DeFi in the Metaverse: Possibilities, Pitfalls, and Promises

Nowadays, if you are following the tech updates, Metaverse is the hottest topic to discuss. Shortly, Metaverse and DeFi are going to change the way we interact with the world. According to the pace of technology, so many outdated systems are trying to get tuned with the further implementation of these advanced technologies. The rebranding of social media giant Facebook to Meta Platforms Inc. has fueled this concept to inspire developers to create more products and services.

This article attempts to cover so many aspects related to DeFi, blockchain, and Metaverse.

What is DeFi?

The term DeFi stands for Decentralized Finance, and it is based on the blockchain that follows the distributed ledger technology. DeFi removes the centralized control of banks and financial institutions to give financial freedom to everyone. Here are the key components of DeFi which are as follows:

• Stablecoins,
• Software, and
• Hardware

These three components help to develop the applications related to DeFi. Indeed, DeFi is still in the experimental phase as it is based on emerging technology, the craze on it is still going on. So many DeFi platforms are emerging according to a daily basis. Some examples of genuine DeFi projects are Sora, MakerDAO, Uniswap, etc. Let’s see how DeFi works:

Blockchain eliminates intermediaries by allowing people to conduct financial transactions, users just need software and internet connections to access the financial services.

What is Metaverse?

The metaverse is a digital reality that is created by integrating a network of 3D virtual worlds for enhanced user experiences. The truest form of Metaverse still does not exist as we don’t have all the necessary infrastructures to realize it practically, but development progress is going on and the activities like virtually getting married, selecting desired goods, and purchasing digitalized lands are mapped with the real-world addresses, etc. are looking like to be possible soon. Let’s see how Metaverse works:

The Metaverse creates advanced online spaces with multidimensional features which will allow users to go beyond just viewing the 2D contents. Simply, it will help users to emerge themselves in the universe where virtual and physical reality converge.

Roles of DeFi in the Metaverse

If we imagine a fully decentralized and free digital space in the Metaverse then DeFi also plays a crucial role to fulfil the growing demands of users. The Metaverse needs the following components:

• NFTs to ensure indisputable ownership
• DeFi applications
• Cryptocurrencies for Metafinance
• Workplace automation
• Online shopping
• On-chain credit scoring
• The natural language processing system
• Artificial intelligence
• Solid infrastructure
• Hardware devices and software

We have seen that the Metaverse itself requires a trustless financial system powered by the DeFi with backed blockchain technology. DeFi provides open access to financial services for the different activities in the Metaverse like online shopping, borrowing, investing, earnings, insurance, etc. without centralized control.

So DeFi would be an effective tool for Metaverse because cross-border payment will be easier due to less time and minimal transaction costs and these features of DeFi would inspire more projects to come into the virtual world. Some reasons why DeFi could be the best financial tool for the Metaverse economy.

• DeFi platforms are already in operation, so it is convenient to integrate with Metaverse.
• DeFi can skyrocket depending on the particular Metaverse and how much freedom they can have there.
• DeFi would leave the traditional financial system far behind in the virtual world due to its use cases and growing adoption trends.
• DeFi offers the financial infrastructure for the Metaverse with advanced security and reliability.

In more recent years, the industry hype towards the DeFi-enabled Metaverse has been growing. Some projects have already launched games claiming they have built their Metaverse products. Here are some crucial reasons behind it.

1. It could be the future of the internet:

The Metaverse is linked with emerging concepts like Web 3.0 and Web 5.0, so it has attracted so many sectors to invent new products which could be the new trend caught by the public. In addition, Metaverse will allow users to interact with digitalized 3D objects so FinTech cannot be an exception to stay in silence, so there should DeFi powered services.

2. Most of the Metaverse will be open-source:

It will be the beauty because most projects make open-source Metaverse so that developers will be free to create so many applications to meet the growing demands of the users.

3. It could be the digital destination:

Metaverse could allow us to interact with each other face-to-face digitally in the 3D forms, so we would hand out on it without physically traveling from each place to another. If it managed to be a successful alternative for interacting with the world, everyone will get attracted to it.

4. Easy to use UI (User Interface):

AI (Artificial Intelligence) powered system in Metaverse with natural language understanding capabilities will help users to interact with the digital world easily.

5. DeFi-based Play-to-Earn economy:

Especially, the gaming industry in the Metaverse could skyrocket as it can attract players with innovative ideas i.e. Play-to-Earn. The Axie Infinity game has already managed to achieve a huge reputation.

6. It could boost hardware technology innovation:

The foundational technology for the Metaverse is computers and smartphones from which users can easily access the internet wherever they are. DeFi-based Metaverse itself requires a cluster of computers or nodes to perform the operations. So, there can be possibilities of coming out with the most powerful devices with enhanced features and operations.

