We’re living through times of rapid technological change - and development - that has seen the recent rise of blockchain-based platforms like NFTs, cryptocurrency, DeFi and the metaverse.
More recently, Binance introduced a new concept aimed at tapping into the infrastructures needed to power virtual economies that can function in parallel with the real world - MetaFi.
Meta-what? Sure, we get it. Understanding all of these concepts and ideas can be quite dizzying these days. But we got you. In this article, we will be looking at what exactly is MetaFi (digestible way, we promise), how can we see it in action, what will all of it look like in the future and what exactly is the MetaFi DeFi connection.
Let’s dive in.
What is MetaFi?
MetaFi is a combination of two concepts - Meta is for metadata (not metaverse) and Fi comes from decentralized finance (shortened as DeFi).
Cryptocurrency exchange, Binance, was the first to come up with the term earlier in 2022 and defined MetaFi as a “new paradigm shift that aims to standardize blockchain technology for traditional Web 2.0 large-scale applications, including games, social media, and the metaverse”.
By bringing all of this together, the idea is that there will be a unifying blockchain standard that helps improve interoperability across digital environments.
Let's break it down a bit more.
Metadata refers to a set of data that describes and gives information about other data, which helps identify the features and properties of the underlying information being given. Think of the photos on your iPhone. They normally have metadata associated with them like resolution details, date and location where the picture was taken. The same goes for blockchain transactions, especially when we refer to non-fungible tokens (NFTs), with each storing information or “traits”.
And when we talk about DeFi, on the other hand, we refer to a financial technology that uses cryptocurrency and blockchain technology to manage financial transactions. We will get into the details a bit later.
The goal of MetaFi is to accelerate the mass adoption of the next generation of the internet, Web 3.0, and blockchain to expand their use cases. For this, MetaFi leverages protocols, services, and products that allow for complex financial interactions between NFTs and fungible tokens or their derivatives. Confused? No need. It’s simple. An example of MetaFi at work is, for example, letting users take a fragmented part of a non-fungible token as collateral for the DeFi lending platform.
NFTs are a huge engine of the metaverse, as we will see right ahead, but MetaFi can provide Defi infrastructures to all sorts of projects, including GameFi and SocialFi.
What Is The Metaverse
Metaverse is seen as a component of the next iteration of the internet (Web3) where people can engage in a number of activities like working , socializing and attending events across shared 3D virtual worlds (or digital spaces) that are immersive and highly interactive.
Simply put, the metaverse is a combination of the physical and digital world in a persistent and immersive way that goes beyond it being just a virtual reality word. In addition, the metaverse will be accessible across a number of platforms like PCs, smartphones, game consoles, and VR headsets, resulting in an all encompassing ecosystem based on top tier technology and feeling immense potential.
Term that was first coined by Neal Stephenson in his 1992 novel ‘Snow Crash’, but it has only materialized in the last few years thanks to advancements in technology like virtual and augmented reality, and artificial intelligence.
As many of us have spent more time in digital environments and virtual worlds during the Covid-19, it's fair to say that without even knowing, we’re already living in a very early version of what the metaverse is imagined to become one day.
Inside the metaverse, you’ll be able to own assets like games or videos and trade them with other users in open and decentralized marketplaces. Decentralized simply means that there isn’t a central authority controlling it. Your items, like avatars or original digital creations, are represented as non-fungible tokens and their metadata indicates things like uniqueness and ownership. And the way in which transactions are made is through cryptocurrency. Are you still with us? Great.
The concept of meta economy is an important one to retain here as we continue unpacking the ideas behind Defi.
Also - are you still curious about what else you're able to do in the metaverse, head to our Metaverse Guide for a more in-depth look at it.
What is Decentralized Finance
Decentralized finance is an evolving ecosystem of financial applications based on blockchain technology, which enables digital transactions between multiple parties through smart contracts that establish the terms of a contract and verify their execution. This innovative financial system enables lending, sending and investing in cryptocurrencies, a form of virtual currency that rely on advanced cryptography to protect transactions.
Transactions take place without the involvement of a central authority, like banks or other traditional financial organizations - that is why it is called decentralized finance.
Finance in the Metaverse
Given the immense potential of the metaverse, investment opportunities have been valued in the trillions of dollars. Bloomberg Intelligence has estimated that the metaverse could become a $800 billion market by as early as 2024, while Citi, one of the largest financial services providers in the world, says that the total addressable market for the metaverse economy could grow to between $8 trillion and $13 trillion by 2030.
In this context, Citi has further added that “metaverse finance (MetaFi) will likely be a combination of decentralized finance (Defi), centralized finance (CeFi) and traditional finance (TradFi), with new products specifically designed to meet the unique needs of the new ecosystem built on standardized metadata parameters. From initial capital formation to supporting commerce within the Metaverse, financial services can play an important role in the evolution”.
Indeed, there is no shortage of opportunities to be explored when it comes to the metaverse and decentralized finance in virtual worlds. The developing economy of decentralized finance has already surpassed the $100 billion mark, signaling the broader appetite for this segment of crypto. The Nasdaq, the leading US stock market, also features a cryptographic index to track DeFi products called Defix (DEFX).
