Title: "Metaverse, What Layer Does It Belong to in the Digital World?"

Author: Professor Shi Zhan, Director of the Political Research Center at the Diplomatic Academy

Source: Yicai

Discrepancy Between Concepts and Times

From the perspective of human order, we are currently in an era of dramatic change. Such drastic changes can leave people feeling confused, chaotic, and at a loss, as this era is filled with uncertainty. There are many reasons for the uncertainty brought about by times of upheaval, one of which is that technological changes have unconsciously ushered people into a new era, yet people continue to view issues through the lens of the previous era. The new era does not conform to the logic of the previous one, and expectations formed based on the concepts of the last era often fall short in reality, revealing uncertainty.

This situation has occurred multiple times in history. For example, Spain and Portugal were the first to embark on the Age of Discovery, sailing into the previously uncharted seas to reach unknown continents and acquire unprecedented wealth. However, both countries still understood the ocean from a land-based perspective. From a land perspective, the foundation of wealth lies in land, so the purpose of exploration was to conquer more distant lands to acquire wealth; the ocean was merely an obstacle to overcome in reaching distant lands, rather than a pathway that connects the world as a whole. Thus, both countries strived to occupy vast territories overseas and amassed great wealth; they also collaborated to push the Pope to divide the world in 1493 along a certain meridian (the Pope's Line), with the eastern hemisphere under Portuguese jurisdiction and the western hemisphere under Spanish control, regardless of land or sea.

However, the ocean has a completely different order logic than that of land, and the attempt by Spain and Portugal to transpose land-based legal logic onto the ocean was doomed to fail. When later entrants like England and the Netherlands ventured into the sea, the best lands had already been claimed by Spain and Portugal; based on the legal division of the two hemispheres, any other country venturing into the ocean without permission from Spain and Portugal was considered piracy, further squeezing the maritime space for England, the Netherlands, and others. The two countries were forced to shift their perspective, no longer viewing the ocean from the land but rather viewing the land from the ocean. Once the perspective shifted, the ocean was no longer an obstacle to overcome but a grand pathway connecting the globe; wealth was no longer based on land but on trade conducted across the ocean. Thus, England, the Netherlands, and others no longer aimed to occupy land overseas but sought to seize strategic maritime chokepoints, with the goal of dominating the seas. This initiated a completely new strategic logic and a corresponding new political-economic logic, allowing England and the Netherlands to turn the tide.

Spain and Portugal, who first opened the Age of Exploration, failed to truly dominate the ocean due to their outdated concepts. We should not mock the discrepancy between their concepts and the times, as early England was not any more enlightened; it was merely that Spain and Portugal had seized the maritime initiative, forcing England to find an alternative path, which ultimately opened up a new situation.

Another example is World War I, where the discrepancy between concepts and times led to massive, meaningless slaughter and further sowed the seeds for World War II. Until the late 19th century, European wars still had an aristocratic character, emphasizing courage and discipline. Both sides in a conflict would respect this aristocratic ethos and leave each other enough dignity. The last war between major European powers in the 19th century was the Franco-Prussian War of 1871, where Prussia, leveraging its newly established advanced railway system, achieved an unprecedented mobilization efficiency and decisively defeated France; this war process was already inconsistent with traditional warfare, but Prussia was led by the old aristocrat Bismarck, who, adhering to his class instincts, allowed France to retain its dignity after victory. Although he demanded territorial concessions and huge reparations materially, he did not humiliate France in terms of dignity.

After the Franco-Prussian War, the Second Industrial Revolution began, with heavy and chemical industries booming in the West, and the scale of the working class expanding unprecedentedly, leading to strong demands for political rights. European countries gradually transitioned into forms of mass democracy. Heavy and chemical industries redefined warfare; from then on, the core of the battlefield was no longer courage but how many Maxim machine guns one had; mass democracy redefined politics, where aristocratic dignity was no longer an unspoken understanding in politics, and skillful political mobilization became the fundamental key to power. However, European concepts did not keep pace with the changes of the times, resulting in Europe stumbling into World War I amidst the fervor of mass politics.

