The Terra-verse: Exploring concepts of the metaverse and the potential for NFT and DeFi innovation within the Terra Ecosystem
NFTs are, to my mind, often quite a polarising topic, to some they are worthless jpegs, to others the keys to unlocking the global digital metaverse. As with many things, the truth often lies somewhere in between. And whereby I believe the latter, the true innovative potential of NFTs is also currently somewhat diluted by the former. I would not describe myself as an expert on NFTs, nor the metaverse, however I am treating my writing here as an educational journal not only for my readers but also for myself on the things which I am passionately learning about. This piece is, therefore, an exploration of my thoughts on how Terra may be perfectly placed as the testbed for transformative interaction between NFTs and Decentralised Finance.
Firstly, I will introduce my understanding of what the ‘metaverse’ is, in order to provide context to the real value of NFTs and secondly, where NFTs fit into this version of the future, and why. Thirdly, moving on to look at a specific example of how NFTs can be interwoven with an existing part of the cryptocurrency world; decentralised finance, and why I believe Terra is well-placed to take advantage of this.
Context is key: The Metaverse
I think most people reading this article likely would have heard the phrase Metaverse, before, and many will perhaps envision a virtual reality, digital world (think Ready Player One) or some global gaming play to earn economy. However to me, the metaverse is much broader than that, it would be like describing the internet as google, or facebook. Virtual worlds, digital economies, virtual reality etc are not in and of themselves the metaverse, but instead component parts of it, built upon it. Much like the internet is a plethora of ‘protocols, technology, tubes and languages, plus access devices and content and communication experiences atop them’ (Ball, 2020), the Metaverse will be too. If you can’t tell at this point, providing a strict definition of this so called ‘Metaverse’ is akin to attempting to describe the internet to someone prior to them having ‘logged in’.
So instead, I defer to Matthew Ball (2020) who identified some likely core attributes of the metaverse, which are that it will be;
1. Persistent and continuous, with no end or pause
2. Synchronous and live, a living experience happening in real time and existing consistently
3. Open to all whilst providing each user with a clear sense of identity and agency
4. A fully fledged economy
5. An experience crossing the physical/digital world, private/public experience and open/closed platforms
6. Interoperable on an unprecedented scale allowing for content, assets and history to transverse platforms
7. Populated by a wide plethora of contributors and creators
The Metaverse in effect becomes a portal to the digital world, something most of us already occupy in one form or another, whilst also providing opportunity as a new layer of economic infrastructure across the globe. Ultimately when considering how and why the Metaverse, a fabled successor to the current internet, is important; I would summarise it as; the internet made everything accessible, the metaverse makes it ownable. And this is where the value of NFTs begins to come into the picture…
NFTs and the common myth
30 years ago, it perhaps wasn’t obvious to many why owning a domain; a piece of the internet, would be important; likewise now, it remains unclear what the exact value of owning each individual NFT is (I suspect pretty damn low for many). However NFTs as a collective are vital to the next step in the internet. So what are they? Non-Fungible Tokens represent a unique token (fungibility means identical and interchangeable — e.g. a dollar) and are in a sense digital deeds over an asset (on / off chain), and represent ownership, which is backed by the creator and community surrounding the token. To some this may appear as weakness, but in reality social value and common myths are essentially the driving force behind human co-operation. To borrow from Yuval Harari’s ‘Sapiens’;
‘Much of history revolves around this question: how does one convince millions of people to believe particular stories about gods, or nations, or limited liability companies? Yet when it succeeds, it gives Sapiens immense power, because it enables millions of strangers to cooperate and work towards common goals.’
This to me is quintessential to what enabled bitcoin’s success, DeFi’s growth and now the emergence of NFTs. To put it bluntly, if you are in crypto and you don’t value the power of community and collective action, frankly you don’t understand the market environment we currently exist in. This even disseminates into traditional markets; the GME saga, Tesla’s cult like following around the ‘prophet’ Elon Musk and so on. This is the narrative of web 3.0. First we have access, now we want ownership. Property rights transpiring across the digital and physical world.
The value of many of these current NFT crazes — based around profile pictures and so on, isn’t in the asset itself, but the sense of ownership, identity, community and belonging it imbues on the holder. Now, does that mean 90% of it isn’t over-valued? Probably not. That is the nature of the bubble, it’s speculative, it attracts speculative investors and huge sums of initial capital. But once that dies down, what will remain? The strong communities, forged around common myths of identity and likely some of the narratives we see in web 3.0 — decentralisation, DAOs and so on… You also see these NFTs form a base around existing crypto communities further cementing one’s position in the digital world and providing a sense of self. From here, the possibilities are endless, bring people together, and the people do the rest. This is the core of crypto, communities build. To sum up my feelings on it;
Bubble? Yes. Truly innovative? Also yes.
