The DeanBeat: How to make payments in the metaverse

Tilia recently spun out of Linden Lab with the backing of J.P. Morgan Payments to fuel payments for the metaverse.

Now it’s in a position to provide payment systems that can fuel multiple virtual worlds that are connected to each other in the metaverse. This kind of metaverse will have a common economy, where players can buy digital items and take them over to different virtual worlds.

And Brad Oberwager, executive chairman of Tilia, wants his company to be the glue to hold the different economies and systems of commerce together. Oberwager spoke about this at our GamesBeat Summit Next 2022 event. He hopes that anyone who wants to handle payments the right way in the metaverse will eventually come to Tilia, and that could in turn help the metaverse become interoperable.

Here’s an edited transcript of our conversation.

GamesBeat: How did Linden Lab develop its ability to handle payments? Can you tell us more about the history of Tilia?

Brad Oberwager: The history of Tilia is really the history of Second Life. Second Life, way back when, just for review — Second Life is still going on. It’s a $650 million economy. It’s a pretty big business. When Second Life was started, it was merely a way to build things. That’s what people loved doing. It was the original gaming engine that allowed people to create. It was where the original creators were. But what they did was they allowed people to run a credit card, buy a Linden Dollar, move the Linden Dollar, and then let the Linden Dollar come out of the system.

That was very prescient and very interesting. It was also very illegal. That’s called money transmission. Money transmission is a highly regulated thing in the world. The United States, the EU, Australia, Japan. They were told to stop doing it. Instead of stopping, they built this company called Tilia, which went out and got all the licenses to move money virtually in these virtual worlds. Now, there was only one real virtual world back then, so they used Second Life as the way to get those licenses. But Tilia became its own company. Then, what we did very recently was we separated the two. That’s the origin of Tilia.

GamesBeat: You came into the picture, too. When did that happen?

Oberwager: Philip Rosedale was the founder. Philip and I, we go to Burning Man every year. We actually drive up in an RV together. Every year I would hear about Linden. They wanted to sell it. They couldn’t sell it. After three years I said, “If you talk about this one more time I’m just going to buy it.” And he did, and so we actually stepped in and bought Linden, which at that time was both Second Life and Tilia. They were absolutely connected.

GamesBeat: Now you’ve done a more recent transaction. We just announced it. Tell us more about that.

Oberwager: We took that company Tilia, which was only supporting Second Life, and we split them apart. Now Tilia started supporting other virtual worlds, metaverse gaming companies. As times are changing and the desire to move money — people are learning that it’s very regulated. We split it up, and then JP Morgan came in and funded it, which is very powerful. They’re leading a round. We announced JP Morgan, but the round is open. We’re doing the round right now. It’s already a profitable company.

GamesBeat: What’s the opportunity at hand for this deal?

Oberwager: Everyone’s read Matthew Ball. Let’s assume that we all agree with him, as a start. We have a lot of experience in these virtual worlds. We’ve learned — I think we have a lot of experience. We’ve been doing this for 20 years. We see these crypto games and blockchain games. We’re not saying yes or no to them. But we’ve learned that virtual worlds mimic the real world quite closely. You get a sense of place, a sense of self. There are rules and governments. You have DAOs, but in our case the community rules, and it’s slightly different. They mimic a lot of society. But every society, throughout all of history, has depended on money in some way to blossom. You’re good at what you’re good at. I’m good at what I’m good at. We both separate. We do what we do. Then we exchange. Even barter is a type of exchange. Money is a much easier way to do it.

The opportunity at hand — we believe that moving your stuff is important. Moving your identity and your friends is important. But moving your money might actually be the most important thing. If you live in San Francisco and I tell you you have to move to New York and you can’t bring your clothes, that’s mildly irritating. But if I told you that you can’t bring your money and you have to start over, you’re not going to move. The movement of money in these worlds is incredibly important. You can’t have a creator economy without it.