Most military officers in European countries were of noble descent, and they continued to set tactics and strategies based on the courage and discipline understood through noble traditions, ordering soldiers to advance fearlessly in neat formations. However, faced with steel-made Maxim machine guns, the noble traditional notions of courage and discipline became insignificant, and the fearless advancing soldiers were ruthlessly consumed by machine gun fire, with peak casualties reaching tens of thousands daily. The war saw no courage or passion, only meaningless slaughter. After four years of struggle, Germany decided to surrender due to resource exhaustion, at which point no foreign soldiers were on German soil; instead, its army was stationed on foreign territory. Germany thus hoped for dignified treatment after surrender, just as it had treated France in 1871. However, mass politics lacked the class instincts of the old aristocracy; at the Versailles Conference after World War I, the victors sought not to grant dignity to their opponent but to exact fervent revenge, morally degrading and humiliating their opponent to alleviate any psychological burden they might feel while oppressing them. This humiliation sparked an even stronger desire for revenge in Germany, ultimately triggering World War II.

Technology and Imbalance

The discrepancy between concepts and times reflects a series of imbalances, which are often brought about by technological advancements.

Human order is a form of equilibrium. Under given resource constraints, people find a way to self-organize, and there is a general recognition of the legitimacy of this organizational method, thus establishing an equilibrium order.

Advancements in production technology can bring about a wealth of new material resources, altering the "given resource constraints." New material wealth is not distributed evenly; often, it is the past failures that have the opportunity to seize new chances because they have nothing to lose and might as well take a gamble on new opportunities; conversely, past successes may have a path dependency on their previous successful experiences, making them unable to seize new opportunities in a timely manner. The distribution of material wealth and the structure of political-social relationships no longer maintain equilibrium, and the ways in which people previously self-organized will face challenges.

Advancements in knowledge production and dissemination technologies can lead to new imaginations of legitimate order and the social diffusion of such imaginations. The same order that was acceptable under past conceptual imaginations may no longer be acceptable under new conceptual imaginations. Under old concepts, people were satisfied with the existing order and had no motivation to change it; under new concepts, people may be filled with the motivation to change, and as new concepts spread, this motivation may translate into real historical processes.

Furthermore, imbalances on the material level and the spiritual level can ultimately be traced back to conceptual imbalances. Technology has called forth a new era, but people remain conceptually stuck in the previous era, and the solutions and strategies to address the imbalances may be completely misguided, even triggering greater imbalances and igniting larger problems.

Progress is the Reconstruction of Equilibrium

From the previous logic, so-called progress is the reconstruction of equilibrium, and a very key point is the elevation of concepts.

Technological progress drives the emergence of new wealth and knowledge, but if these new elements have not yet gained spiritual awareness and have not fundamentally clarified what they mean, then a new order has not yet formed; only new elements have emerged, which usually possess tremendous growth potential that traditional orders cannot imagine. At this point, it is not to say that traditional orders no longer exist; they typically serve as a form of infrastructure upon which people rely when advancing into the new elements' world. However, there may be various intense conflicts between traditional orders and new elements, meaning that the infrastructure and its applications may not match in various ways. How can we settle the intense conflicts between traditional orders and new elements and guide them toward a new order? This requires an elevation of concepts.

In response to the sovereignty claims made by Spain and Portugal over the ocean, the father of international law, Hugo Grotius, proposed the "Freedom of the Seas" doctrine in 1605, arguing that the ocean, unlike land, could not be practically occupied and thus obeyed a completely different order logic; the ocean is free, subject to natural law, and not to the sovereign laws of any nation. Thus, the ocean order began to gain spiritual awareness; it was no longer a casino of chance where adventurers risked their lives, but began to form an expanded order containing legal certainty. A parallel ocean order emerged alongside the land order, and with its immense growth potential, it integrated the traditional land order through ocean-based trade logic, prompting the latter's self-transformation and evolution. Grotius, through the elevation of concepts, brought about the spiritual awareness of the ocean and the modern world, reshaping the order equilibrium that transcended land and sea.