NFTs, of some sort, are quite clearly in a bubble, one as a bystander you can easily mock or choose to ignore as a fad, however at the same time NFTs are likely going to change the world. These statements are not contradictory. The importance of technological innovation is something which often becomes clear once the hype dies down. For any Terra investors reading this, a comparison between NFTs and DeFi would be that Terra is currently the emerging innovation coming out following the ICO bubble and initial stages of DeFi Summer. NFTs, meanwhile, are likely on either the positive or negative hype side of the Gartner Maturity curve shown below:
I won’t try to predict if NFT hype has ‘topped’ on a short time frame yet, but the key message here is that innovation is coming, and it would be wise not to entirely dismiss it.
(And a small disclaimer regarding DeFi — I actually believe we have probably played out a micro-cycle version of the Gartner hype cycle, but on a longer time frame are still in the early iterations of positive hype for what DeFi can achieve globally as a whole, just my opinion, I am known to be wrong).
NFTs — your key to the digital world
So you have your strong communities, but why should we value NFTs specifically? To me, for the same reason as cryptocurrency, they are simply more efficient and effective in many roles than their traditional counterparts. If an NFT can provide more value, utility, status, portability (and often enjoyment) to a user, then why would it not simply cannibalise its’ predecessor. I believe we are beginning to see the early stages of this in gaming with play to earn models which I expect to grow exponentially over the next decade. The metaverse represents a leap forward in the internet, and NFTs will be your personal key to unlocking this new digital world. We are moving from a world where, first crypto meant every protocol had a token, to one where every valued digital representation of an object or person has a token. Will everyone participate? No. But will billions participate? I truly believe so. As Naval described:
If you’re in crypto, you should begin to notice the arguments made against NFTs are likely sounding quite similar to the early sceptics of bitcoin and other cryptocurrencies, sometimes it is hard to see the value when a technology is yet to find its’ true use case or application. That is what hype cycles are, technology searching for its’ true calling, being bounced around by many, built on, challenged, replaced. NFTs are currently experimentation, and with that I move on to the next section of this piece, what I like to call ‘so fucking what’.
NFTs — your key to the digital world; so fucking what
This section will be relatively short and sharp, to provide an overview of just a few of the potential uses cases for NFTs;
- Digital identity — we have already touched on this, but reclaiming your identity in the form of an NFT, giving sense of ownership over one’s self as we move away from siloed internet-verses, twitter, youtube and so on. Currently digital identities are fractured across these platforms, as the metaverse evolves, NFTs will enable your identity to move cross platform and cross world. I believe this layer ties into many of the use cases below and will ultimately be a driving force behind NFT ownership in many ways
- Gaming — Play to earn models, digital collectibles in-game, micro transactions via in-game currencies, in-game art and any unique asset in-game
- DeFi — unique benefits to NFT owners, derivatives, accessibility to financial opportunities and secondary markets for the NFTs
- Real estate — fractionalised NFTs for collective ownership, digital deeds of off chain assets (Note this is most likely a regulatory headache in its’ current form)
- Entertainment industry — Ticketing and exclusive access to events, Musical NFTs to create unique experiences and records with fans, crowdfunding of artists work
- Collectibles and Art — self explanatory at this point I reckon
- Logistics and supply chain — immutability and transparency to improve the speed and accuracy of goods and service chains
Bringing it all together on Terra
At this point we have explained what the metaverse could potentially be, what NFTs are and why they are potentially more than some overpriced jpegs on a blockchain. Let’s now look at why I believe the Terra ecosystem to be a huge opportunity for NFTs to be interwoven with some of the example use cases above.
For the uninitiated Terra is a blockchain built on the tendermint cosmos SDK, which has primarily focused on its’ payment and DeFi network powered by the Terra stablecoins (e.g. TerraUSD — UST). It is a layer 1 ecosystem and as well as having a hub of activity on its’ own development platform, ultimately seeks to be fully interoperable across all crypto ecosystems allowing for tokenised assets and data to move cross-chain. The native token of the ecosystem LUNA provides stabilisation to the Terra stablecoins algorithmically via arbitrage. Without getting too technical, algorithmic stablecoins use a central pool of tokens controlled by smart contracts to maintain price. So, for example, if the price of UST rises above $1, the algorithm would use LUNA to mint more UST and reduce the price. If the price fell, it would swap UST for LUNA to push it back up. This is incentivised gamification as the users doing this are able to profit from the arbitrage opportunity of returning the peg.
