The Metaverse DeFi Unlock
Decentralized Finance Applications’ Killer Interface: the Metaverse
NFTs. Metaverse. DeFi.
🤦 Not more buzzwords...
I get the reaction. The title can read like hyperbole salad. But, I want to argue these three technology trends are real. And matter. And what most analysts miss is - they increasingly look to be connected. After working in gaming and fintech the last three years, I argue NFTs unlock the metaverse, which unlocks DeFi:
Images: CryptoKitties (NFTs), Axie Infinity (Play to Earn), Travis Scott in Fortnite (Games Broadly), Ready Player One (Metaverse), and CryptoWise (Decentralized Finance).
Here is my thinking:
I will go through ‘The Basics’ to begin with a shared understanding of the trends. 🍲🛌🏼
Then, I will explain the argument in a nutshell. 🌰🥜
Then, I will walk through the data and philosophy. 📊 🏎️
From there, I will double-click into the linkages between the trends. 🔗↔️
Finally, I will wrap up with why this all matters. 🤷♀️💰
🍲🛌🏼 The Basics
What are NFTs?
Non-Fungible Tokens. These are openly available digital records of ownership of an asset. These have seen the most uptick in two domains.
First, digital collectibles and art. Remember Beanie Babies? NFTs enable you to certify your ownership chain of a digital collectible. This solves the problem of paintings stolen from Jews in the holocaust, for instance. The ownership record is in the shared open digital ledger that is the blockchain. This applies just as well to art, and NFTs have seen an explosion of usage for digital art sales. This includes the famous $69 million sale of Beeple’s art. 💰
Second, video games. Games that use NFTs for in-game items, characters, and economies have been blowing up recently. This has been led by the trend of play-to-earn games. The biggest game in this category so far is Axie Infinity.
There is actually some interesting potential extensions of NFTs in the future. They could be programmed. This could enable things that are not possible with physical art. There could be art that changes as a result of ownership, or based on community voting.
What is the Metaverse?
If you ask Mark Zuckerberg, Matthew Ball, or Tim Sweeney, you will get slightly different answers. But they are probably the three who are most responsible for the idea reaching the zeitgeist. Tim started it, Matt studied it. That reached Mark. Of course, all three men have been thinking about it for a long time. Here are three definitive pieces from each of them:
Tim Sweeney, 2020: Dice Talk
Matthew Ball, 2021: Metaverse Primer
Mark Zuckerberg, 2021: On Facebook’s Metaverse
At the summarized level, the metaverse will be a digital representation of ourselves, where people spend increasing amounts of time and money. Think of the movie Ready Player One. If you have not seen it, young adults spend most of their time in a VR world, with avatars that disguise their true looks and voices. It looks something like this:
Ready Player One is one of the most realistic depictions of what the Metaverse will be like. Users will spend a great deal of time in a digital world with different avatars and financial systems. Image: Warner Bros.
Facebook already got a good start on the metaverse hardware by purchasing Oculus back in 2014. Games like Fortnite already got a good start on the metaverse software by building an engaged base of users that interact with a potpourri of characters - from Superman to Ariana Grande to Rick and Morty. But the true manifestation and form are yet to be developed.
What is Decentralized Finance (DeFi)?
Modern financial products are set up on centralized financial rails. This means that we rely on a trusted third party, like a Bank, or PayPal, or the Federal Reserve, to mediate our financial transactions. The centralized party is who we turn to in the case of dispute. Decentralized finance aims to take this centralized player out of the equation. 🏦
Decentralized finance uses technologies like the blockchain and smart contracts to eliminate the trust problem in transactions. Bitcoin, for instance, aims to enable payments without going through a trusted third party to prevent double-spending. As a result, products like stable coins, decentralized exchanges, and decentralized payments are enabled through crypto-currencies that are fully free of a third party. Changes to the protocols are managed through a consensus mechanism, instead of an authoritarian central authority.
🌰🥜 In a Nutshell
NFTs → Metaverse 🗝️
While we are not clear yet what the metaverse will look like, one of the increasingly likely candidates to transport us there looks to be NFTs. As I successfully predicted about NFTs and Games back in April, we were just turning upwards on the trough of disillusionment. Since April, the momentum that NFTs have picked up has been just as exponential as the hype cycle curve would predict:
NFT volume on Ethereum has been blowing up
Axie Infinity and other play-to-earn games have been taking off
NFTs have come to additional blockchains, Solana and Cardano
What all this momentum adds up to is: NFTs are becoming gateways to the metaverse. Play-to-earn game economies like Axie Infinity are becoming the primary onramp for metaverse activity. This opens up a critical insight: the blockchain is being used as the metaverse onramp.
What does this actually look like in practice? Here is a video of someone loading up money to play Axie Infinity. The NFTs are the Axie Infinity currency. The metaverse is the Axie Infinity game.
