“Metaverse Masterclass” is a series of reports, articles and interviews from experts around different topics in Metaverse. This is an article by Jamie Burke, CEO and Founder Outlier Ventures, originally appeared on Ourlier Ventures Blog.
We believe the next phase of growth in the evolution of DeFi will come not from better integration into the existing financial system, more regulation or real world assets and CeFi but instead by unlocking digital value already native to the Metaverse.
In our follow up to The Open Metaverse OS paper we introduce MetaFi: decentralised finance in the Metaverse.
The concept of decentralised finance (“DeFi”) has been steadily gaining momentum within the crypto community since 2018. Built on the principles of sovereignty of wealth, permissionless innovation and the promise of financial inclusion, the mission of various DeFi protocols and applications is to construct a digital financial system that is more open, innovative, efficient and less extractive than the one the majority of the world still relies upon today, which in contrast is referred to as CeFi or TradFi.
While DeFi has commanded a lot of attention in the crypto space, its adoption is still relatively low, estimated at under 5% of all crypto assets being put to work as collateral in it. In 2021, DeFi achieved $4.6bn in annualized monthly revenues, which is less than 5% of JPMorgan’s revenues last year. Furthermore, DeFi is still primarily limited to basic forms of borrowing and lending against stablecoins, Ether, or wrapped Bitcoin. While there is notable work being done to create bridges from centralized finance (CeFi) into DeFi — for example, to introduce real-world and income-bearing instruments as new forms of collateral — an increasingly hostile regulatory environment, low capital efficiency, and challenges around managing counterparty risk for institutions make this bridging seem a long way off.
In this paper, we propose that the majority of growth in DeFi will not be driven by CeFi. Instead, we explore how it unlocks value in the Metaverse through what we call “MetaFi”: the decentralised financial tools of the Metaverse. But what is the Metaverse exactly? What kinds of value exist within it? And more importantly, how will DeFi be combined with continued innovations in tokens and crypto-assets to enable MetaFi at scale?
In advance of reading this article, and if you are new to the Metaverse and our thinking, we recommend first reading our Open Metaverse OS thesis published earlier this year back in January 2021. You can download and read the original paper and updated primer here.
However, in summary, the Metaverse could be understood as an interface layer between the physical and virtual worlds, comprising a combination of innovations in hardware and software, but most importantly, an economic system parallel to the fiat financial system. In that context, it’s critical that we think about it in terms of financial inclusion. This anchor will be important as we unravel the concept of MetaFi.
The internet in its current state suffers from drawbacks like limited inclusion of digital assets by the banking system, dynamic terms and conditions of centralized platforms and value being siloed in platforms by design.
We view MetaFi as one of the potential solutions to these problems as it adopts the core DeFi principles of unstoppability and composability.
This paper outlines how the adoption of MetaFi will be driven by four key trends: improvement of the DAO services stack, mutualisation of risk, development of financial tooling, and gamification of finance and the financialization of everything. These trends will be most visible in the main clusters of activity of MetaFi, like virtual worlds, games, avatars, wearables, marketplaces, yield-bearing NFTs, and access tokens. We invite you to download the full paper for a complete overview of MetaFi and the possibilities it will unlock in the medium to long term future.
Some paragraphs from the report (Download the full report)
The Metaverse is Crypto
As discussed, the Metaverse is first and foremost an economic system, a meta-economy if you will, that enjoys supremacy over any one digital economy, virtual world or game which should rather be considered a singular instance of the Metaverse, or individual verse. In fact, on a long enough time horizon, as the combined GDP of this meta-economy outgrows those of nation states, so too will it enjoy supremacy over their fiat based economies. We believe, The Open Metaverse at least, is an open and permissionless version of this meta-economy, made possible through what we might in aggregate refer to as Crypto. And in the absence of an alternative meta-economy today you could, and we do, make the argument The Metaverse is Crypto and Crypto is The Metaverse.
Status Quo of the Digital Economy
Today, there are billions of dollars of value currently trapped in proprietary web platforms such as social media (Facebook, Instagram or TikTok) or gaming (Fortnite and Roblox). What we refer to as Web2 has actively and deliberately built “moats” to trap that value and the user for as long as possible in order to extract as much “lifetime value” as possible for the benefit of shareholders. Web2 firms generally operate on the principle of shareholder supremacy over all else, even or especially, at the expense of the user. This value, in the case of social media or free-to-play games, is often primarily monetized through advertising and the profits generally not directly shared with the users themselves. Even with Roblox, where the whole premise is the ability of creators to monetise their user-generated content (UGC), the percentage they receive is only estimated to be 25%1. This extends to the music streaming model and programs on YouTube. In aggregate, it is estimated that the digital economy is currently worth US $11.5 trillion globally, equivalent to 15.5% of global GDP2. It has grown 2.5x faster than global GDP over the past 15 years, almost doubling in size (since 2000) with an increasing percentage of the population depending on the internet for their livelihood. If we zoom into a subset of the digital economy — the digital creator economy, it is currently only a fraction of the mainstream digital economy, but its core areas are growing. This includes fields like publishing, gaming (skin creation), digital art, streaming, music, film, and more. On the supply side, there are currently up to 50 million3 content creators in the space, who consist of mostly amateurs (46.7 million)4 and around 2 million professionals. Professional participants in the digital creator economy can easily earn up to $100,000 per month. However, the majority earn much less, their income is irregular, and receipt of funds as they work their way through the system can take several months after delivery. We argue that much of the digital creator economy today would not be considered part of the Metaverse, because value is not freely tradable across platforms and is primarily locked into the value of platform equity alone.
Web 3, NFTs and the Metaverse
In contrast, in the Web3 world of crypto-currencies, DeFi and NFTs, the whole paradigm is oriented around the user and their sovereignty: their identity, data and wealth. In Web3, even data itself can be a form of digital wealth and income. This means that while there are still platforms that help with the creation, discovery or curation process, the user is in full control of the output and can freely transfer value between platforms to resell, borrow and lend against in a completely permissionless way. In short, transferability is a fundamental “property right.” Unsurprisingly, we have seen in the early successes of Web3 that when moats are removed and transferability made possible, people spend more time and money on platforms they like, such as the blockchain game Axie Infinity5. This is something we laid out in our previous paper. Long-term, the Metaverse and its platforms (including much of Web2) will adopt Web3 technology and principles, not necessarily because it’s philosophically the right thing to do, but because it’s good business.
For us MetaFi is an all-encompassing term for the protocols, products and/ or services enabling the complex financial interplay between non-fungible and fungible tokens (and their derivatives). For example today, with MetaFi an individual could use a fraction of an NFT as collateral in a DeFi lending platform. To understand MetaFi, we must first highlight the two core principles of DeFi that make it possible. It is 1) unstoppable and 2) composable, acting as a form of “money lego” for developers, which in aggregate form a highly innovative parallel financial system. Developers all around the world can openly participate and compete to provide the highest yields, whilst ruthlessly removing inefficiencies. It is also important to note that regulators can only limit how the fiat-based systems they oversee interact with DeFi, but not necessarily what happens in DeFi itself — that is, as long as projects and their teams themselves are sufficiently decentralised. MetaFi brings together these DeFi principles to the wider Metaverse through a mix of non-fungible and fungible tokens combined with novel forms of community governance such as Decentralised Autonomous Organisations (DAOs). The combination of these different crypto primitives enables a fully-fledged parallel economy bringing hundreds of millions, and eventually billions of users, into the crypto ecosystem over the next decade.