Why does this matter, why Terra? There are three key reasons for me;
- Programmable money and the innovative financial products already being built on Terra — two flagship examples being Anchor Protocol, a savings dApp that allows users to earn a 20% stable yield on their stablecoins, facilitated through the lending and borrowing of proof of stake assets, and Mirror Protocol which enables the trading of synthetic stocks and assets, as well as the ability to earn yield on these through yield farming. With the upcoming Columbus-5 upgrade we are about to see a huge expansion of products and protocols launching on Terra (read about some of my favourites here: https://medium.com/@TerranExplorer?p=11aa9467efd4) and with that comes further innovation. It is my belief that some of the upcoming launches will create unique opportunities to develop use cases which deeper embed NFTs and DeFi (more on this soon)
- User experience — Terra projects, both current and upcoming have focused hugely on user experience and have, typically, provided a simple, sleek experience for users which far outweighs competitors. To me, this is central to any ecosystem seeking to onboard the next billion users. Further to this, the use of stablecoins on the network carries an easier understanding for new users, unfamiliar with cryptocurrency, as transacting in dollars terms (and other local currencies) is a much smoother learning experience than trying to value things in native crypto asset. I believe this also applies to NFTs, and if they are to be a key to a digital world, they must be simple to understand and their interactions with other elements of the digital world — e.g. DeFi must be easy to use
- The community and builders — To anyone has spent 5 minutes in the community, it is incredibly obvious how strong it is, cult-like at times, and that is a good thing. Referring back to the ‘common myth’, it is this form of belief in a narrative that brings about co-operation between humans. This is extremely powerful, and we are about to witness the result of this over the coming months as 100+ dApps are set to launch on the ecosystem, many of which are passion projects of the community and to which many of Terra’s users will feel immense ownership, pride and loyalty towards. This, to me, is a clear sign that NFTs have a home on Terra, and that strong communities will seek to embrace digital identity, sense of self, and then seek to build this in new and innovative ways.
So there it is; for me, the perfect ingredients are there for NFTs to thrive on Terra — you have true innovation (at scale with the number of projects launching), an easy to understand platform to facilitate scalability of users and a resilient community of builders and users ready to embrace new technology, make it their own and build upon it. After all, the sum of community based NFTs could be seen, in theory, as a valuation of the strength of a community itself.
The Opportunity — examples of NFT and DeFi composability on Terra
There are already a huge number of NFT platforms and projects looking to launch on Terra; for example:
https://twitter.com/TerraFidenza
https://twitter.com/Astroverse_NFT
https://twitter.com/OnePlanet_NFT
https://twitter.com/DeviantsNFT
https://twitter.com/SudeshaNFT
https://twitter.com/DerbyStars_HQ
https://twitter.com/Fansquad_fund
https://twitter.com/ForgeProtocol
https://twitter.com/TalesofTerra
https://twitter.com/StardustMarkets
https://twitter.com/AndromedaProt
https://twitter.com/FantasyInvestar
https://twitter.com/ProtocolTalis
https://twitter.com/PlaceboNFT
https://twitter.com/galactic_punks
https://twitter.com/spaceloot_nft
https://twitter.com/terra_racers
https://twitter.com/Terrafirma_NFT
https://twitter.com/collectxyznft
https://twitter.com/terratabula
https://twitter.com/Minerva_NFT
https://twitter.com/terra_social
Probably missed a few, sorry in advance, but you get the idea…I won’t go into detail on what each of them is building (this piece is already long enough), please give them a follow and check them out to learn more. What I am interested in is to consider some of the opportunities NFT projects and platforms will have as they utilise Terra as a base ecosystem for their innovation. Now, consider these are just my thoughts, and I am not the person building these protocols, this piece is more to look at the opportunity and to hypothesise on the future of NFTs / DeFi on top of Terra and the huge potential this can unlock for all users alike:
1. Bid to Earn and Bid to Give auction model, this is something I covered in a twitter thread here: https://twitter.com/terranaut3/status/1438649337517645831 Very simply, in a typical auction there is only one winner and everyone else loses. Bid to Earn models instead turns auctions into a situation where you either win the NFT or you make money. You place a bid, and if someone outbids you, you get your bid back, plus a % from the new buyer. The items are initially listed by the platform itself with a minimal floor price encouraging users to come in and bid. When a new bid is placed, a formula calculates how much money the bidder will earn as an incentive if they are outbid. This is customisable depending on how much you want bidders to earn. For example — you can set varying incentive levels across the auction (likelihood of degen activity on the high % pools is probably guaranteed), but it allows, in theory, everyone to win. Further to this, as a commenter on my original thread mentioned, this could be interwoven with Angel Protocol, perpetual charity protocol on Terra, in a ‘bid to give’ model whereby the % return is instead pooled into a central pot and donated to charity at the end of the auction. Either way, this model gamifies the auction process and incentivises users to participate (to the price level they are comfortable) and ensure everyone can win.