Facing the victorious nations that succumbed to nationalist fervor and crazily exploited Germany at the Versailles Conference after World War I, Keynes calmly proposed that if Germany were to be squeezed for huge reparations, it could only rely on massive exports to obtain hard currency to pay the reparations, and Germany's exports would crowd out the markets of the victors; the day Germany paid off its reparations would also be the day the victors faced their doom. To avoid this terrible outcome, if Germany were not allowed to export, it would have no means to pay reparations; squeezing it for huge reparations without giving it the ability to pay would result in an endless humiliation for Germany, which would not bring peace but only lead to another great war. To avoid this scenario brought about by the treaty, it was necessary to transcend nationalism and find a supranational institutional solution to guide Germany into a more desirable post-war order. Keynes's design for a supranational solution formed the prototype for the World Trade Organization, the World Bank, and the International Monetary Fund, as well as the Marshall Plan. Unfortunately, in the wave of nationalism after World War I, no one heeded Keynes, ultimately leading to World War II. As World War II was coming to an end, people recalled that Keynes had provided a complete set of solutions twenty years earlier, and they finally implemented this plan, laying an important foundation for the post-World War II world order.

Keynes, through the elevation of concepts, brought about a spiritual awareness that transcended nationalism, responding to the various imbalances brought about by industrial economies and mass politics, reconstructing equilibrium and establishing the logic of the post-World War II world order.

The Internet and Human Order

Observing history is to understand the present. The current world is also in a state of great imbalance, and we need to discern which technologies are causing this imbalance and how to elevate our understanding in the future.

The technology contributing to this imbalance is broadly defined internet technology. The internet is not just a technology; it is a technical simulation of the evolutionary logic of human order. In human order, we can see two paths: one is a self-generated order that is distributed from the bottom up, and the other is a constructed order that is centralized from the top down. However, any constructed order must unfold in the process of continuous game-playing and negotiation with multiple other constructed orders, and the result of this negotiation is still a self-generated order, with the constructed order merely being one of the participants within this larger self-generated order. Thus, in this sense, the order of human society is essentially a process of distributed decision-making and distributed movement, aggregating into a world order through various forms of sharing, interconnection, and reorganization. The internet is precisely a beautiful technical simulation of this evolutionary logic of human order.

Furthermore, because the internet is reconstructing the ways in which humans connect with each other, it is also redefining "the way humans self-organize under given resource constraints"; at the same time, there are numerous new concepts on the internet, and the speed of concept dissemination is unprecedentedly fast, leading to constant iterations and evolutions of people's imaginative models of legitimate order. All of this accelerates the pace of human order evolution significantly due to internet technology.

Since the late 1990s, when the internet began to rise on a large scale, the world has changed dramatically in just over twenty years. This undoubtedly brings about a lot of imbalances, and at the same time, our concepts are likely to lag significantly behind this era. Therefore, the internet world to date is still in a chaotic phase of order; the chaotic phase means that the internet world has not yet gained spiritual awareness, thus not constituting a new order, but merely containing some new elements that still embody various contingencies; if we cannot find the appropriate relationship between new elements and traditional orders, then the success of new elements will lack legal certainty, and traditional orders will suffer various harms in conflicts with new elements. Until we can elevate our understanding sufficiently, viewing both new elements and traditional orders from a higher perspective and finding the logic to integrate both, will a new order truly emerge.

How to elevate our understanding is still unclear, and people are still exploring various paths in the chaos. However, there are methodologies for exploring in chaos. The first is to classify the chaotic objects and identify the potential possibilities for a new order.

Levels of the Digital World

The (broadly defined) internet constructs a dazzling digital world, but this digital world is inherently layered. The so-called layers here do not refer to high or low distinctions but are divided based on their distance from the traditional world.

In recent years, we have repeatedly heard the phrase "every industry is worth redoing in an internet way." No matter how developed the digital economy is, it still requires various offline implementations, which must rely on traditional industries, so traditional industries cannot possibly disappear; there are no sunset industries, only sunset practices. Today, traditional industries must reconstruct themselves in an internet (broadly defined, including the Internet of Things) manner; otherwise, they will struggle to achieve the production efficiency of the industry itself and will find it difficult to access market channels. Companies that cannot participate will be eliminated in this process.

