Decentralized MetaFi — Blood Circulation System for a Decentralized Metanomy
If we consider society as a living organism, then the economy is the source of life that provides energy for the body and the financial system is the blood circulation system.
It’s the same in the metaverse. The complete metaverse needs an economy of its own, and that economy needs to have a financial system to server society as a whole. Due to the characteristics of the metaverse, we will use the term “Metanomy” to describe the economy of a metaverse, and the term “MetaFi” to describe the financial system of said economy. Since we are building a decentralized metaverse, so I will focus on the decentralized MetaFi model.
Let’s start with the real-life financial system. A real-life financial system typically has five main components.
Briefly, they are:
- Financial Institutions
- Financial Markets
- Tradable or Financial Instruments
- Financial Services
- Currency (Money)
The financial system plays a very important role in any economy. The main function of the financial system is to ensure the healthy circulation of funds between different sectors of the economy. Specifically, some of the key functions of a financial system are listed as follows:
- Payment System — An efficient payment system allows businesses and merchants to collect money in exchange for their products or services.
- Savings — Public savings allow individuals and businesses to invest in a range of investments and see them grow over time. Borrowers can use them to fund new projects and increase future cash flow, and investors get a return on investment in return.
- Liquidity — The financial markets give investors the ability to reduce the systemic risk by providing liquidity. It thus allows for easy buying and selling of assets when needed.
- Risk Management — It protects investors from various financial risks through insurances and other types of contracts.
- Government Policy — Governments attempt to stabilize or regulate an economy by implementing specific policies to deal with inflation, unemployment, and interest rates.
What if we have a bad financial system? The consequence is simple: fund flows will be congested, and outflow will occur: funds will flow to other economies with better circulation.
Exactly the same in the metaverse, the financial system will ensure the healthy circulation of digital funds. With a decentralized metaverse, the metafi platform is of course also decentralized. And in the decentralized digital world, the role of financial institutions is not as important as in the real world. At this point, the decentralized financial system of the metaverse can only be left with four important components: DeFi Market — DeFi Instruments — DeFi Services and a common stable token.
DeFi models and services have grown quite rapidly in recent years in the world of cryptocurrencies. However, because the links between the cryptocurrencies world and the real world are still very weak and fragmented, the applications and value of DeFi are still very limited. DeFi still has clear value only within the borders of the cryptocurrencies world, and still faces enormous barriers when it comes to connecting to the real world.
This will change in a decentralized metaverse that has reached a certain level of development. When the population of a metaverse is large enough, the services in the metaverse are rich enough, the accumulation of digital assets of the residents also reaches a certain extent, the need for decentralized financial services is obvious. At this point, the metaverse itself can be said to have really become a small world, so DeFi will have enough space to be effective without having to connect to the outside world.
What’s the difference between (decentralized) MetaFi and DeFi? Decentralized MetaFi is the financial system that provides the operating space for all DeFi services, instruments, and markets. And the most critical component of a MetaFi and also of a stable metanomy is a unified monetary system. From some point of view, the metafi currency is a kind of DeFi instruments as well.
It should also be added that in the world of cryptocurrencies people often confuse the concept of currency and digital assets. Currency must have stable value in order to be easily usable as a medium of exchange of value. Therefore, an economy with stable growth certainly needs a stable monetary system. In the case of our decentralized metafi, a stable coin or token that serves as the common currency of the metaverse is required.
So what if a decentralized metaverse doesn’t have its own MetaFi and metanomic systems? That means this metaverse is incomplete. Or this metaverse is built on top of another ecosystem and is using that ecosystem’s economic and financial systems. In this case, the metaverse will be difficult to accumulate and control digital funds, and will often only act as temporary destinations in the flow of funds.
To summarize briefly, a metaverse that wants to have a thriving economy definitely needs a diverse and robust metafi system. The topics about metafi and metanomy are endless. See you in the next posts.