2. Bid yields — All bids on NFT auction platforms are deposited into Anchor or Nexus Protocol to earn 20% yield on the bid, up until the buyer either removes the bid or it is accepted by the seller. This has two main purposes — to ensure no asset is left idle, your money should always be working for you, and secondly creates a gamification element to the process where over time the decision of what is an acceptable bid for the buyer/seller changes. It is my understanding that Forge Protocol may be attempting something like this, very excited to see how it turns out
3. Collateralised NFTs that gain value over time. In this model, the minting process involves the use of an interest-yielding token (e.g. aUST on Anchor), which is then used as collateral tied to the NFT. The collateral will earn interest over time, and with an option for the user to burn the NFT at any time to return the initial collateral, the NFT has an inherent floor value which only rises over time. In the case of Anchor’s UST — this would be a yield of 20% or so a year, but other projects such as Mar’s protocol may allow users to use other interest-yielding tokens which also allow a user to speculate on the future value of an asset. Equally, Prism Protocol which allows for the refracting of assets could potentially enable a user to convert your asset into a principal and yield token, for example, LUNA (pLUNA and yLUNA), allowing you to benefit from staking rewards and airdrops from the yLUNA and then, should a form of digital receipt for the yLUNA be provided, use this as collateral to back the NFT, fixing a guaranteed yield and basket of rewards to the holder of the NFT, therefore benefit from; exposure to LUNA’s price and liquidity via the pLUNA, receive the benefits of staking LUNA in the form of airdrops and also speculate on the price / utility of the NFT it is backing. When selling the NFT, the collateral is transferred to the new user, I will admit, in the case of Prism I am not 100% on how that would work yet as it has not launched, but hey I’m just a degen, that isn’t my job
4. A digital identity which, over time, accrues and unlocks certain traits and customisations, enabling the holder to have access to other benefits such as higher yields on certain projects once you’ve been staked in Terra station for 365 days, or access to new airdrop allocations based on your history in the Terra ecosystem. E.g. someone who has ‘collected’ NFT badges from the use of LUNA staking, Anchor bLUNA staking and farming on Mirror Protocol will receive a small boost in a future protocol’s airdrop. Or perhaps you earn a Halo once you’ve donated a certain % to Angel Protocol. You begin to get the idea. This is in theory not entirely different from how certain perks are denominated by wallets today for things such as airdrops, however with the introduction of NFTs it firstly, creates a real time identity for the user to show off, and also is something wallet-agnostic and can therefore be kept by the user and also eventually moved cross-chain should other platforms allow it. Creating a long term identity, based on Terra, that you can carry with you wherever you go in the digital world. Finally, whilst your identity is not tradable, a secondary market could be built to trade these winnable items — creating a speculative value around their value and creating a further economy within Terra… Plus, who doesn’t love a new, updatable, twitter profile picture. I say twitter… surely someone is building a Terra alternative for this new digital world we are building, I want my NFT there (Cough Loop Finance and Terra Social)
5. NFT lending and borrowing — we have already seen the development of secondary markets for the purchasing of NFTs, but once an NFT has utility — either in terms of access or yield, I see no reason why platforms cannot begin to create a third tranche of marketplace, whereby someone is able to lend their NFT to other users who perhaps wish to access its’ benefits but either are unwilling, or unable, to purchase the asset outright. At the same time, the lender may be paid a % yield for lending the asset out to users should they not need to use it (or perhaps have already put it to use elsewhere as a form of collateral). If you are to combine this with the yield generating collateral NFT, the NFT holder is now holding an incredibly powerful asset which 1. Returns yield on their underlying collateral 2. Can be lent out and receive yield based on that, and 3. Still provides the optionality to access the exclusive benefits the NFT provides. What is interesting further about this concept is it would likely require fixed time allotments for borrowing/lending as the assets themselves are non-fungible (so can’t be drawn from a liquidity pool to withdraw). Rather than being constrictive, I see this as opening up another avenue — fixed term yields which can then be paid up front to the depositor, which just adds another layer of benefits and composability to the holder of said NFT.