Here we see the digital field most closely related to the traditional world, the Internet of Things, and various equipment manufacturers, operators, etc., all of which are interface existences between the digital world and the traditional world. This is the first level of the digital world, where operations are based on the real economy, which relies on specific physical spaces, thus having various relationships with sovereign states; it can even be said that sovereign states have considerable dominance at this level.

The second level of the digital world enters the realm of virtual economies, but this is a non-distributed digital world. Over the past decade, a series of digital giants like Google, Facebook, Amazon, Alibaba, Tencent, ByteDance, etc., have created an enormous digital world, with the wealth generated by the virtual economy and its appreciation speed being unimaginable in the traditional world, leaving people astounded. These digital giants undoubtedly drive distributed content production, with countless internet users participating in content and data production; but users are all active on platforms provided by these digital giants, and the management of digital platforms is centralized. To put it bluntly, these digital giants can pull the plug; Facebook, for instance, did so to the Australian government in 2020. Therefore, the second level of the digital world is dominated by digital giants.

A significant difference between platform-based internet companies and traditional companies is that traditional companies experience diminishing marginal returns; as the company scales up, management costs rise continuously while marginal returns decline, ultimately reaching a point where marginal returns are zero, and the company’s scale expands to its limit; platform-based internet companies, on the other hand, experience increasing marginal returns; the larger the network, the greater its value, and the increased management costs are negligible compared to the increased network value. The expansion limit of increasing marginal return enterprises is the entire world. Such industries also exhibit a strong head effect, as the more users gather on one platform, the greater the value they receive, leading to even more users congregating there, resulting in a situation where ultimately only two or three large giants can compete in a given market, while other companies are at a significant numerical disadvantage.

The two fundamental elements of platform-based internet companies are technological innovation and network scale. In terms of technological innovation, the most efficient is the United States, while in terms of scale, China has the greatest advantage. Thus, in the past decade, the world's top ten internet companies have only included companies from China and the United States, and this is not without reason.

From this, we can further hypothesize that the second level of the digital world will be dominated by the digital giants of China and the United States in the foreseeable future. However, these digital giants need to transcend their own countries to form their strategies; otherwise, they cannot truly realize their scale effects and will lose to competitors in fierce global competition. In other words, these digital giants must transcend nationalist frameworks; otherwise, they will harm their own capabilities, and their dominance in the second level of the digital world will also be compromised. On the other hand, since the management of these digital giants is centralized, sovereign states can still find ways to impose constraints on them.

The second level of the digital world is non-distributed management, which does not exhaust the distributed possibilities of the internet. Thus, we have the third level of the digital world, which will be a purely distributed world, where user activities and platform management are all distributed. Blockchain provides the technological possibility for the emergence of the third level digital world.

Blockchain is a revolutionary technology that offers a third solution to the famous "prisoner's dilemma" in game theory. The "prisoner's dilemma" illustrates how easily humans can betray each other and how difficult it is to cooperate; this tendency to betray is inherent to human nature and unchangeable. The reason humans can stand at the top of the food chain is precisely because they can engage in large-scale cooperation, so humans must find a solution to the prisoner's dilemma without violating their inherent nature.

Historically, humans have discovered two solutions: one is repeated games. In this case, players, considering long-term interests, will forgo immediate benefits gained through betrayal, allowing cooperation to emerge. However, the premise of repeated games is a small-scale familiar society; if it is a society of strangers, various cooperations are one-off transactions with no long-term interests, making betrayal a more attractive option. Modern society is a large-scale society of strangers; in this case, there needs to be a strong third-party enforcer who imposes severe penalties on betrayers for cooperation to be possible, and the state serves as this third-party enforcer.

Blockchain provides a third solution that can achieve the effects of a familiar society in a society of strangers. On the blockchain, many people are distributedly keeping accounts, and the accounts confirmed by all record-keepers have complete backup copies on each record-keeper's device, and everyone can check these accounts at any time. Unless one can find and bribe more than half of the record-keepers, the accounts are immutable and unalterable; however, since record-keepers are irregularly distributed across various locations globally, as long as their number exceeds a certain scale, it becomes impossible to find and bribe more than half of the record-keepers, making the blockchain's ledger trustworthy and public.

