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Decentralised World —How NFTs, Metaverses, and DeFi Are Coming Together

José Oramas 28 September, 2021 | 6 min read

There is a new Buzzword spreading in social media today —the Metaverse —virtual reality worlds that combine everyday tasks in a new, limitless digital space. But these are not uncommon for the DeFi community as we already have Metaverses powered by blockchain technology like Decentraland or Sandbox. It’s only now that tech and financial giants are jumping on the NFTs and virtual reality worlds bandwagon by launching their own Metaverses or NFTs collections. Inevitably, distributed ledger technology will be necessary to power those future ecosystems.

Blockchain can serve as the necessary tool to power the metaverse infrastructure. The idea relies on a community-powered digital landscape where decentralised economies are harvested, and giving players the sense they have control of what they do in a decentralised, open-source universe.

NFTs, Metaverse, and DeFi Converging

One of the hottest trends in the DeFi space right now are NFTs (Non-Fungible Tokens). If you recall our previous article about NFTs, then you know people are paying considerable amounts for digital collectibles such as CryptoPunks, artworks, and other forms of digital collectibles.

We could say NFTs started with the famous crypto trading cards in 2016, which were issued using the Bitcoin blockchain. Bitcoin NFT trading cards were booming that year with a game called Age of Chains —a blockchain trading card game that sold several card series through a marketplace and various cryptocurrency forums.

NFTs are now a tremendous source of revenue for several DeFi projects, and we could say that the future of various crypto products will depend on how projects engage with the DeFi and NFT market. One of the key players in this field is Axie Infinity —a Play-to-earn online game built on the Ethereum blockchain. By the second quarter of 2021, it became one of the top revenue-generating blockchain products, thanks to its ability to bridge the NFT world with the DeFi ecosystem.

The open interest for NFTs has been so high that Ethereum has experienced massive congestion on its network, subsequently increasing gas fees. Content creators and collectors have had to pay over $60 to $100 in gas fees just a week ago. The interest in NFTs has been reflected in the derivatives markets. According to data from Glassnode, the Ethereum open interest volume reached new heights on September 6, surpassing its previous all-time high in May with an outstanding record of $11.6 billion.

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NFTs fit well with the DeFi space —they are rare and cryptographically secure digital assets that have a unique value to their holders. Developers can orient decentralised applications (dApps) to the creation of NFTs and ownership of unique digital items and collectibles —this can range from small items like clothes, avatars, art pieces, to pieces of land and real estate in metaverses such as Sandbox and Decentraland.

But to better understand why NFTs and DeFi are colliding, we need to see what we can do with tokenization. One important aspect is proof of ownership, and we can see that coming into practice with real estate. By tokenizing real estate, we provide assets with an easier representation of ownership and flexibility for transfer. Real estate is usually illiquid and demands a lot of documentation. With ownership becoming so personal, It can make more sense to use NFTs instead backed by a blockchain like Ethereum or Solana, where all pieces of information can be stored and seen on a distributed ledger.

Here, we have the potential applications of DeFi and NFTs. NFTs represent some sort of value, and these values can be administered in a blockchain through the use of smart contracts.

The Metaverse

Another trend accompanying NFTs are metaverses —virtual reality worlds where anyone who joins can interact with other players, go to a bar, have a reunion, and even trade virtual goods that sell for a considerable amount, all in an all-encompassing alternate world.

Metaverses have become wildly popular recently especially after the COVID-19 outburst hit the world in December 2019. Industry giants like Facebook, Google, and Budweiser are catching the Metaverse train to launch their version of digital landscapes. But one question remains —What technology will run the metaverse?

Mark Zuckerberg has already laid out his ideas for Facebook’s transition to becoming a Metaverse, powered by an “open-source, interoperable community connected to several third-party actors.” Yet, he didn’t specify if he was referring to distributed ledger technology, which can pretty much serve as the backbone of the Metaverse. Two of the most successful examples of blockchain technology applied to the Metaverse are Decentraland and Sandbox, virtual reality worlds built on the Ethereum blockchain.

One of the leaders in the DeFi industry is not so keen on Facebook’s plan, though. Vitalik Buterin, the co-founder of Ethereum, has said that if Facebook wants to transition into a metaverse, it will have to create its own blockchain protocol to run it. He’s even convinced that Ethereum can run the Metaverse “in a few years.”

But, What Technology Will Run the Metaverse?

