Why DeFi Is Central to the Success of the Metaverse

Visa buying a CryptoPunk NFT for around $150,000 recently may be the first sign that these unique digital assets are starting to be taken seriously for commerce. Up until now the sale of these ‘non-fungible assets’ has been associated with high priced artwork, but Visa’s purchase, while also about art, is really about promoting their expertise to businesses in the field of using NFTs for commerce. Indeed, in a report [1] coinciding with the CryptoPunk purchase they state a longer-term vision: “While the prices of individual NFTs fluctuate, fascinating use cases for NFTs are still emerging and the groundwork is being laid for the long-term utility of NFTs.”

One such use case led by big consumer brands from Facebook to Coca Cola is the use of NFTs in the virtual world’s online, called the metaverse. Indeed, if you heard the news that Facebook is about to launch its own crypto wallet Novi (which is in true metaverse fashion interoperable with other wallets) then you may also recall it’s also due to work with NFTs as well as stablecoins. What you may not know is that Facebook’s CEO Mark Zuckerberg sees the future of the global social network in the metaverse. Indeed, last month Zuckerberg said within five years Facebook would be a “metaverse company” while Satya Nadella, Microsoft’s CEO, said they were investing in the “enterprise metaverse.” Simply put, whoever can integrate NFTs and payment with the metaverse may well lead the biggest change in online culture and economy since the birth of the web in the 1990s. A view supported by David Raszucki, head of the $50 billion Roblox Corporation, who sees the emergence of the metaverse as profound a shift as the invention of the internet and the world wide web. [2]

Certainly, it’s along those lines in terms of potential of the wider metaverse, coupled with the key role of NFTs that software developer Alethea AI, which claims to have created the world’s first “intelligent NFT,” recently raised $16 million in funding to create a metaverse populated by its bots. The NFTs that will fill the metaverse will be talking, intelligent NFTs (iNFTs) created by Alethea: machine-learning bots that can have human-like conversations. “Alethea’s thesis is that NFTs will provide a definitive property rights infrastructure for the emerging Metaverse driven by interactive and intelligent Avatars,” the announcement said. “The AI infrastructure built by Alethea will serve as the underlying connective tissue to enable NFTs to ‘come alive’ as interactive media assets, with personality traits, preferences and real-time interactive capability.”

In a recent interview in The Verge Zuckerberg [3] laid out his vision of a metaverse bringing, “enormous opportunity to individual creators and artists; to individuals who want to work and own homes far from today’s urban centers; and to people who live in places where opportunities for education or recreation are more limited. You can think about the metaverse as an embodied internet, where instead of just viewing content – you are in it.” Of course, anyone who’s watched The Social Network, or has seen how Facebook can do harm through manipulating its online users’ behavior, is certainly going to wonder if the metaverse is going to be in safe hands with Facebook. As Epic Games’ CEO Tim Sweeney contentiously remarks: “This Metaverse is going to be far more pervasive and powerful than anything else. If one central company gains control of this, they will become more powerful than any government, and be a god on Earth.” While in a recent report from UK-based blockchain VC company Outlier Ventures the need for the metaverse to remain open to all, to have a crypto decentralized core is therefore paramount: “The defining characteristic of a true Metaverse is that it needs its own economy and currencies native to it, where value can be earnt, spent, lent, borrowed or invested interchangeably in both a physical or virtual sense and most importantly without the need for a government.”

Supporters of a thoroughly decentralized metaverse, where NFTs play a pivotal role in facilitating the DeFi necessary for this meta-project to come into being, gathered recently at the Paris-based ETH event EthCC. Key speaker Ben Lakoff [4], co-founder of NFT-protocol Charged Particles, led discussion of the need for permissionless, trustless financial services with a high transaction rate for a metaverse to function optimally. The metaverse would also necessitate a large amount of data to be stored and unaltered, where blockchain technology comes into play. Lakoff underlined this point to the audience, connecting DeFi and identity in his presentation: “NFTs as identity, as a DeFi passport, this on-chain credit scoring — all of these things kind of mixed together. We can start to see how these things play together in a very, very unique way that paved the way for Web 3.0.” Lakoff became particularly passionate when talking about NFTs as financial products able to hold other tokens. “You have your NFT that acts as a basket, owning all of these different types of assets,” he explained, adding that baskets could contain social tokens and interest-bearing assets, as well as enabling easy transfer to another individual’s portfolio.

Certainly, there are many aspects of the metaverse to be figured out before the vision becomes a reality. Matthew Ball, a venture capitalist who wrote a key article about the metaverse in early 2020, also makes this point. A lot of the pieces of the jigsaw must come together before the metaverse can take shape, with Epic Games’ popular ‘Fortnite’ game possibly the nearest to that future available right now, says Ball. Putting aside the technological challenges of an ‘always on’ environment capable of supporting thousands if not millions of people online in the same virtual space at the same time, what is certain is that a DeFi financial architecture involving NFTs is likely to be key to its success, what you might call the ‘MetaverseFi’ [5].

Looking at the current cryptocurrency landscape for clues on what form these decentralized products and services might take in the metaverse it’s worth returning to the real world. Take the accelerating mainstream adoption of cryptocurrencies, and greater financial institutional involvement. From the legalization of bitcoin in El Salvador, the implementation of crypto payments in PayPal, to the reformation of the Dogecoin Foundation to push its crypto payment potential, the trend is clear. At the same time, as we’ve seen over in the US with the Infrastructure Bill inclusion of provisions on crypto, and the European Commission’s proposed Regulation on Markets in Crypto Assets (MiCA) [6], there’s a parallel push for greater regulation from the government.

Clearly, any key players in creating the metaverse which includes large corporations like Facebook and Epic Games are going to have to be compliant with these emerging DeFi crypto regulations when creating its decentralized payment systems. In an in-depth look at the prospects for a metaverse from UK-based blockchain VC company Outlier Ventures the need to have a crypto decentralized core is made paramount: “It needs its own economy and currencies native to it, where value can be earnt, spent, lent, borrowed or invested interchangeably in both a physical or virtual sense and most importantly without the need for a government.” However, while the metaverse may reside in the virtual world, I believe its use of NFTs and DeFi to bring it to life are firmly rooted in the real world. The dream of an open metaverse is truly a motivating vision that engages individuals and attracts corporations, but if it’s going to include people from all around the world from Beijing to Boston, it’s also going to have to contend with the impact that increased government scrutiny and regulation will have on DeFi.

Article written for Anndy Lian. Published version on Forkast.

Article references
[1] NFTs: Engaging Today’s Fans in Crypto and Commerce, VISA link
[2] Masters of the Metaverse, Sunday Times link (paywall)
[3] Mark in the Metaverse, the Verge link
[4] Ethereum In Spotlight As London Fork Looms And Paris Conference Closes, Crypto News BTC link
[5] Anndy Lian’s Opinion: Why metaverses are becoming the new craze in the NFT space link
[6] What the EU’s new MiCA regulation could mean for cryptocurrencies, LSE link

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