Heinrich Hamann

MetaFi: DeFi for the Metaverse

December 21, 2021


We believe the next phase of growth in the evolution of DeFi will come not from better integration into the existing financial system, more regulation or real world assets and CeFi but instead by unlocking digital value already native to the Metaverse.

In our follow up to The Open Metaverse OS paper we introduce MetaFi: decentralised finance in the Metaverse.

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Background context

The concept of decentralised finance (“DeFi”) has been steadily gaining momentum within the crypto community since 2018. Built on the principles of sovereignty of wealth, permissionless innovation and the promise of financial inclusion, the mission of various DeFi protocols and applications is to construct a digital financial system that is more open, innovative, efficient and less extractive than the one the majority of the world still relies upon today, which in contrast is referred to as CeFi or TradFi.

While DeFi has commanded a lot of attention in the crypto space, its adoption is still relatively low, estimated at under 5% of all crypto assets being put to work as collateral in it. In 2021, DeFi achieved $4.6bn in annualized monthly revenues, which is less than 5% of JPMorgan’s revenues last year. Furthermore, DeFi is still primarily limited to basic forms of borrowing and lending against stablecoins, Ether, or wrapped Bitcoin. While there is notable work being done to create bridges from centralized finance (CeFi) into DeFi — for example, to introduce real-world and income-bearing instruments as new forms of collateral — an increasingly hostile regulatory environment, low capital efficiency, and challenges around managing counterparty risk for institutions make this bridging seem a long way off.

In this paper, we propose that the majority of growth in DeFi will not be driven by CeFi. Instead, we explore how it unlocks value in the Metaverse through what we call “MetaFi”: the decentralised financial tools of the Metaverse. But what is the Metaverse exactly? What kinds of value exist within it? And more importantly, how will DeFi be combined with continued innovations in tokens and crypto-assets to enable MetaFi at scale?

However, in summary, the Metaverse could be understood as an interface layer between the physical and virtual worlds, comprising a combination of innovations in hardware and software, but most importantly, an economic system parallel to the fiat financial system. In that context, it’s critical that we think about it in terms of financial inclusion. This anchor will be important as we unravel the concept of MetaFi.

The internet in its current state suffers from drawbacks like limited inclusion of digital assets by the banking system, dynamic terms and conditions of centralized platforms and value being siloed in platforms by design.

We view MetaFi as one of the potential solutions to these problems as it adopts the core DeFi principles of unstoppability and composability.

This paper outlines how the adoption of MetaFi will be driven by four key trends: improvement of the DAO services stack, mutualisation of risk, development of financial tooling, and gamification of finance and the financialization of everything. These trends will be most visible in the main clusters of activity of MetaFi, like virtual worlds, games, avatars, wearables, marketplaces, yield-bearing NFTs, and access tokens. We invite you to download the full paper for a complete overview of MetaFi and the possibilities it will unlock in the medium to long term future.

Download the full report here

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