If we step back, you can’t build a virtual world. You have to let the creators do it. They don’t do it for free. Moving that money within the world with these money transmission licenses, moving the money between worlds, that’s going to drive most of — we believe money is going to be the underpinning of the picks and axes that will be the underpinning of the virtual worlds. That’s what we think the opportunity is.

If you read the press, it’s going to be somewhere between $2 and $8 trillion dollars. The interesting thing is how little people truly understand the movement of money in the world. If you’re good at games, you think you can just sell virtual currency and everything will be fine. The reality is that is not even close to being true. Unlike making a mistake when you’re VC-backed and things don’t work out, when you’re moving money and you make a mistake, people go to jail. It’s not okay to mess with people’s money in that way.

GamesBeat: This is a specialty that’s regulated. Very few other companies can do it.

Oberwager: The first thing is, anyone who’s seen Ocean’s 11, that’s the way to start thinking about it. Ocean’s 11 was all about trying to rob the vault. Why was there so much money in the vault? In casinos, the casino must have cash that represents every chip on the table. The casino makes money because you walk out with fewer chips than you walked in. But they must have that in the vault. The same applies when you have a virtual world and you’re selling diamonds. If you earn the diamonds and you can put them into a bank account, the government steps in and says, they’re your diamonds. It’s your money. You’re not allowed to touch it. I’m not allowed to touch it. Even Tilia is not allowed to touch it. You have to put it in this very special bank account, a sequestered account or a custodial account. All the money in the virtual world must be backed in that account, by law.

That’s the miss. The companies that are doing this, if you can put money into the bank, the big miss is, you’ll get a phone call from a regulator, because New York, Texas, California, Florida, they’re on this. Because it can be dangerous. If you’re a small startup, you take that money in and you spend it on engineers and things go sideways for a bit, and then the creator wants to take that money out — if you say, “Hey, we don’t have it,” that’s illegal.

GamesBeat: Can you distinguish between tokens that we all hear about and then Linden Dollars? Those have a fixed price, right? Tokens are fluctuating.

Oberwager: Let’s talk about how this works. The first option is, why wouldn’t you use fiat? Fiat is the US dollar and the euro and so on. Why wouldn’t you use that? We’ll put that over here. And then over here we’ll talk about crypto. If you do use crypto, all this goes away. If you use crypto and it trades on Coinbase and it moves in your world, but you can get your money out through exchanges, then you don’t need money transmitter licenses. We’ll get to that.

First, fiat. Fiat is clumsy and slow. In these virtual worlds you need to be instantaneous. Someone buys a set of eyes, you can’t wait for an ACH transfer to sell it. You can’t use a credit card, because credit cards have minimum fees and stuff like that. I think everyone would agree that fiat is terrible. But there’s a lot of talk about crypto in case you haven’t heard, and how crypto would work in these games. That’s very different.

Crypto doesn’t work, and there’s a couple of reasons why. The first reason is, it can’t support an economy in the way people think. If you have an economy like a Second Life where you make wings and I have money and I want to buy your wings — say the crypto is increasing in value by one percent per day. That would be very normal for crypto. Why would I spend it on wings? I don’t need wings that badly. I like going up one percent a day. Meanwhile, if it’s going down one percent a day, you’re not going to accept it. The economy breaks down very fast if it fluctuates. That’s the economic reason why crypto doesn’t work. People think they can get around it. We haven’t been able to see it. Tilia is separated out. We support other things. We haven’t seen anybody truly work it out.

That doesn’t mean you can’t make money on crypto. We’ll talk about NFTs later. But there’s another set of reasons why crypto doesn’t work and you have to use what we call virtual coins. Second Life, which people thought was dead, or a lot of people probably haven’t ever heard of Second Life — Second Life does 1.6 million transactions a day. If you compare that, without talking badly about another company — if you compare that to a popular blockchain game or metaverse game you can think of, we’ve done more transactions during this fireside chat than the top two or three have done in 2022. Not crypto trades. That’s different. But actual in-world transactions.

