The Metaverse and the Trough of Disillusionment

This phase is characterised by fading enthusiasm and interest wavers due to underwhelming experiments and unsuccessful implementations. We witness a period of consolidation or even failure. Investments continue if the surviving developers can enhance their products to meet the expectations of early adopters while keeping costs down.

2022 was anticipated as the pivotal year for the metaverse. Instead, it was a struggling playground for ambitious entrepreneurs like Mark Zuckerberg. Facebook changed its name to "Meta" to align with its strategic plan to create its own metaverse. Meta indulged in creating legless avatars and investing exorbitant amounts in virtual realms. By the end of the year, Meta incurred a staggering loss of $13.72 billion in 2022 with its Reality Labs division. They effectively became the poster child of the failed metaverse by the media.

Mature metaverse platforms such as Decentraland (MANA) and Sandbox (SAND) also had a tough year, with sharp declines in value and user engagement. The former saw a 91% drop in the value of their native coin, MANA, despite high volumes of NFT transactions relating to their metaverse. It should be noted that the weak conditions in the cryptocurrency markets are a significant factor in the decline of the value of all metaverse projects running on the blockchain.

Countless companies placed their bets and suffered losses related to the metaverse last year. But are any of these signs of the demise of the metaverse? Or are we merely moving through Gartner's Hype Cycle, where we will eventually enter the slope of enlightenment and later the plateau of productivity?

Despite last year's turmoil, Zuckerberg and Meta continue to invest heavily in the Reality Labs division. Reality Labs is responsible for researching and developing Meta's most forward-looking projects. Looking at the Q1 report, they suffered another $3.99 billion loss, coupled with a statement that similar losses can be expected throughout 2023. It is worth noting that Real Labs are not only working on their metaverse, but also standalone VR development and automation processes using artificial intelligence across their product range. Concerning the Q1 report, Zuckerberg stated that they would continue to focus on AI and the metaverse. This signals a firm conviction from Zuckerberg about the future of the metaverse.

For metaverse platforms running on blockchain, projects like Decentraland have continued to struggle along with the overall crypto market. The number of unique active wallets (UAW) continues to drop, displaying a continued slowdown in user engagement. MANA is down 66.76% since the beginning of 2023. However, Decentraland continues to deliver features: new ways of using their platform, personalisation, protocol and SDK enhancements, marketplace updates, and a continuous stream of events and activities.

The key takeaways about the current state of the metaverse and the future:

The metaverse will follow the trajectory of blockchain, falling out of favour but inevitably resurfacing. During interim periods we will witness many failures, overcome obstacles, define the user experience and learn from mistakes. In time, the public's enthusiasm will return, much like we've experienced the rise of consumer AI and the different phases of blockchain. The continuous development of leading metaverse platforms is a strong indication of this.

We are witnessing the trough of disillusionment for the metaverse. Many companies have failed, while the remaining ones are improving their products to the satisfaction of early adopters. The number of active daily users in the existing metaverse platforms continues to drop. In 2023, developers will need to cut costs to make it through this phase. Compared to other metaverse projects, Meta has more runway, and their Reality Labs division is already generating revenue, although it is a fraction of the company's total revenue at $339 million (1.18%). Their AI and VR development will continue to generate revenue to offset the losses and help carry costs related to their metaverse. There are also synergies between their VR development and the metaverse.