7. IoT and Metaverse:

Here is no doubt Metaverse and its emerging technology require the most advanced IoT  (Internet-of-Things) architecture. Since the Metaverse would blur the gap between virtual and physical worlds, it will increase the demand for high-quality sensors and wearables, for example, sensor gloves, gaming consoles, AR glasses, head-mounted displays, etc.

8. It will give full freedom:

The decentralized nature of the Metaverse allows users to have full control over their data, assets, and privacy, so it will transform the way the digital world operates. User consent would be required for performing any sort of operations in the metaverse and blockchain helps to offer security instead of the centralized servers or entities.

9. It will help scientific research:

Researchers could conduct scientific research in the Metaverse by gathering the target groups, and it will reduce the costs. In addition, the medical sector could get huge benefits from it as the professionals could perform diagnoses of different diseases.

The new concept of MetaFi:

The term MetaFi refers to the combination of Meta and Finance where Meta is for metadata and Fi comes from DeFi.

The concept of MetaFi is trying to standardize large-scale applications like dAapps, Metaverse, decentralized games, and social media. The role of MetaFi in the Metaverse would be to make infrastructure with specified metadata so that users can communicate with each other in the virtual world with the enabled identity management features.

This is another emerging concept so it also has its own limitations to overcome.

Metaverse Challenges:

To realize the full potential of the genuine Metaverse with its advanced features, it has to overcome several challenges which are as follows.

• Blockchain technology to handle Metaverse would need advanced features like high throughput, advanced sharding management, low latency, storage distribution mechanism to prevent single point failures, infinite scalability, etc. but till now, no such blockchain networks are in operation for processing the bigger-sized data including multimedia files.
• DeFi services in the Metaverse can be accessible to everyone if there is internet connectivity, but the internet penetration is still low in most parts of the world, so it could create complexities for the mass adoption trends.
• Security issues are one of the most important factors to determine the success rate of Metaverse because so many DeFi protocols are exploited by attackers to create a huge loss. Since there will be no one to take responsibility for the decentralized system, a single security breach might create a huge loss to the entire ecosystem.
• Digital literacy is required to use the functionalities in the Metaverse, so it would take a long time to spread awareness.
• Advanced hardware components for using the Metaverse are not available in the markets. High-quality sensors and wearables are required on the mass scale for the cheapest prices, so everyone can afford to have them.
• High-speed internet connectivity is required so that remote collaboration will be possible for users to have true experiences in the Metaverse.
• DeFi is not fully free from the human intervention for various roles like mining/validating the transactions and also financial services are not fully automated as they require manual verifications for most cases. To avoid human error and extra delay in the operations, advanced AI will require to process everything quickly, but AI in this sector is not so mature.
• Computers that are available in the markets still have so many limitations in terms of performance, data storage capacities, etc. Metaverse would require devices with more functionalities and features.
• Technology has to be served everyone so physically disabled people should also get benefits from the Metaverse. There should be complexities in implementing features for such people.

Future of DeFi-enabled Metaverse:

Human beings by nature, always seek freedom in their life. Financial freedom has been discussed for a long time. It is certain that future generations will surely seek alternatives to the centrally handled traditional financial system. Not only the financial system, but DeFi in the Metaverse will also allow users to have full control over their data too. Now, the Web 5.0 concept is being raised on the internet that is also linked with Metaverse. Web 5.0 could bring DeFi to the next level enabling users to have full control over their data and identity.

In the future, quantum computers and quantum AI are more likely to come into existence which could bring our imagination into reality. The larger computational power of the quantum computer can entirely change every aspect of our daily life.

In addition, both quantum AI and computers could enable seamless switching between the physical and the digital worlds with a better UI. Such advanced technology could entirely transform the current education system too because students will get a more practical learning mechanism with digitalized 3D objects.

There will be no single industry to get benefits off Metaverse, but almost all will be there like scientific research, especially in the medical and the aerospace sector will get an extra twist. Agricultural products, arts, industrial products, etc. can be ordered and tested online before physically having them so, so there is no doubt, that Metaverse has a long way to go.

Another milestone to advance Metaverse technology could be the advancement of the internet like we have 5G internet and cloud-based high-speed internet now. Several experiments are going on to bring even the fastest 6G internet to this world. This sort of rapid progress of innovating new technology will assist the digital world to go up and get matured. So, it is safe to say, the future of Metaverse is bright.

Bottom Line:

The Metaverse is an exciting idea that has endless possibilities to bring changes. Indeed, it has a long way to go, we are already experiencing Metaverse-like projects so, there is no doubt that next-generation blockchain technology will be fueling up more projects, and DeFi will be there to integrate the financial structures. The combination of innovations will transform the way of interacting with this world in virtual space.