MetaFi – What will Money look like in the Metaverse?
Last October Mark Zuckerberg announced he would create a holding company for his social media platforms Facebook, Instagram, and WhatsApp. The name of the company: Meta. This was a nod to the metaverse, an idea out of the 1992 science-fiction novel Snow Crash that describes a fully immersive, 3D version of the internet. While many saw this rebranding as an attempt to divert public attention from the devastating news cycle on Facebook, the metaverse idea has proven remarkably persistent. Rather than fizzling out, it has whipped up the enthusiasm of entrepreneurs, journalists, and even some bankers.
Considering its potential, this is no wonder: A recent Citibank study estimated the metaverse’s broadly addressable market at 5 billion users which translates to between $8 trillion and $13 trillion by 2030. But what has turned the metaverse from a science fiction phantasy to a strategic target that corporate boards dare to write onto their agendas so quickly? In short, it was a series of rapid parallel advancements in 5G, extended reality and immersive interfaces, cloud computing, Artificial Intelligence, and above all blockchain technology. Basic building blocks of the metaverse have only started to emerge in the last couple of years and months – cryptocurrencies and Decentralized Finance (DeFi), Non-Fungible-Tokens (NFTs), and Decentralized Autonomous Organizations (DAOs).
The metaverse is not just a game. It is an entire economy by and of itself. As such, it follows its own monetary and financial rules. Who eventually turns out running money in the metaverse will also shape the future of money outside of it. Questions abound. Will central bank digital currencies (CBDCs) or rather cryptocurrencies be the backbone of the metaverse economy? Can commercial banks transfer their position as masters of money to the new world? And how much leeway will regulators allow for finance in the metaverse?
To answer some of those questions I talked to Mark van Rijmenam, an author and entrepreneur who analyzed the metaverse like hardly anybody else. His book Step into the Metaverse: How the Immersive Internet Will Unlock a Trillion-Dollar Social Economy is coming out May 20. For the book Mark has interviewed more than 100 experts and conducted 150 surveys. I chatted with him about MetaFi (i.e. finance in the metaverse), what role banks will play in it, and how centralized this new cyberspace will really be. But before you read the interview make sure to pre-order your copy of his book here or visit his website!
Igor: Your book title says the metaverse will be a trillion-dollar economy. How did you arrive at that figure?
Mark: Actually, in the book I write that we will see a 15-20 trillion-dollar impact. If we look at the top ten internet companies today, those are alone worth more than 15 trillion dollars, and I think that the metaverse will be bigger than the internet. Moreover, some other forecasts arrive at figures in the range of trillions of dollars.
Igor: I get the feeling that very often the terms Web3, Web 3.0, and metaverse are used interchangeably. At the same time, I keep hearing terms such as Web 3.0 since at least 2006. So, can you give us some terminological clarity?
Mark: Many people think that the metaverse equals Web3, which is not correct. Web3 is infrastructure. The metaverse is built on top of an infrastructure, which can be Web3, but it can also be Web2. If it is built on Web2 then we have the same scenario as now: Walled gardens and no interoperability. If the basis is Web3 you have ownership of assets, identity, and data. Web 3.0 and Web3, on the other hand, are the same thing.
In the next two decades we will probably see a hybrid version of the metaverse. We will use Web3 for self-sovereignty, control and ownership of assets and identity, but we will use centralized Web2 technologies to stream all this data. Today you simply cannot get the performance you would need for the metaverse via a decentralized protocol. We can’t even do it in a centralized fashion, let alone in a decentralized one.
Igor: Before we talk about finance in the metaverse, I am interested in your view on two key components of the metaverse. The first one is interoperability. Can there be a metaverse without it?
Mark: Interoperability is crucial only for an open metaverse; it doesn’t play a role in a closed metaverse. Interoperability is about being able to take an asset from one platform to the other. The value that we create has a purpose. We move from value extraction (by Big Tech) that is happening in today’s world to value creation for the users.
If you buy a pair of jeans for Pub A you want to be able to wear it to Pub B as well. So, it should be in the metaverse. If you buy a pair of jeans for your avatar in Decentraland (a so-called skin), you also want to wear it in the Sandbox and other metaverse environments.
Igor: The second key component of the metaverse is digital identity. Can you summarize in a nutshell, what the difference is between an avatar in a video game and an identity in the metaverse?
Mark: Identity will be one of the key features of the metaverse. It allows us to be whoever we want to be and wherever we want to be it. We can be a blue human with a burning head or we can be Toad or Bowser from Mario Kart. That will result in a Cambrian explosion of identity in the metaverse. Avatars are 2D or 3D representations of ourselves, but the metaverse avatar has to be self-sovereign. Otherwise, Mr. Zuckerberg could delete your avatar because he doesn’t like you. We should avoid that at all costs.
Igor: We can look at the metaverse from all sorts of aspects. I am particularly interested in the economics of the metaverse, and even more in finance in the metaverse. How do you envision the future of banking and money?
Mark: Cryptocurrency will be what makes the metaverse go round. DeFi also plays an important role in this new world, especially when coupled with NFTs. The groundbreaking thing about NFTs is that we can prove digital ownership of a single asset. I can monetize my asset by, for example, mortgaging my house to take a loan or start a business – all because I can prove ownership of that digital asset. After monetizing the asset, I can drop it into a DeFi protocol, I can use it as collateral to build more NFT products, and make more money.
There are many challenges here at the moment. First, DeFi and cryptocurrencies are very user-unfriendly. Second, we need to protect users. It would be fatal if people mortgage their house and lose it because they are unexperienced in the DeFi space or because they become careless. But those are things that will fall into place and eventually it will revolutionize the finance world. It will be a world in which fiat will play a much smaller role than cryptocurrencies.