The number of transactions that you need to do is staggering. Even with all the talk about layer 2 and all the new ways you can do crypto — we’re talking about billions of transactions a day. Second Life is a $650 million economy with 1.6 million transactions a day. That leads to the next problem. The speed at which you need these things to happen is instantaneous. You cannot wait for anything. Now, I know there are some cryptos that are able to do that. But again, this is pretty complicated. The real problem is the average transaction size. In a virtual world you don’t buy a beer for four bucks. You buy a beer for four cents. In fact, we can move 1/250 of a dollar profitably. That is very hard to do on a blockchain or with crypto.

Having done a lot of work on this, crypto doesn’t work. I know that might be controversial and a lot of people have investments in these crypto games. They’ve made a ton of money on crypto trading. But to power a virtual world — we cannot see, in the five to 10 year time horizon, how you’re going to solve the economics and the things that are just systemic to crypto for a virtual world. You would have to build a treasury that would buy and sell to flatten out the fluctuation, which then of course — why would you do it?

That brings up what Linden is. Linden is a closed and open system simultaneously. It’s open in the sense that you can put money in, you can move it, and you can take money out. That’s the open part. That’s similar to any currency and crypto and everything. But it’s somewhat closed in the sense that Linden Dollars only work in Second Life. While some may say that’s terrible, that’s not distributed, that’s not web3 — you’re right. But we’ve enabled a marketplace so that money can come in. If you want to buy Linden Dollars you don’t buy them from me. You buy them from a resident in Second Life. There is a market. We step in to moderate that market. We are a treasury. We’ll sell if there’s too much buying pressure and buy if there’s too much buying pressure. That’s incredibly rare, though. The market kind of takes care of itself.

Again, if that happened on Coinbase, you have a real problem on your hands. If you were Sandbox and the price was coming down, you’d have to spend $100 million to prop that back up and make that work. We let the market work itself out. That’s why we do what we call — we would call them a virtual token or a virtual coin, not a virtual currency. A virtual currency, by definition, would be out there, and that’s a very different need case.

GamesBeat: But this is a metaverse opportunity. How big is it?

Oberwager: I guess we’re back to how you define the metaverse. There’s been so many people that have said, “These are the seven things.” And they’re all probably right. We view the metaverse, certainly, as a bunch of technology. We think that interoperability is super important. But when we come back to money and we think about — if Second Life is $650 million, and if it’s true that the economy is different than the money in — Second Life doesn’t bring in $650 million. Second Life generates $650 million of activity. Those are very different things. The money in, the money moved, the money out, that’s much less than $650 million.

The point of that is that if you think of the gaming world as $150 billion, roughly — it’s bigger than that, but let’s think about that — one way to look at the future is that all of these games are going to be somehow loosely or very tightly associated with the concept of the metaverse. They’re all going to lean into creator economies. They’re all going to lean into building different things. If our revenue is $80 million and money that comes in is $160 million — most people would keep that kind of quiet, but we’re pretty open with stuff — if you think of that, and you think of our economy as being somewhere between four and eight times our revenue, and then you take the gaming market and say that’s all going to go creator economy, you can see how these gaming worlds would be trillions of dollars, even if there’s no growth. It’s a pretty safe assumption that there’s going to be a lot of growth.

When people throw out a number like $8 trillion and you recoil and say that’s impossible, it’s actually very doable. You asked what the opportunity is. The opportunity is going to be multifaceted. Everyone is going to have a different opportunity. Different investments will do well. There will be web3 stuff, web2 stuff, web 2.5. All that will happen. But for us, the opportunity is back to the casino example. If you have $8-10 trillion out there that you have to back, that’s a big financial opportunity. If you can make a very tiny amount of money every time something moves, that’s a big financial opportunity.

