Over the next couple months, High Fidelity will release a new cryptocurrency and a public blockchain allowing virtual world users to buy and sell digital goods as well as store information about their property.
We are getting ready to deploy blockchain software to create a new currency for virtual worlds, called HFC. This currency will be a public blockchain with a consensus group made up of multiple parties, and ultimately independent of High Fidelity’s control. It will achieve the key goal of a virtual world currency, which is to provide an easy way to enable transactions between virtual world users who physically live in different parts of the world with different local money systems. HFC will be convertible to local currencies or to other cryptocurrencies at popular exchanges, enabling creators of digital goods and experiences to immediately start making money. In addition to providing the basis for in-world transactions, the HFC blockchain will also be used to store information about the ownership of digital assets in virtual worlds. We plan to use this aspect of the blockchain to provide an open way to protect intellectual property by embedding certification affirming item ownership into the blockchain.
Federated Consensus for High Speed Transactions
For virtual world transactions — where we want to store not just currency but also certificates for digital assets that may frequently change hands or status as well as other information such as identity — we need a very high transaction rate and very low (or zero) transaction fees. For this reason, we can’t directly use the big public blockchains (Ethereum or Bitcoin), because the full decentralization of these networks imposes limits on how quickly they can process transactions and requires significant fees per transaction. This is basically because a very large network of ‘miners’ have to share the transaction fees equally among themselves, and the algorithmic ‘game’ that allows the miners to pay each other without trusting each other will break down if the transactions happen too quickly. Smart designers (not just us) have observed that if a trading network can trust a smaller subset of members to act as verifiers for new transactions (typically called ‘block signers’), you can greatly speed up the performance of the network and reduce the fees without compromising the most useful quality of a blockchain: a single public ledger which everyone can read and write, and which enforces the requirement for correct digital signatures for every transaction.
Creating a Stable Exchange Rate
Buyers and sellers of digital goods want a currency that remains fairly stable so that they don’t have to constantly change prices, and potential buyers aren’t tempted to hoard the currency instead of spending it on useful things. But this hasn’t been the case at all with existing public cryptocurrencies and has been highlighted most recently with the numerous ‘ICOs’, which have seen wild price fluctuations as investors speculate as to the future value of a scarce set of coins or tokens. The dream of a global digital currency that can be used for everyday transactions has been hampered by the speculative excitement around their rapid increase in value. But Second Life’s Linden Dollar, supporting an economy with a million or so people generating more than $500M in yearly transactions, demonstrated that price stability is achievable in a digital currency through active management that increases the available money supply as economic activity (e.g. users and transactions) increases. So rather than creating (or selling) a fixed number of ‘tokens’, we are going to design a system and policies that will gradually increase the amount of HFC in circulation . Because the currency will be created on a public blockchain with a federation of signers, we can use an open process, voting, smart contracts and other mechanisms to regulate the monetary policy. We will start with the simple strategy of attempting to evenly distribute new currency to many participants with the measurable goal of a stable exchange rate.
Content Protection and Intellectual Property
With virtual worlds likely to become as useful as the real world for a wide range of activities, the rules around intellectual property for digital goods are going to be as important as they are in different countries today. Content creators will not engage in building the virtual worlds we all want if they cannot adequately protect and profit from their work.
The HFC blockchain will allow creators to permanently attach digital certificates to their creations that will securely identify their origin and unique ownership when they are later encountered anywhere in the virtual world. In the same way that a blockchain eliminates the possibility of ‘double spending’ digital currency, the HFC blockchain will not allow the certification of goods to be duplicated. Similarly, the blockchain also gives control over the sale, ownership and transfer of certified goods completely over to their creators and owners — there is no way for intermediary agents (such as a company like High Fidelity or a VR server operator) to take an action to change the status of something you own.
Digital certificates issued by the High Fidelity marketplace (and likely other marketplaces choosing to use HFC) will serve a similar function as patents or trademarks — creators will register their works to get the initial certificates, and these certificates will be given out only for work that is not infringing on other or earlier works. We will create a process of public review, as is done in many countries and communities, to improve the likelihood that new registrations are unique. Once granted, these durable certificates cannot be revoked and can then be attached to purchases on the blockchain to prove the origin of goods. The absence of an accompanying digital certificate and blockchain entry will make digital forgery more obvious and impactful than in the real world — for example, server operators may choose not to host content without certificates and end-users may choose not to ‘see’ content according to it’s certificate status.
Wallets and Privacy
As with other cryptocurrencies, your privacy and security when using HFC is under your control. You will create HFC addresses for currency and assets in a local wallet and you will be responsible for storing and backing up your own keys. High Fidelity will not store (or ever see) your keys, meaning you are the only person who can initiate a transaction using HFC or transfer a digital good. And since these addresses and keys are separate from your identity, your use of currency and digital goods does not require an association with your account name or other aspects of your online identity.
Virtual Worlds are a Killer App for Blockchains
Virtual worlds are already a source of tremendous creativity and economic value, having enabled billions of dollars in transactions between millions of participants in Second Life alone. Blockchains are the perfect home for these transactions: Buyers and sellers in virtual worlds are rarely from the same country, and virtual world transactions need to happen quickly and with minimal fees since they are often for small amounts. Additionally, blockchains offer the ability to store information about the ownership of digital goods along with transactions.
We are very excited to help create this key component that will begin to spark entrepreneurial content creation and growth of the broader opportunities for VR. We’ve been discussing and getting feedback on these designs in our ongoing community meetings in High Fidelity, and wanted to lay out this roadmap more broadly as we begin deploying components of this plan over the coming weeks. I’ll make a separate posting with some additional details on the content protection strategy shortly.
Q: Why not just use Bitcoin or Ethereum directly?
A: The fees are too high, and the transaction rates too slow for managing digital assets. Bitcoin transactions cost a couple dollars and take 30 minutes or so to settle, and although Ethereum is faster it is still limited to 25 transactions per second or so. With Second Life as a reference point, we expect that 10 million virtual world users will probably generate 500–1000 transactions per second — and we eventually expect billions of VR users!
Also, the huge price volatility of BTC and ETC combined with their generally upward price trend makes them a poor choice as a trading currency — they have become more like decentralized commodities. HFC can be easily exchanged for these currencies when needed, but in-world transactions happen against the faster consensus network.
Q: Why not use a system like VenMo or PayPal to enable trade?
A: Because buyers and sellers are very often not in the same country, and there aren’t any existing systems that work well across a lot of different countries. Also, many of these systems don’t have API’s that would easily allow them to be used from within a virtual world, and/or are not designed to support digital goods. As described above, our strategy for content protection also requires a public ledger for virtual asset certificates, which we would have to build alongside such systems.
Q: Can I get paid miner’s fees?
A: No. You will be able to host/replicate the HFC blockchain but do not get paid mining fees, because blocks are signed by a smaller consensus group rather than proposed by miners. This is what enables high speed and eliminates basic transaction fees. It is, however, part of the High Fidelity strategy to enable sharing of computing resources between server operators, and HFC will be used as payment in these upcoming systems.
Q: Will my money and digital assets survive if High Fidelity goes away?
A: Yes. Because the HFC blockchain is a public ledger, anyone can (and many will) make a backup of the data. If High Fidelity were to disappear, someone else will startup a new blockchain from that backup and provide the same service of accepting new blocks to write to the ledger. Also, both High Fidelity and the blockchain software we are using are open source.
Thanks to Alisa Kurt, Mukul Agarwal, Howard Stearns, and Caitlyn Meeks-Ferragallo.