Metaverse → DeFi 🔑
Today, decentralized finance is a technology in search of a consumer. There are almost as many people building decentralized finance applications as using them. The rails for everything consumers do, from taxes to daily purchases, still rest on centralized finance architectures. This has led uptake of decentralized finance applications to be slower than expected.
The metaverse could be a crucial unlock for decentralized finance. As the metaverse grows in usage, more people will have experienced an onramp to financial products native to blockchains. By being a blockchain-native platform, financial transactions will naturally happen on blockchain rails. This will solve the critical problem inhibiting DeFi uptake.
📊 🏎️ Behind the Key Trends
The four technology trends we opened up with are all worth zooming into with this context. The data for the first three matters. So does the philosophy of the fourth.
Mega-Trend 1: The Rise of NFTs
Mega-Trend 2: The Rise of Play-to-Earn
Mega-Trend 3: The Rise of Metaverse Experiences
Theme: The Importance of DeFi
Mega-Trend 1: The Rise of NFTs
NFTs are growing at a rocket-like pace. If you have been covering your ears screaming , “Bubble!” 🙈, you may have missed out on the amazing momentum the space has picked up recently. The momentum is strong enough that it is causing down-stream impacts in other industries.
Just a take a look at this insane volume:
NFT sales in the last 30 days were over 2 trillion US dollars. 🤯 Data: Nonfungible.
The dollar volumes are staggering. This is a technology that is solving burning, ubiquitous problems. People want verifiable status symbols. It’s a cultural community status symbol. Can you even be a technologist without a smartphone? NFT is headed the same way. As a result, it is being used voraciously. Opensea alone went from $325M in volume in July to $3.4B in Aug🔥
One of the most interesting use cases here is “cool.” NFTs have managed to have the Nike effect without the tremendous brand marketing department. It would be anathema to find a technology influencer without an NFT as his or her Twitter avatar these days. If you do not own the image in a verifiable wallet, can you even use anything besides your face as an avatar these days? The cultural impact has been swift and decisive.
Mega-Trend 2: The Rise of Play-to-Earn
Play-to-earn games have recently stormed onto the scene. Axie Infinity has led this trend, with over 350,000 daily active users. But it is not just players that the game is generating.
The Axie protocol generates revenue by taking a 4.25% fee from transactions in its marketplace. The metrics for this are completely calculatable. The numbers are insane. On February 1st, the management team was looking at a business that generated $92K in the last 30 days. On August 26th, the business generated $400M in the last 30 days:
Axie Infinity is but one game in this ecosystem. There are many more games available today, and many more to be developed. The gaming industry evolves rapidly. There is a global set of innovative players. One can expect the potential that Axie has demonstrated to result in a slew of even more fun NFT games.
Mega-Trend 3: The Rise of Metaverse-Like Games
Outside of the play-to-earn phenomenon in gaming, metaverse games like Fortnite, Roblox, and Minecraft are taking over the gaming world. Players spend over 40 hours a week in the game. For dedicated pros, where it's actually their job, they spend double that. Even content creators like ItsJerian and SypherPK can spend more than 40 hours per week in game.
When you put together the casual players and the in-depth players, the numbers are compelling. The Covid-19 pandemic nearly doubled the amount of time spent in these spheres:
Roblox hours are nearly 10 billion a quarter. That’s over 100 million hours a day. Chart: Roblox IR.
More and more young people are growing up spending their time in Metaverse-like games. This will accelerate Metaverse adoption in the future as they're already used to the environment.
Theme: The Importance of DeFi
Philosophically, it is important to continue to disintermediate centralized authorities. Relying on them leaves us open to a number of perilous situations. The two that rise to the top are currency and storage.
Currency
Sympathize with the Zimbabwean or Venezuelan people for a second. They left their money in banks and currencies run by humans. They trusted these banks and currencies to be reliable. But they were not. The elite humans controlling them printed too much money. The currencies became worthless. With it, so too did their people’s life savings. 😭
Any currency is fickle. While it seems crazy to imagine, the US dollar may not always retain its legitimacy. This might be due to forces internal or external. Perhaps the government over prints money. Or perhaps when Chinaw becomes the world’s largest economy, forces change. The promise of decentralized finance is to provide an alternative that works for everyone across the globe.
Storage
Keeping money in the hands of others, banks and brokerages, means that we are at risk of seizure. The entity could fall to bankruptcy and assets above the FDIC limit could evaporate. The investment manager could be of Bernie Madoff’s ilk. There could be a dispute or untruthful lawsuit that results in seizure of our assets. This is an ever present threat with centralized financial institutions.
These two problems are critically solved by decentralized finance. Building upon the trust problem that Bitcoin solves, modern protocols enable the entire modern financial instructure on blockchain rails.