In this scenario, if two people complete a transaction via blockchain, once one of them commits fraud, it will be recorded, and everyone can check it at any time; this person's fraudulent behavior is equivalent to broadcasting across the entire network, making it impossible for them to engage in future transactions. Considering this, they will refrain from committing fraud. This achieves the effect of a familiar society in a society of strangers, meaning that large-scale cooperation can occur without a strong third-party enforcer. This is undoubtedly a revolutionary technology.

The new question is, keeping accounts requires time and effort, so why would record-keepers be willing to do so? If it is a private or consortium chain, this issue is easy to resolve; the initiator of the chain pays people to keep accounts, and such a chain is still managed centrally by the initiator. However, if it is a public chain with no one to pay, an incentive mechanism must be found to encourage people to keep accounts. Thus, public chains issue tokens (digital currencies), allowing record-keepers to earn tokens, thereby forming an important positive feedback loop. As long as there is a token incentive, people will be willing to keep accounts, but at this point, the token has no value, merely a string of characters; this is not important. As long as a certain number of people are keeping accounts, others will be willing to engage in transactions on this chain because the activities on this chain are trustworthy, and as long as enough people engage in activities on this chain, the token will begin to gain value, and the more people participate, the higher the token's value will rise. Thus, we see that for public chains, blockchain and digital currency are in a symbiotic relationship; without the chain, there would be no currency, and without the currency, the chain would lack vitality.

Therefore, the vitality of public blockchain is based on the consensus of the community on the chain, and this consensus itself is distributed; it can be established for various reasons and can also dissipate rapidly, with no one able to substantively control it. If someone attempts to control a public chain by controlling enough record-keepers (computing power), it is equivalent to them possessing superpowers in the digital world of that chain, allowing them to alter the ledger. No one can resist the temptation to use such superpowers; once they start altering the ledger, they will quickly be discovered by users, and the news will spread rapidly. The chain will no longer be trustworthy, the consensus on that chain will shatter instantly, and the crowd will disperse, causing the value of the tokens issued by that chain to plummet to zero. Thus, public chains are inherently resistant to centralized control.**

Blockchain also offers a completely new organizational mechanism akin to a company, known as DAO. The DAO, or "Distributed Autonomous Organization," uses open-source code to algorithmically establish a series of public rules, allowing anyone to become a participant in the organization by providing services or purchasing shares in the organization. Based on the open-source algorithms, the matters the organization seeks to promote can operate autonomously without intervention or management, and participants will automatically receive dividends. This organizational mechanism will form a new type of company structure that can perform functions similar to a company but does not require centralized registration and management.

This is the characteristic of the true distributed digital world at the third level, which is dominated by community consensus.

The metaverse belongs to which level is still in a vague state. The current metaverse is mostly driven by digital giants at the second level, remaining a non-distributed state, dominated by digital giants that can create and destroy it. However, logically speaking, the true metaverse should belong to the third level; it should be a truly distributed digital world, having initial initiators, but its development and evolution process will transcend the initial initiators, gaining independent vitality. It cannot be destroyed unless: extraterrestrial beings arrive, or the community consensus within this metaverse shatters, leading to its collapse.

Blockchain technology provides the technical possibility for this metaverse, while the DAO organizational mechanism offers the organizational possibility for the metaverse.

The metaverse has immense potential to represent the future, which is also related to technological evolution. Technological evolution has profoundly changed human production and consumption structures throughout history. In the agricultural economy era, with low technology and scarce wealth, perhaps 95% of people were in production while 5% were in consumption; in the industrial economy era, with technological advancements and wealth emergence, 95% of people were in production and 95% in consumption; with the arrival of the digital age, the widespread use of artificial intelligence and robots has led to a decreasing demand for manual labor, potentially resulting in only 5% of people in production while 95% are in consumption. These 95% of people do not wish to refrain from production; rather, they are simply not needed for production. So how will they gain the ability to consume? Unless their consumption activities themselves become a form of production, for example, generating data through consumption activities, as data will be an extremely important production factor. The metaverse precisely provides such a "consumption-production" scenario where the two are one and the same.