Right now we’re lucky enough that we partnered with JP Morgan. They can move an awful lot of money. They can store an awful lot of money. That’s why they invested in us. It was the partnership. The investment actually came later. If you think about that from our perspective — we’ve lucked into — we may not be the only company that can do this. But we’re the only company that is doing this. A company like PayPal could step in. They have the same licenses. But they would have to issue tokens. They would have to do transactions around 12 cents. Paypal is not in the business of moving 12 cents at a time.

GamesBeat: If we can catch up some, what are you enabling in terms of virtual economies in games by going across more platforms, by being outside of Second Life?

Oberwager: If you could convert your Linden Dollar and buy a Fortnite sword, that would be super interesting. That’s also a very long time in the future. But if you could do that — the question is how. You’re going to need a set of financial rails that we actually don’t have right now. We have a concept of ACH. We have this new thing, relatively new, in crypto. But moving money instantaneously between even the nation-states that we have right now — even moving money from the United States to Canada is a more arduous process than it should be.

The metaverse is not a replacement for the real world. It’s not just going to be completely different in some ways. But the instantaneous nature of needing to move stuff and money, that’s going to be at a level that we haven’t seen before. The Visa network is incredible. We can talk about how that will impact the metaverse. But that opportunity, to take a dollar of one semi-open, semi-closed system — which we think is the future — a virtual coin, and use that in a different virtual world — you’re talking about universal wallets and things like that. That’s a future that is super exciting and an enormous opportunity.

GamesBeat: Do you need an interoperable metaverse to maximize the opportunity here? How are you going to help make that happen?

Oberwager: I’m not so sure you need an interoperable metaverse for things to happen. It certainly is going to make it a lot better. We think of the future as similar to nation-states and satellite economies. There will be, in our opinion — first, for a second let’s ignore the full interoperability of the metaverse. There will be large virtual worlds or silo’d metaverses that you think of as nation-states. They have their own governments, their own sense of space, their own passports, and their own money. Then there will be smaller satellite states around them that might use those rails. They might use the same currency. They might use the same money movement techniques. They might have the same or similar passports. Or they might just be adjacent.

That could stay on its own and not be interoperable. There may be a thousand of those. There may be 20. Facebook might be one. Google might end up being one. Second Life might be one. Epic is certainly going to be one. EA is going to be one. Now you talk about how they’re going to exchange with each other. It gets extremely complicated, extremely quickly. If you have a money system in EA and you have a money system at Epic, the concept that you could easily go between the two of those is somewhat false. If in one world a sword is worth 10 wings and in another world wings are worth 10 swords, there’s no crossing mechanism. It’s not a perfect market where it will all end up at five for five. They’re just different.

There will need to be some sort of mechanism where this nation-state goes into this thing that goes into this nation-state. That thing might be a crypto. That’s where this starts to change. I don’t see a world where the nation-states can operate on crypto, but the thing that goes back and forth — most likely it will be a stablecoin, because it will be very difficult to do that with fiat. It will have to be something that is absolutely backed by fiat. We won’t be able to get around that. The minute one of the entire ecosystem of every nation-state — the minute one can turn that money into fiat, the law, the current law, will come in and say the entire ecosystem must be backed. It’ll have to be backed by fiat. But it will have to move instantaneously at very low dollar volumes with very low friction and no gas fees. It’s complicated. But that’s the 10-year-out vision.

GamesBeat: Right now, what partners do you have in this?

Oberwager: We have partners and we have customers. Our customer list, in various stages — this is pretty recent, that we spun this out. We partner with AWS. We partner with Unity. Obviously we partner with JP Morgan. We have a partnership with PayPal. They don’t know it, because they’re so big, but we work with them, as well as Coinbase and others. Those are low-level partnerships. 92 percent of games in the world have some portion of their system on AWS. And by the way, AWS is an outstanding company to partner with.

GamesBeat: On the customer side, what’s happening there?

