suggested, may be starting to prevail among former crypto evangelists. Robertson’s evidence: Gaming staple Minecraft last month clarified that NFTs and the blockchain technology underpinning them will not be allowed to be integrated into its game. He also noted the Treasury Department’s recent crackdown on crypto mixer Tornado Cash for its role in helping hackers launder stolen money, implying this may further dent the confidence of those advocating the use of cryptocurrencies for legitimate transacting.

While there may be some validity to these arguments, it is first necessary to unpack their various elements and relationships to one another.

Blockchain technology allows digital records to be stored on a distributed ledger held on a vast number of computers. All computers hold the authenticated version of the ledger; unlike classic ledger systems (e.g., as held by banks), no single firm or person controls collation of or access to the information held on the ledger. The information can be viewed by anyone, but new information is added via a combination of cryptography and complex computer algorithms. The algorithms make it highly unlikely that information can be altered once it has been added to the ledger (in blocks “chained” together in order of addition, hence the term “blockchain”).

Blockchain’s transparency and apparent resilience to tampering have been viewed as advantages, particularly from those welcoming competition for existing gatekeeper-controlled “closed” ledgers. Their use in creating, issuing, and recording transactions in cryptocurrencies (in competition to sovereign governments and traditional banks) reflects this potential. A further benefit is the ability for computer code to be stored on some blockchains (e.g., Ethereum) and enacted in the future (so-called “smart contracts”). This has led some to suggest that entire complex institutions such as firms, markets, and even complete societies can be automated and operated online, removing the need for a wide range of human-mediated institutions, such as courts and even governments. It is easy to see how these concepts have spurred conceptions of a “metaverse,” where all activity is confined to code embedded on a blockchain.

However, the metaverse is currently (and likely indefinitely) a hybrid state set up to meet the needs of humans who ultimately underpin the avatars (and digital institutions serving them) carrying out their activities in a digital space. While it is possible to create digital property, lodge the code for the property, record its provenance and ownership transfers on a blockchain, and remunerate the various transactions associated with it using cryptocurrencies, the human actors remain firmly grounded in the physical world, subject to its rules and limitations. A human may create the code for a digital “skin” for a game character, lodge it on a blockchain, and create an NFT to record its provenance and ownership, but access to it is controlled by possession of the relevant private key. The human does not “own” the NFT; what matters is control of the key, which can be revealed to (or stolen by) another person in the human world. If the key code is forgotten, the NFT continues to exist digitally but cannot be accessed (“controlled”) for human purposes. What can be done in the metaverse remains contingent upon activities in the physical world.

Likewise, blockchain ledgers can record activities in the physical world (e.g., movement of goods between two points in a supply chain) and smart contracts can be triggered based on those activities (e.g., crypto payment for the goods can pass from the buyer to the seller). But the veracity of the ledger relies upon the physical world activities matching the digital ones. (What if the packers put the wrong contents in the package that was tracked, recorded, and paid for?)

Crypto mixers break the link between a cryptocurrency depositor and the actual tokens by pooling the deposits and paying withdrawals using other tokens in the pool, just as traditional banks do with cash. The transactions may be digitalized, but the process is identical. The human intentions—not the code managing the process—are what matter for law enforcement purposes.

It appears, then, that Robertson has asked the wrong question. Humans, not crypto, are foundational to the metaverse. Crypto, blockchain, and the metaverse are merely tools to obtain human ends.

Note: Bronwyn Howell’s 2021 paper, co-authored with Petrus Potgieter, “Uncertainty and Dispute Resolution for Blockchain and Smart Contract Institutions,” which this piece draws on, has been short-listed for the 2022 Elinor Ostrom Prize in the interdisciplinary field of institutional research.

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