Finance in the Metaverse: Show Me the Money

The metaverse will use cryptocurrencies supported by the blockchain.

I just wanted to put this sentence in normal font size in the middle of two pages, and the little red ‘d’ (endmark) that we use to signify the end of an article. I thought I was very creative and expected a lot of positive feedback from you, dear reader, for my brain. My editor thought I was lazy, not creative, so let’s go, using 1.6K words to elaborate on that same sentence.

Crypto

Of course, it will be the cryptocurrencies that will rule the many metaverses that will appear, but it will be chaos. And why wouldn’t there be? It’s an invented economic system, used to transact in an invented world, to buy things that are invented. Add to that the complexity of each service constituting its own money, and no real way to decide the value of that money against real money, except for demand, although coined money is totally worthless in apart from the service for which it was invented. . A word salad that!

Let’s take an example.

Decentraland and Sandbox are two great metaverse projects, and both have their own cryptocurrencies. Just like in life, to do anything meaningful and exciting in those early metaverse offerings, you need money. In Decentraland, you need MANA, their digital currency powered by the Ethereum blockchain. In Sandbox, you need SAND to trade, and their cryptocurrency runs on the blockchain. As of this writing, the value of SAND is around $4.88 and MANA is $3.12. They are the ones that are equated with real values ​​in US dollars.

In simplistic terms, we know how the valuation of the US dollar is obtained, or for that matter any currency in the world. All currencies have relative values ​​and are pretty useless in isolation. Indeed, the world depends on importing and exporting, trading and sending money to and from other countries. So, currencies have to be valued against each other, and it’s done in a hugely complex way that it takes a degree or two in economics to really understand.

However, in its simplest form, an exchange rate is a simple equation between supply and demand. More people buying Indian rupees, and the value of it goes up, fewer people buying the value, and more people selling Indian rupees to buy other currencies causes the value to drop even faster. The more INR held in reserves by countries around the world, the less INR there is in circulation, which increases the value of the INR.

Real world links

Of course, what people are buying and selling are not actual physical Indian rupee notes, it is import and export, investment in an Indian business or, conversely, disposal of an investment older. Foreigners (people, governments or companies) investing in India, buying exports from India or even just tourists visiting and changing currency into INR to spend in India, all of these activities increase the value of the Rupee. There are other factors, such as the GDP of a country, the parity of purchase prices, the stability of a government, the policies it adopts, whether it is at war or not, etc. , all of which must be taken into account as well. It’s just a lot easier to look at it through the prism of supply and demand.
Now, although all these physical currencies are linked to each other, they are compared to a standard currency, such as the US dollar, which allows the whole world to trade with each other. And this trade is fair based on the promises of the governments of each country. This is why the banknotes carry the message of “promise to pay” from the head of the financial institution or the president or leader of the country.

Cryptocurrency, on the other hand, is effectively valued by its rarity and popularity. Bitcoin, for example, has a fixed maximum circulation, which means that its value can fluctuate on a daily or weekly basis, but as long as it remains popular and in demand by an increasing number of people, its value should only increase. . We say “should” because there are many other factors at play as well. For example, governments could make it illegal to accept bitcoin as a currency and ban it. It would hurt its value.

Compound?

So, are cryptocurrencies just made up and essentially useless? Yes and no. As long as they’re popular, they’re valuable and you can trade them, but at risk. The risk usually comes from factors outside the crypto world, such as the government intervention we discussed earlier. Then there is also the risk that a project to which a cryptocurrency was attached will die out. A competitor could make a much better product or service, which would drastically reduce the popularity of a game or service, and that too would kill the currency (supply and demand, remember).

Three or more decades ago, many Indians favored gold investments. Lessons learned from world wars, the partition of India and financial depressions made people realize that paper money could become unreliable in times of conflict, but gold was still valuable.

Bank accounts can be frozen and become useless for a person. Governments could (in theory) usurp land or declare an individual or company broke with the stroke of a pen. This has happened before, an example is the persecution of Jews in Germany during Hitler’s reign. Freedom can be lost, which is exactly what happened to Japanese Americans during their war with Japan. Banks could collapse due to mismanagement, or a stock market could collapse due to a recession, but owning physical gold was considered a safe bet, as gold can be sold in other countries, even when your currency is rendered useless.

So what physical and tangible asset do cryptocurrencies have to back them up? What is the equivalent of gold in a digital universe?

NFT?

Short for non-fungible tokens, NFTs are something of an attempt to give the crypto world something even more unique than gold. When something is fungible, it means that only the amount is important, not the thing itself. Thus, a hundred rupee note has exactly the same value as another hundred rupee note. As long as it wasn’t counterfeit, I could take your old 100 note and give you a new clean 100 note, and there would be no difference in your financial situation.

So when something is non-fungible, it is irreplaceable, or one of a kind. This should be better than gold in the real world, as even gold is fungible, as a 1kg pure gold brick is worth exactly the same as another 1kg pure gold brick. And in theory, NFTs are actually unique, and are (usually) stored on an Ethereum blockchain.

The problem is that it’s like investing in gold, giving it to your bank, which then lists it in your bank account in terms of cash. If the bank fails, so does your gold and silver, rendering the whole exercise of buying gold pointless. Same with cryptocurrency and NFTs, because even if an NFT is stored in a different part of a blockchain, it is still susceptible to the same risks as the cryptocurrency itself.
Most NFTs being sold today are digital art, but whatever becomes of them later, they will remain purely digital things and will need to be stored on a blockchain and attributed to an individual. There is nothing physical you have that can claim your right to your wealth if measured in NFT.


Cryptos will rule the Metaverse

FOTDA

It stands for digital apocalypse fear, and it’s not a well-known acronym because we just made it up. It’s a sentiment that goes back to the time of the year 2000, even though the number of people fearing a digital apocalypse in 1999 was almost insignificant by modern standards, it was still a big deal back then. It’s a sentiment that resurfaced in financial circles with the bursting of the dot.com bubble in 2001. That and the shutdown or liquidation of so many sites and services we took for granted, like Orkut, Google+, BlackBerry , MySpace, Google Glass, etc.

And what it’s done is make us very suspicious of digital promises that are huge and world-changing. Cryptocurrency and all things crypto have to be the biggest change we’ve seen in the digital world, and it makes the hype of the late 90s pale in comparison. However, it is nonetheless a bandwagon, and there will be billions of dollars lost, as not all crypto businesses will be successful in the end. Even a significant percentage of them will not survive, judging by past history, and the best we can hope for is to be taken over by bigger companies. Kind of like how internet companies today are usually taken over by one of the big tech giants.

Of course, that doesn’t help you, the small investor, who might back the wrong coin, but that’s how unfair all things financial have been for some time now.

Still Crypto

And yet, it will be crypto that rules the metaverse, as there is no other option yet, and it seems unlikely that a new one will emerge any time soon. Instead, we will get governments to back their favorites, or some other governments banning crypto altogether (because of how easily it can be used for illegal transactions), and there will be a mess, but it will end by settling in the United States and Europe. decide to adopt because they have the financial power to rule the space.

We expect more and more banks and governments to jump on the bandwagon and legalize or legitimize cryptocurrencies, which will make them spread much faster to the digital natives of the world. In fact, many services might adopt it so seamlessly that you won’t even notice the difference. However, there is no way you can afford to ignore how cryptocurrencies work. We all need to take them very seriously and educate ourselves about them, because right now they aren’t going anywhere.

And don’t worry about cryptocurrencies being “fabricated” as I described them earlier, because even the current financial system is essentially fabricated too!

This article was first featured in the January 2022 issue of Digit magazine

About Sharon Joseph

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