From virtual real estate to fashion and advertising, investment opportunities in the three-dimensional worlds are the talk of town - and helping move forward the conversation about MetaFi, or decentralized finance in the metaverse.
How does MetaFi work?
So - how does it all really work?
We earlier said that one of the goals of MetaFi is to improve interoperability and build a standardized virtual ecosystem. One way of doing it is to take advantage of the metadata associated with assets on a blockchain. As explained by Binance, an NFTs metadata will generally contain a link to the associated image. You can also add metadata to a bitcoin (BTC) transaction, allowing you to input extra information as plaintext. By creating metadata standards usable on any blockchain, digital assets can become machine-readable and sortable.
Why is this convenient? Well, imagine an NFT marketplace that can use this system to understand and sort NFTs from many blockchains if they all present their metadata in the same way. This can give way to stable and interoperable projects. MetaFi also involves community governance like Decentralized Autonomous Organizations (DAOs).
The combination of these components creates a fully functional parallel ecosystem that serves users around the world via blockchain.
MetaFi Use Cases
Let's look at some of the metaFi functionalities and use cases unlocked by the convergence of the metaverse and Defi:
Metaverse (Virtual worlds)
A metaverse is defined as a 3D digital space for social, work, business opportunities, where users can engage in a number of activities in the same way as they would in the real world. Such virtual worlds have many implementations such as wearable NFTs, consumables, collectibles and more, offering a simple infusion of NFTs into virtual reality.
However, interoperability is a major challenge in helping the metaverse come to life. Without it, a virtual world supported by one game, for example, wouldn’t be able to easily connect to a social network. Or users of one metaverse might have trouble moving between virtual worlds while using their avatars or digital properties.
However, with MetaFi, there will be an infrastructure with defined metadata standards that enables virtual worlds to seamlessly interact with each other. It also helps enhance the functionality of digital assets and virtual tokens. This way, their use cases can go well beyond their native platform. Another use case can be tied to decentralized identity management and reputation management systems through which users can access their digital identity and assets in a simple and safe manner.
Many companies such as Walmart, McDonald's, Nike, Coca Cola and Gucci (to name just a few in a rapidly expanding list), are dabbling in a meta ecosystem where they can sell their products.
Currently, there is a sea of NFT marketplaces available. These include Rarible, Nifty Gateway, LooksRare, OpenSea, to name a few. These platforms are decentralized and depending on the blockchain, can offer different types of non-fungible tokens. Crypto enthusiasts can feast on NFTs that include digital artworks, virtual wearables, domain names, music, virtual real estate, and much more. NFTs are treated as financial assets and govern ownership.
MetaFi aims to help expand the capabilities and functionalities of the marketplaces where they can list every single asset type that can exist in various chains. This will result in a better user experience and make the trading of NFTs much more efficient and an easy process for buyers, sellers and creators alike.
NFT Yield Farming
The idea behind yield farming is that you’re able to put your idle NFTs to good use and make money in return for using your tokens as collateral or renting them out for a profit. This has been a popular strategy in gaming where people can rent expensive or valuable NFT in-game items to players who normally couldn’t afford them. Yield farming NFTs are then a suitable application for MetaFi.
These tokens can be both fungible and non-fungible and give their holders access to various forms of benefits, like VIP memberships, access to special events, voting rights, and much more. Fan tokens are normally minted by sports clubs or fan clubs as a way of letting fans access exclusive perks. There are several marketplaces where they’re available, including Chiliz, Binance, and Coinbase. In this context, MetaFi can be a great tool to make the process of minting and trading tokens more efficient.
Building a unified standard that can serve a vast digital ecosystem poses a great challenge to developers for several reasons:
Software and Hardware
The next generation of the internet will require higher capabilities that go to support 3D virtual worlds powered by VR, AR and AI. The same goes for blockchain scalability and ensuring security across networks. For the time being, all of these technologies like 5G and cloud computing are far from being implemented and adopted at a global scale. Many aren't ready for commercial use, either.
Additional challenges arise from the blockchain where MetaFi runs and operates.Operability refers to the ability of an application (Dapp) to access and trade information across different platforms and blockchain networks.
Different blockchains create frameworks that run within their own ecosystems, but that can’t “communicate” with other platforms, not to mention other issues like high transaction fees and scalability issues.
As such, there’s a need to explore improvements on foundation technologies like layer 1 blockchains to make applications running on blockchain protocols more accessible across the board. The reuse will be, hopefully, a high number of interoperable projects developed with multi-chain functionality and bridges that will facilitate an enormous volume of asset and data transfers.
The ongoing crypto craze, including when it comes to DeFi, has made it clear the need for sustainable tokenomics that, as described by Binance, “can provide users with more stable and reliable incentives that make sense on an ongoing basis and allow long-term growth and discourage big sell-offs driven by volatile drops in APY or incentive rewards”.
Governance and Legal Concerns
As per Binance again, MetaFi will ideally empower token holders with usability features such as voting rights and earning yield. This area needs to be clear and transparent to protect all participants.
MetaFi is an exciting new idea in crypto and the possibilities that arise from it are virtually endless. Whether in the metaverse, gaming or other areas, this concept is sure to spark even a great number of MetaFi applications and more innovation in the crypto universe, even if we are still a long way from seeing it fully implemented and broadly adopted.