The Metaverse Podcast - MetaFi: DeFi for the Metaverse, the Audiobook with Jamie Burke
Primer: What is MetaFi? In this audiobook, Jamie Burke of Outlier Ventures weaves together blockchains, DeFi, and metaverses together into an all-encompassing concept called MetaFi. This is our thesis at Outlier Ventures and he breaks it down for listeners here.
Context
Recently published a paper called MetaFi: DeFi for the Metaverse
The paper is freely available on their website
It introduces the concept of MetaFi
“It looks at how we believe the metaverse is crypto and crypto is the metaverse.”
- Jamie Burke
Introduction
DeFi has been steadily growing momentum since 2018
Despite its growth, adoption is still relatively low, with estimates of less than 5% of all crypto assets being put to work in DeFi
While notable work has been done to create bridges from centralized finance (CeFi) to DeFi, an increasingly hostile regulatory environment, low capital efficiency, and the management of counterparty risks for institutions makes bridging a long way off
In our paper, we propose that the majority of growth in DeFi in the short/mid term will be driven by what we call MetaFi — the decentralized financial tools of the metaverse
The metaverse is an interface layer between the physical and virtual worlds, comprising of a combination of innovations in both hardware and software
The metaverse is also an economic system parallel to the fiat financial system
Chapter 1: The Metaverse Is Crypto
To Outlier, the Metaverse is an economic system
In a long enough time horizon, the combined GDP of the metaverse economy will outgrow those of nation states
Believes that the Open Metaverse is an open and permissionless economy made possible through Crypto
Our definition of the Metaverse includes 2 concepts:
The interface layer — where the end user experiences the metaverse through various hardware and software technologies
The financial compute layer — where the metaverse computation is executed, on which end users exchange goods, services, and money and upon which developers can build
A good example of the financial compute layer is Ethereum
The interface layer could take many shapes and forms in the early days (e.g. 2D, browser-based, VR or AR, etc.)
Believes that the core of the financial compute layer will be based on Web3/blockchain technologies
The Metaverse has to be rooted in Web3 to provide fundamental property rights, interoperability, and permissionless value transfer across each respective domain or vertical of the metaverse
The decentralized and permissionless nature of the Metaverse makes it hard for the traditional systems to keep up with it
The DeFi components of the Metaverse will enable financial inclusion globally
The Metaverse will promote generational wealth transfer
“The Metaverse will promote generational wealth transfer, favoring upcoming generations who are disenfranchised by the current financial system, rather than the legacy world.”
- Jamie Burke
Chapter 2: The Status Quo Of The Digital Economy
Today, there are billions of dollars of value trapped in proprietary social media platforms (e.g. Facebook, Instagram, etc.) and games (e.g. Fortnite, Roblox, etc.)
Web2 firms generally operate on the principle of shareholder supremacy over all else, especially at the expense of the user
The digital economy is currently worth over $11.5 trillion dollars globally
It is growing 2.5 times faster than global GDP over the past 15 years
The digital creator economy is a subset of the digital economy. It consists of fields like publishing, gaming, digital art, streaming, music, film, and more
On the supply side, there are currently up to 50 million content creators in the space:
~46.7 million are amateurs
~2 million are professionals
Professional participants in the digital creator economy can easily earn up to $100,000 a month
For the majority of them, their income is irregular and receipt of funds could take several months after delivery
Web2 digital platforms have several limitations:
Have limited inclusion
Dynamic terms and conditions
They are siloed by design
Chapter 3: Web3, NFTs, And The Metaverse
In Web3, the whole paradigm is oriented around the user and their sovereignty:
Identity
Data
Wealth
Platforms help primarily with the discovery or creation process. Users have full control over their outputs and can freely transfer value between platforms
When moats are removed and transferability is made possible, people spend more time on platforms that they like (such as Axie Infinity)
Over the long term, Web2 will adopt Web3 technology, business models and principles, not necessarily because it's philosophically the right thing to do, but because it's just good business
Chapter 4: Defining MetaFi
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
MetaFi is enabled by two core principles of DeFi:
DeFi is unstoppable
DeFi is composable
All over the world, developers can openly participate to provide the highest yield while ruthlessly removing inefficiencies in the system
Regulators can only limit how their fiat-based interact with DeFi, and not DeFi itself
The growth of a parallel economy will be accelerated by the following trends in MetaFi:
The development of financial tooling
Financialization of everything
Improvement of the DAO services stack
Mutualization of risk
Gamification of finance
“Many talk about cryptos speculative nature rather dismissively, without fully understanding that this is a feature, not a bug. By leveraging MetaFi technologies, value in its flow can be captured in digital assets, for everything and anything.”