🔗↔️ The Linkages
Why are NFTs looking like the most likely onramp to the metaverse?
NFTs have the characteristics of a great growth product. They solve problems. The art and collectibles markets have existed for millenia. They have had three driving forces:
Humans desire to own scarce things
Scarce things can provide utility or status, but mainly status
Things can only remain scarce if they can be authenticated as original
Louis Vuitton and Porsches are status symbols. Crypto authenticates digital goods to satisfy a similar human need. As a result, NFTs are set to grow. This is going to drive a continued stream of innovation around their technology. Expect issues like high transaction fees to eventually be addressed. In fact, expect the launch of protocols like eth2 to increase the activity in the NFT space by orders of magnitude.
This growth in NFTs is going to help their adoption in gaming. They have already seen great adoption in play-to-earn games, which is a growing sector of the gaming market. Axie Infinity, for instance, has shot up recently in value.
They will also slowly see greater uptick generally in gaming, outside of play-to-earn. Right now value is locked up in single games. By making gaming assets public and reusable, NFTs offer a compelling value proposition in the free-to-play space. As a result, expect NFTs to permeate most parts of gaming.
Gaming is likely to be most folk’s portal to the metaverse. Judging by the data today, Fortnite with its 400M+ players is the closest thing to scale in the metaverse. The Travis Scott concert in Fortnite, the largest concert ever, is just one example of how this metaverse will mash up shooter video game players dressed as Rick and Morty Avatars attending an interactive rap concert:
Fortnite brought a Travis Scott rap concert to over 27 million console-playing youngsters across the globe, in the ultimate metaverse mash-up of first person shooter players and a serious American rapper. Image: BBC.
All of the above could be wrong. The metaverse’s future is still to be written. The thing is, NFTs may not enable the metaverse, but the metaverse could still enable decentralized finance.
First, they are on the same rails. Decentraland and other virtual worlds are using digital and blockchain protocols to enable their economies. This shift into the digital world on digital rails will accelerate the shift from centralized to decentralized finance because they are on the same native digital rails.
Even more importantly, decentralized finances solves important problems for the metaverse. As any metaverse theorist will tell you, a nightmarish version of the metaverse would be similar to the Apple App Store today, regulated by a centralized entity collecting a 30% tax. Decentralized finance protocols is how the metaverse achieves an independent and fair economy.
Why is the metaverse going to unlock DeFi?
Unfortunately, the path to DeFi today is rough. The path of Bank of America to Coinbase to Ethereum to Uniswap is not an instant process today. Decetralized finance suffers from the locked in value problem. Until visions of a universal wallet - where people can readily use any currency or commodity for any transaction - come to fruition transactions have to go through fiat-based monetary systems. This means that money only flows into DeFi as quickly as it converts from fiat to bitcoin and then the altcoin of choice.
To avoid this ‘buck meets the road’ problem requires natively digital patterns for assets, use, and currency. That is unlocked by the combination of metaverse and DeFi. The digital patterns are going to be enabled when there is a place where we spend a lot of time with native economics. Right now, we are transplanting our regular economics into the digital system.
Imagine logging into a virtual world where your wealth was far different from the physical world. You wake up to a house bigger than your physical home. In a more exotic location. You open to check your bank balance on your virtual phone. $100 billion, orders of magnitude above your real wealth. On the agenda today? Your new construction project. You are looking for some leverage to build your project. Your bank? DecentralFi Inc. Of course you bank in a different currency, at a different bank, with a different payments system.
When you’re in the metaverse, you’re not going to use an earth bound banking system. Image: The Financial Brand.
That is the world of the metaverse and decentralized finance put together.
🤷♀️💰 Why does this even matter?
When I started my career many years ago, I worked in management consulting. We were doing a multi-million dollar project in just a few days. The goal?
To understand three industries out the impacts of the shale revolution. 🛢️ You see, this was years before the US shale revolution even happened. But seeing it coming, this investment firm was planning to invest on the downstream impacts of this change.
By identifying what is going to happen a few trends out, I am showing you all what is going to happen with finance. It will take years. The effects will trickle down over time. But this is how you spot opportunities before others. Decentralized Finance is going to be a massive investment opportunity. Current valuation models are not going to be accounting for this market growth.
The investment firm for which we did the project? They are now one of the largest money managers on the planet. Invest like the best. Think a few trends ahead. 🔮
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📝 I worked on the metaverse at Epic Games and work in FinTech at Affirm. But this post reflects neither my present nor past employers. I am merely a humble newsletter writer.
🙏 Special shout-out to Michael Sklar, Mike DeLucia, Vishal Srivastava, Daniel Sisson, and sperzderchler for their thoughtful feedback on this piece.
This is great!