However, many of the currently popular metaverse concepts and companies may not truly represent the future. The current hype around the metaverse is very reminiscent of the internet bubble at the end of the 1990s; people sensed the future and rushed in to stake their claims. This process generated a lot of bubbles, and after the bubbles burst, many were left in ruins. However, it was precisely the companies that survived the bubble that truly brought humanity into the internet age, leading to the world we have today, allowing us to sit here discussing the metaverse.

In simple terms, we have glimpsed the future, but we still cannot clearly see who will truly bring about that future; it is even very likely that those who will truly bring the future have not yet appeared, and the metaverse belonging to the third level of the digital world has not yet truly emerged.

The third level of the digital world relies on the first level of the digital world as its infrastructure, while the first level of the digital world further relies on more traditional worlds as its infrastructure. This layered transmission will form a vast network of interdependence and symbiotic evolution. For instance, after the large-scale development of the metaverse, the energy consumption will be of a magnitude unimaginable today; if it relies on traditional energy, the pressure on the climate will be unbearable, thus creating a strong demand for new energy, while the development of new energy will also generate strong demand for a series of other traditional industries. Thus, the metaverse, through layered transmission relationships, will reshape the industrial logic of the traditional world and profoundly reshape the political-social logic of the entire "traditional-digital" symbiotic world.

Possibilities of a New Order

The later the digital world emerges, the further its relationship with the traditional world becomes, and the more different its order logic is from that of the traditional world.

The main players in the traditional world are sovereign states, which still hold considerable dominance in the first level of the digital world; however, the dominant players in the second level of the digital world are already digital giant companies. Yet, since these digital giants are still centrally managed, sovereign states can still find ways to regulate them; the third level of the digital world is based on true distributed community consensus, and this consensus-forming community is indeterminate and does not rely on any specific physical space. It can be said to be shadowy, formless, and omnipresent; whenever you try to grasp it, it slips away like a wisp of smoke, effectively freeing itself from the control of the traditional world.

Thus, when we envision future orders, we will notice that a third-level digital world, completely distinct from the traditional world, is emerging; however, the third-level digital world is not entirely independent of the traditional world, as it still requires the preceding levels of the digital world to provide various infrastructures to operate effectively; yet, this infrastructure cannot be monopolized by any sovereign state or digital giant, so the third-level digital world will navigate through the various market competitions of the first two levels, gaining space for its growth and expansion.

Due to the existence of multiple levels of the digital world, players at any given level will gain new maneuvering space during their games, and all strategies may differ from those of the past. Therefore, the third-level digital world is truly distributed, but it cannot monopolize the title of the true digital world; the combination of several levels constitutes a true digital world, and based on this layering, there are still various interfaces between the digital world and the traditional world.

Facing this growing digital world, people are like the Spaniards facing the ocean 500 years ago. This digital world has not yet fully matured, its logic has not yet fully unfolded, and people cannot have a concrete understanding of it, often imagining this world from the perspective of the traditional world. The various data regulatory laws formulated by countries we see today are essentially legislative attempts to understand the digital world from the perspective of the traditional world, which is only marginally more insightful than the Spaniards trying to legislate for the ocean from a land perspective 500 years ago.

However, based on various analyses of the digital world, we can undoubtedly conclude that sovereign states can no longer be the sole dominant players in the future global order. The second level of the digital world already contains the potential for a non-sovereign merchant order, while the third level of the digital world embodies the potential for a purely individualistic order. Yet, regardless of the level, all still require various infrastructures from the physical world to meet basic physical survival needs, so sovereign states still hold an irreplaceable position.

A more likely logic for such a future is the return of the economy to the economy, society to society, politics to politics, and law to law. The various imbalances brought about by current technological advancements have very realistically pushed this possibility before us. How to grasp this reality, gain spiritual awareness of it, and truly elevate our understanding to construct a more transcendent order that integrates the traditional world and the digital world is an era question that humanity must respond to.