Igor: What about stablecoins?
Mark: Stablecoins will have an important role to play because of the volatility of cryptos. I don’t see them going away.
Igor: You attribute a crucial role to cryptocurrencies in this blockchain-based virtual reality. So you don’t think that CBDCs (central bank digital currencies) could become the backbone of the whole metaverse? After all a CBDC has all the capabilities of cryptos without all the wild currency fluctuations…
Mark: …but with all the privacy violations. This is crucial. The FED is not doing anything with the digital dollar, the ECB is looking into it, but will definitively have nothing in place before 2026. The digital yuan is the only one already used. I would rather rely on a digital dollar or euro than a digital yuan, but I am not a big fan of CBDCs. It’s privacy violation all over the place. Bitcoin it is also traceable, but it is harder than with CBDCs.
Igor: I believe it is a question of how you set up those admittedly centralized blockchains. The ECB, for example, is experimenting with obfuscation techniques to guarantee anonymity vouchers to mimic the features of cash and safeguard privacy. You could use similar techniques such as Monero or Zcash to protect transactions from being monitored. Wouldn’t this be a viable alternative?
Mark: But it is not just the money aspect. Governments are also working on digital identity wallets, which are the opposite of self-sovereign identities. The underlying concept is one of a centralized digital identity, which is very scary. I should be able to control my identity, not the EU, not Facebook, not anybody else.
Igor: And regulators and governments will allow this to happen? After all China, for example, has banned cryptos altogether. There won’t be much of an alternative there than to use CBDCs.
Mark: China is different. In Europe you can’t ban cryptos unless you have a great firewall like China has. There will be millions of crypto-currencies. 99.9% of them will remain small and irrelevant. You would be able to swap them seamlessly between the metaverses.
Igor: Do you see the metaverse changing the nature of finance or simply using and merging concepts that we know such as crypto, DeFi, CeFi, and so on? Many talk about MetaFi, but is this a real thing or just a buzzword?
Mark: MetaFi, i.e. finance in the metaverse, is the next level of DeFi. The great thing is that NFTs and fungible tokens can collaborate. You can fractionalize the tokens and drop them into DeFi protocols, then sell it in different markets.
Igor: So which role do you see banks playing in all of this? Some pioneers have started to take notice. JPM Chase has a lounge in Decentraland that players can visit to find out more about the bank and its blockchain efforts. Do you think banks will seriously get into it?
Mark: I doubt it. If you are a blockchain company, it is still very difficult to get a bank account. Hence, it is difficult to imagine that banks would be Web3 friendly, let alone be the drivers of it. We should focus on the startups, the new generation that does not have any legacy problems. But the financial rules and regulation I would expect to be the same in the metaverse as in the physical world.
Igor: Do you see Big Tech as part of this equation?
Mark: It could be. Fortunately, Big Tech has not yet come up with a game-changing financial product yet. Facebook has tried with Libra and fortunately it failed. I don’t think that it would be a good idea to hand Big Tech our financial data, but I am sure they are looking into it.
Igor: Which tech giants you believe are best placed to succeed?
Mark: Microsoft focuses on the enterprise, which is a good strategy. Zuckerberg is looking at both, B2B and B2C. Obviously Big Tech is trying to get into this, because they see the trillion-dollar opportunity. I hope it will be companies with a Web3 mindset that make it big so that we avoid the mistakes we made with Web 2.0 where we have a few companies that rule our lives. We now have a blank canvass to create the next generation of the internet, so let’s do it in a way that is beneficial for you and me.
Igor: So do you think that these Web3-mindset companies will be DAOs (decentralized autonomous organizations) or regular startups?
Mark: It will be a combination of both. A platform cannot start as a DAO. It can turn into one later on, but it cannot start as one. Yet DAOs will definitively play an important role.
Igor: And once they grow bigger, wouldn’t they become simply a new generation of Big Tech? After all, platform economics inevitably leads to the creation of powerful giants.
Mark: Could be. I would not be surprised, but we must prevent it. We must not let it happen again. It is the same as Web1. In Web1 you owned your data, your servers, your e-mails etc. Then suddenly there were companies that made it easy to sell stuff – Amazon – companies that made it easy to build websites – WordPress – companies that made it easy to host stuff, and so on. Now in the metaverse it is much more difficult to build immersive experience, so the temptation to centralize is definitively there. The question is really what approach do you have to society? Do you want to be the new Big Tech?
Igor: I want to return to the banks which you don’t see as the big drivers of finance in the metaverse. Do you think they will be reduced to doing the financial plumbing of the metaverse or won’t they play any role in your opinion?
Mark: Banks will definitively play a role; they are too powerful not to. I don’t see them building cryptocurrencies; they are too regulated for that. But they could certainly play a role in the compliance aspect. Banks have always been able to adopt and make a profit by taking and lending money. But I find it difficult to say which role they will play exactly.
Igor: But you could envision a scenario in which I go to the metaverse, mortgage my physical house via DeFi, and get a loan all without ever getting into contact with a bank?
Igor: My last question concerns the underlying protocols of Web3. Most of Web3 today relies on the Ethereum blockchain. Do you think that Ethereum will still be the dominant platform of the future?
Mark: There will always be new platforms. After all, platform economics inevitably leads to the creation of big companies. But it was due to Ethereum’s weaknesses such as high gas fees that competitors like Solana and Cardano emerged. If Ethereum’s switch to Proof-of-Sake succeeds, then Ethereum has a good chance of staying the most relevant protocol.