Oberwager: Upland, for example. Which, by the way, is a crypto game. It moves land as NFTs. They’re a customer of ours. We drive, if you will, their stablecoin, their virtual coin that money comes in and money comes out. They were very astute — of course they liked us, so that’s why I call them astute. But they were very astute in the sense that they were able to do both. They had NFTs and crypto, and they had securely backed coin. They have actually grown when you see some of their competitors like Decentraland, who have actually declined, because they did it the other way. Certainly we wish we were supporting Decentraland. That’s a huge company and we want everyone to do well. But that’s a perfect example of a customer.

As other companies, very large aggregators of mobile apps — they are thinking about being a nation-state. There are companies that have a thousand mobile apps and they want to have a single token that will go between all of them. They’re going to figure out games of skill and games where they just sell diamonds. As they see that economy grow, they’ve chosen Tilia. I don’t want to keep them secret, but we’d like to keep them secret so we can announce them when they’re ready to launch, instead of when we sign the contract, so we can get some press. But in general, outside of Meta or Horizon, we are in some level of discussion — either we’ve signed the contract, we’re about to sign the contract, or we’re about to launch, with almost everyone who’s not a crypto game. If you’re a blockchain game we only have one or two.

GamesBeat: Are other countries beyond the U.S. getting their act together on things like metaverse payments?

Oberwager: Yeah. Another thing that’s heading toward people that they may not see — just as the EU led in privacy, they are quite strict on what you’re allowed to do in terms of what you do with money. They’re quite advanced in so many ways. The euro and the EU, they have a lot of experience with the concept of nation-states, and their laws are more recent. A lot of what’s happening, especially in the U.S.–it’s so confusing, and people kind of abused it. We came up with this thing called crypto. People did whatever they wanted. Everybody made a bunch of money. They left the government behind. Governments don’t like being left behind. They’re going to come in and regulate. It doesn’t matter whether it’s the SEC or whatever. Regulation is coming. But it’s going to be old regulation with maybe three words tweaked and applied to this brand new thing. That’s going to be a disaster.

Europe was much later when they started creating all of these money laws. Their laws will apply better, and since they do, they’re doing it faster. The EU, the U.K., Australia, Japan, South Korea, they’re ahead of the U.S., but in a good way. The U.S. is going to catch up, hopefully in a good way. But I’m not overly optimistic. The good news for us as a company is we have Congress on our side. The more inept Congress is, the more you need what we provide. Congress is our moat against competition. So that’s not a bad thing.

GamesBeat: What’s the road map like? Where do you want this to go, and what’s going to help you get there?

Oberwager: The resonance of these virtual worlds. We are just an enabler. There will be people building the picks and axes and people mining the gold. We look at ourselves and say, “The whole reason you need the picks and axes is to mine the gold. Once you get the gold, you have to move it somewhere.” We move the gold. We want everyone to be successful. The more success out there, the better we do, and the better the world does. We have a huge opportunity. This metaverse thing could be really good for the world. We have an equal opportunity that it could be bad for the world. We’d like to see a good, massive, virtual world metaverse interactivity, and then we just want to be part of that.

GamesBeat: And the regulators are what makes you one of the more unique companies? Not everybody is going to get past them.

Oberwager: Right. The regulators are real. They’re not the most forward-thinking, because that’s not their job. Their job is not to think ahead and make things easy. Their job is actually to make sure that consumers are protected. Regulation is good. You partner with JP Morgan. They know regulators. We’ve been doing it for seven years. We know the regulators. When we hear people say, “We’ll get our money transmitter licenses too,” I want to have a PDF packet that has every state, who the transmitter license person is, their email, their phone number — it takes years and tens of millions of dollars just to get them. And then it takes tens of millions of dollars to keep them.

It’s not so much that people can’t do it. It’s that there’s no game on the planet — even Meta backed out of it. Nobody on the planet should do this on their own rather than using us. That’s what we like about regulation.