- Jamie Burke
NFTs As Collateral In MetaFi
NFTs will be increasingly put to work in DeFi protocols
Interplay of fungible and non-fungible social tokens generated by creators to reduce the need for intermediaries that allow people to take a stake in a creator or community franchise and their future value creation
Social tokens are now collectively valued at $1.1 billion and growing
Chapter 5: A Framework For MetaFi
Their Open Metaverse OS Framework consists of 3 building blocks:
Foundations
DeFi
Verses
Foundations consists of core frameworks or protocols that could be labelled as layer zero, one, and two (such as Polkadot, Ethereum, and Polygon)
If an application does not integrate with with the Foundations layer, it will be isolated and economic and creative value will stagnate and fade away
The DeFi layer consists of financial applications that are available on core protocols
Verses consists of a set of domains or parallel verses that make up the totality of the metaverse
DeFi in a Metaverse (aka MetaFi) occurs in between the intersection of the vertical and horizontal components
The Foundations layer, using Ethereum as an example, provides a uniform layer. This means that any smart contract on Ethereum could interact/is interoperable with one another
Chapter 6: MetaFi Clusters Of Activity
There are a few emerging core clusters of activity in MetaFi:
Virtual worlds — scarce land that can be represented as NFTs that can be purchased, traded and built on freely. Examples include Sandbox Game or Decentraland
Games — digital games that are played for amusement. Often comprise a play-to-earn element. Examples include Axie Infinity, Zed Run, Battle Racers, etc.
Avatars — specifically designed to create unique digital identities and representations for users. This includes profile picture projects (PFPs) such as CyberKongz and SupDucks
Wearables — digital objects that can be manifested and shown off in the Metaverse
Marketplaces — digital places that match supply and demand, facilitating better price discovery for NFTs. Examples include OpenSea, SuperRare, and Rarible
Yield-bearing NFTs — NFTs can produce yield both directly (adding yield-bearing DeFi LP tokens into NFTs) and indirectly (using NFTs as collateral for taking out loans and re-investing them at higher rates). An example of the former includes Charged Particles
Access tokens — gives access to holders to various forms of value and utility. An example is Bored Ape Yacht Club
Many of the above categories overlap with one another
Chapter 7: Limitations Today
There’s a couple of limitations that need to be overcome:
NFT appraisals — owners need to know what their NFT is worth before it can be used as a collateral
Legal and governance issues around fractionalization — when an NFT is fractionalized and distributed, it’s not clear how those rights are managed
Standards across blockchains — the Metaverse is being built on multiple blockchains and these blockchains are still not 100% interoperable with one another
Expecting new ways to bridge NFTs with DeFi:
Fractionalization of NFTs — dividing non-fungible tokens into many fungible tokens that become interchangeable. Examples of NFT fractionalization projects include Fractional and DAOfi
NFT-isation of DeFi — the upgrading of DeFi protocols so that they can accept NFTs as collateral
NFTs as derivatives — creating a range of liquid digital assets whose value depends on the value of off-chain assets, in-game items, social capital, etc. that is represented as NFTs
The Final Chapter: MetaFi 2022
MetaFi, or Metaverse Finance, is an all-encompassing term for protocols, products and/or services enabling the complex financial interplay between non-fungible and fungible tokens (and their derivatives)
Based on what we observed in the market and going through our accelerator, we expect the following developments in the short to midterm:
The combination of different MetaFi categories and the creation of entirely new ones
Improvement in UI/UX of the financial MetaFi projects, probably incorporating elements of VR and AR
Further innovation in DeFi 2.0 transferring to MetaFi
Improvement in the foundational technologies like layer ones (e.g. lower transaction fees, increase throughput, etc.)
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