6. NFTs as proof of ownership / sale on real world assets which can then be utilised as collateral to borrow against on Terra. E.g. the purchase of an asset (regulators plz ignore this post, plz) which can then be accredited with an NFT determining the asset’s value. This can then be deployed on an NFT protocol which enables the user to borrow UST against this to a certain % and deploy into Anchor protocol (or similar opportunities).
7. Play to Earn and integrations with gaming — this is probably too expansive a topic to cover in this article, and to date, the gaming component of Terra is somewhat limited, however I believe strongly this will change, and with it, the use of NFTs in game as both game utility and collectibles will be large. Alongside this, play to earn models could integrate with DeFi protocols on Terra to create a play to invest model, whereby users are rewarded for in game actions with specific investing pools or opportunities within the broader Terra Ecosystem, perhaps also through access to a new marketplace being launched on Terra or to invest in fractionalised ownership of virtual real estate on the game or other terra-verses. Or simply game winners are paid out in allocations of the projects next investment opportunity — be it a new launch or development.
8. Fractionalised Community Investment Fund — A DAO managed treasury fund created by community members, whereby each individual investor is identified via an NFT — this NFT must be first purchased off of the treasury for a fixed amount. The funds from the initial raise (via NFT sale) are deposited into anchor earn for yield until an investment opportunity arises. As an NFT holder you are entitled to a vote in the DAO on how funds are to be utilised, with a larger allocation providing a proportionally larger voice (however total allocation per user being capped at 1%, as an example). This provides, a large, collective, community fund which can be helpful to fund new projects launching on Terra which wish to involve more decentralised, crowdfunding initiatives but also want access to a reasonably sized fund. The DAO itself will have a forum for community users to come together to offer ideas and skills that can assist in any potential launch — allowing the project to tap into a possible sea of passionate community builders, marketers, developers and so on. Upon wishing to exit the fund, your NFT entitles you to your % of the current pool, with any future returns from current investments being guaranteed and returned to you as and when any allocations have vested. Should a user wish to withdraw early, there would be a penalty tax which is returned to the central pool of funds to reinvest accordingly. I strongly believe in the idea of DAO based Venture Capital, where funds are reliant on networks of communities rather than more traditional, private hierarchical structures, this would be an interesting experiment in that direction.
9. Fractionalised NFT ownership of real world assets such as real estate — I will be honest, I first envisioned this on Pylon Protocol, making use of their lossless investment UST pools to deploy capital into a DAO like structure, with a lock up period where the capital is deployed and users are able to benefit from growth of the asset, as well as yield deployed on terra. However, I got a little stuck mentally trying to unwind some of these elements, and it turns out as I’m editing this piece a new project on Terra turned up and is doing it for me, Terrafirma. So instead, this last part will just be an advert of sorts for them I guess, as they seem to have worked out what I couldn’t. Do note, they have mentioned their approach is somewhat vague due to regulatory requirements; but essentially Terrafirma provides:
- Professionally curated real-world commercial and residential real estate projects
- Fractionalised NFTs that benefit from long-term capital growth of real-world assets with regular yield issued to stakers
- Governance on how properties are managed
- A marketplace where you can trade your NFTs to realise profits or to expand your holdings
- Speculative value opportunities for collectors and art enthusiasts
- Entry on new projects through #LosslessInvesting (incorporating a lockup period — likely 12 months, but some projects may better fit shorter/longer terms)
(read more about Terrafirma here: https://www.loop.markets/terrafirma-nfts-an-introduction/)
Ball, Matthew (2020). The Metaverse: What It Is, Where to Find it, Who Will Build It, and Fortnite, https://www.matthewball.vc/all/themetaverse
Harari, Yuval N. (2015). Sapiens: a brief history of humankind. New York :Harper
I hope you enjoyed this piece, bit of an experimental one from me just laying out some thoughts I’ve had swirling around my head for the last week or so, and to reiterate the examples above are purely thoughts and are not necessarily achievable or desirable in the format provided. Hopefully it gives you something to think about however, and I am sure many people will come up with much better ideas than those I’ve presented here.
As always feel free to follow me on twitter here: https://twitter.com/terranaut3
