Decentralized Finance (DeFi) has been the talk of the town in crypto space since 2018 for various obvious reasons. The concept of DeFi relies on permissionless innovation, the vision for broader financial inclusion, and principles guiding the sovereignty of wealth. At the same time, another technological innovation has emerged in the form of the metaverse.
Now, the convergence of both technologies in the form of MetaFi is stirring up many debates throughout the global crypto community. DeFi has successfully garnered mainstream attention from crypto investors, albeit with relatively low adoption rates. With only just below 5% of the total crypto assets working as collateral in DeFi, it is important to wonder how it will expand in the future. In the following discussion, we shall try to uncover the MetaFi DeFi connection and how it works alongside some of its potential use cases.
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Background of DeFi
Before you try to learn more about the MetaFi DeFi for the metaverse, it is important to understand the background for its development. DeFi protocols and applications have been focused on developing a system that can facilitate improved transparency and efficiency with openness to innovation. However, the adoption of DeFi is quite slow.
The annualized monthly revenues in DeFi amounted to $4.6 billion in 2021 stood at less than 5% of the revenues earned by JP Morgan in 2021. In addition, the scope of DeFi has been limited to basic applications like borrowing and lending. However, DeFi solutions can unlock value in the metaverse through MetaFi functionalities. What is the probability of success in a convergence between metaverse and DeFi? This is where you need to understand the background of the metaverse and how it fits with DeFi.
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Background of Metaverse
One of the significant highlights of the metaverse is crypto and the way it facilitates the creator economy in the metaverse. The metaverse is basically an economic system with a creator economy, which is better than a centralized digital economy. Experts predict that the overall value of the meta-economies would surpass economies of nation-states by huge margins. With an open metaverse, you can find an open and permissionless version of a meta-economy. The functionalities of MetaFi crypto depend a lot on the two main layers of the metaverse.
The two layers are the interface layer, and the financial compute layer, where each layer has its own functionality. Interface layer helps the end-user in experiencing the metaverse by using different hardware and software technologies. On the other hand, you have the financial compute layer, which is the foundation for executing metaverse computation tasks. The financial compute layer sets the decentralized, democratic and transparent foundation for defining the logic of creator economy underlying the metaverse.
You can clearly notice the prospects for MetaFi DeFi in the background of the metaverse. It shows the possibilities for creation of a parallel economic system with decentralized ledgers. The system offers support for crypto, global accessibility, and transparency. At the same time, the metaverse also lays the foundation for many new digital-first economies, especially with the rise of NFTs and Play-to-Earn games.
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Is MetaFi a Feasible Proposition?
Just because the metaverse and DeFi are two emerging innovative technology trends with potential, you could not mix them up. Many people seeking information about possibilities of a MetaFi protocol in the future might also wonder about the feasibility of such ideas. In the present times, you can find many social media and gaming platforms with control over billions of dollars in value.
The overall digital economy has a current value of almost $11.5 billion. On the other hand, you also have an emerging subset of digital economy in the form of a digital creator economy. As of now, there are more than 50 million content creators in the digital space. However, they have to face restrictions of the web 2.0 digital platforms and incur economic losses at the cost of control over their creations.
On the other hand, the world of web 3.0 is completely different. You can find DeFi, decentralized apps, crypto, and NFTs in a paradigm that revolves around users and their autonomy. In the long term, one can expect the metaverse to take up web 3.0 technologies and related principles for empowering users. Therefore, it is definitely reasonable to assume that DeFi applications for the metaverse can be a truly favorable proposition.
The basic definition of MetaFi suggests that it includes protocols, services, and products that enable complex financial interactions between NFTs and fungible tokens or their derivatives. For instance, you can use a fraction of your NFT as collateral for DeFi lending platforms. The important highlights of MetaFi DeFi are the two core principles suggesting that it is composable and unstoppable. Developers from various corners of the world could actively engage in the new ecosystem while competing for higher yields.
It is also important to note the MetaFi NFT connection as it helps in introducing DeFi principles to the metaverse. How? It basically facilitates a blend of non-fungible and fungible tokens under novel approaches to community governance. The combination of various essential crypto traits provides the foundation for a well-developed parallel economy.
Structure of MetaFi
If you want to understand MetaFi in detail, you must take a look at the important components which define its structure. Here are the important components you can find in the convergence between DeFi and the metaverse.
The foremost aspect in any MetaFi protocol would refer to Foundations, which are basically the building blocks. Foundations include the core frameworks, which would serve as layer zero, one, and two solutions. The core frameworks help in building applications over them by leveraging shared application logic and security.
The most important foundation in MetaFi, DeFi, includes the small financial applications available on the core frameworks or protocols. You can think of them as the money legos, which work as unstoppable applications enabling complex financial dynamics by using smart contracts.
The final component in the structure of MetaFi crypto ecosystem refers to verses. Verses are basically a collection of domains or parallel verses which build the whole metaverse. The different virtual worlds shall remain connected with the foundational layers of verses according to compatibility and cost-effective value transfer.
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Driving Forces for Adoption of MetaFi
The adoption of MetaFi DeFi for the metaverse is probably not a long distance away, considering the major trends supporting it. Here are the four key trends which would drive the growth of convergence between metaverse and DeFi.
- Complexity of DeFi stacks used to drive away crypto developers. However, new NFT platforms have enabled creators and communities to establish the economic terms for creative exchange with users. At the same time, NFTs also enable perpetual royalties for creators through personalized social tokens.
- MetaFi technologies can also drive better prospects for capturing value and flow of digital assets in open free markets. In addition, it also opens opportunities for real-time price discovery, thereby paving the way for unlocking hidden value.
- Matured governance models such as DAO could also play a vital role in adoption of MetaFi crypto with better governance. DeFi has been successful in introducing prospects for community-based insurance to all users, particularly in combination with DAOs.
- Most important of all, the evolution of play-to-earn games and new ways for monetizing data can also draw Gen Z closer to applications of MetaFi DeFi in the long run.
Also Read: Frequently Asked Questions About Metaverse
Challenges for MetaFi
The final and most crucial aspect in an introduction to MetaFi DeFi for the metaverse is an outline of challenges. With DeFi applications in the metaverse, users can look for many value advantages. However, the concept of combining both worlds is still under development. Therefore, you can notice some prominent challenges for MetaFi, which will serve as roadblocks in broader adoption.
- The foremost challenge for Metaverse DeFi convergence directly pertains to the MetaFi NFT interplay. Owners should have a clear impression of the worth of their NFTs for buying, selling, or borrowing against an NFT. However, NFT appraisals bring the concerns of uncertainty, generally by lenders.
- The fractionalization of NFT in different MetaFi crypto applications also draws another challenge in the form of legal and governance issues.
- Furthermore, the variable standards across different blockchain networks also pose a formidable challenge for combining DeFi and metaverse.
You can unlock the true potential of DeFi for metaverse only by resolving such concerns.
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The overall impression of MetaFi clearly shows how it brings the best of metaverse and DeFi together. In a surprising turn of events, DeFi has garnered substantial popularity in the year 2020. However, the functionalities of DeFi are limited and do not present viable prospects for large-scale adoption in the future. On the other hand, the metaverse is growing as a digital counterpart of the real world.
In such cases, the use of DeFi applications on metaverse would not only complement the traits of the metaverse but also empower the metaverse. Apart from identifying the opportunities for using DeFi in the metaverse, it is equally important to address the underlying challenges. Learn more about metaverse and DeFi in detail to understand the prospects of their convergence.
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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!