Integrating blockchain technology into the Metaverse can bring several benefits, to name a few:

  • On-chain governance: through DAOs (Decentralised Autonomous Organisations), an ecosystem is managed by its community. In this type of system, rules are encoded in a smart contract deployed on the blockchain. Members of the DAO can propose and make changes through code updates and voting rights provided to them based on the number of tokens they hold.
  • Layer distribution: A Metaverses’s architecture can be divided into several layers to protect the ecosystem and reduce network latency by dividing the blockchain into several independent layers. We can take the example of Decentraland and its three-level layer distribution: consensus layer, land layer, and real-time layer —all of them serving a specific purpose to keep the Metaverse running efficiently.
  • Permissionless identity: Permissionless blockchains provide open networks available to everyone to participate in the Metaverse.
  • Enhancing decentralised economies: Decentralisation is an important factor of the metaverse, and blockchain can technology can provide a complete decentralised infrastructure at its very foundation.

Another essential aspect is interoperability —Metaverses shouldn’t be limited spaces, so bridging several Metaverses where users can interact with other worlds and players will bring its core concept to life. Blockchain technology can bridge one virtual world with another and allow several parties to negotiate and exchange goods. We might see someone from Facebook’s Metaverse selling an NFT in a decentralised marketplace, and then use the funds to buy a piece of LAND in Decentraland. Artists, musicians, e-commerce companies, and other retailers can interact and collaborate and then sell their NFTs that might end up being owned by a user from another Metaverse. A company might have set up shop on Facebook’s Metaverse and buy a parcel of land in Decentraland, Fortnite, or Sandbox, for example.

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The Role of DeFi in the Metaverse

DeFi will play another important role here when it comes to financial services and exchanges. There are decentralised exchanges specifically made for NFTs like Rarible and NFTs marketplaces like OpenSea. Let’s take a look at the numbers:

OpenSea recently saw a record of 3.4 billion transaction volume on Ethereum in August —10 times the previous month. The demand and media attention pushed the prices of several NFTs showcased on the OpenSea homepage. A collateral effect is an increase in ETH price. Most NFTs are minted on the Ethereum blockchain, so as NFTs interest spike, so does ETH. This has also congested the network, spiking gas fees to almost 100$ per transaction.

CryptoPunks alone recorded transaction volumes of over 200,000 ETH in OpenSea —over 800 million at that time.

NFTs Powering Metaverses

NFTs and cryptocurrencies are a big part of the Metaverse too —without them, decentralised economies couldn’t run, and digital commerce would be pointless as well. All types of NFTs are traded in Decentraland, for instance —from fashion, crypto cards, to real estate promoted as pieces of LAND. In June, one piece of land in Decentraland was sold at nearly $1 million, making it the biggest virtual reality estate purchase in the game.

NFTs are now a substantial part of the Metaverse, just like cryptocurrencies. Recently Visa purchased a CryptoPunk for $150,000. The art piece was an avatar of a female character with a mohawk and red lipstick, which prompted Facebook to reconsider NFTs for its Metaverse goals and support NFTs in the Novi wallet. Even Dolce & Gabbana launched a collection of virtual clothing and accessories, so we can assume there is big money ready to be invested in what’s considered the next big thing: the Metaverse.

The innovative characteristic of NFTs is that they are collectible and unique items that content creators can set a value. They are unique pieces of digital work with blockchain standards, which ensures the product is unique. The ERC-721 was the first token standard issued by the Ethereum blockchain. Every standard is a smart contract that tracks the ownership of an asset. But as competition has risen, other protocols have launched their own standards to gain ground in the NFT market, like Binance Smart Chain, Solana, or Avalanche.

Security and Ownership

Security and ownership is an essential aspect of the decentralised world. Web 2.0 refers to a series of websites intended to emphasize user-generated content, but, unsurprisingly, tech giants ended up owning pieces of this infrastructure to the point they control the servers and the information they allow on the network. The Metaverse, which is often referred to as Web 3.0, is designed to be the antagonist of the current state of the web —a decentralised, permissionless ecosystem where users have full control of their assets and information, displacing the structural power fomented by tech giants.

The future of the Metaverse is uncertain, but whether it fails or succeeds, it needs innovative technology approaches to enhance the infrastructure —technology that can store and sustain data and serve billions of people and applications built on the Metaverse. This implies that advanced algorithms will be necessary to peek track of data transactions.

Author's avatar
José Oramas
Fintech and finance writer, with keen interest in blockchain and crypto.

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