Metaverse and Its Inroad into Financial Markets

The content of CoinDesk Indices; not affiliated with CoinDesk editorial.

By Reza Akhlaghi, Senior Content Marketing Manager, CoinDesk Indices

Today, the term metaverse has come to represent a range of new technologies that are associated with, but not limited to, the emergence of Web3, blockchain protocols, play-to-earn (P2E) gaming, and virtual ownership of assets. The metaverse is one of the defining characteristics of Web3. The latter is the evolution of Web1 (read-only internet) and Web2 (read and write internet) into its current read, write, and own internet that leverages user generated content and blockchain technology.

The metaverse epitomizes new, decentralized, and immersive social settings and experiences that utilize avatars, virtual reality (VR) and augmented reality (AR) technologies. It offers a whole new set of social relationships with hitherto unimaginable opportunities. So, the question many ask is how did the metaverse become part of the digital asset taxonomy and carve itself a place in the financial markets?

The metaverse can be broadly defined as a blockchain-fueled, all-encompassing virtual world that offers new human and socio-cultural experiences. The term comes from the 1992 science fiction book “Snow Crash” by Neal Stephenson, who is currently the chairman of Lamina1, a metaverse-focused blockchain. In the book, Stephenson offers characters who immerse themselves in virtual social settings to escape from a dystopian reality. Fast forward three decades, and Stephenson’s fiction has in many ways become fact.

Using real-time interactivity, augmented and virtual reality, as well as tools that represent ownership of virtual assets, the metaverse creates a digital simulation of life as we know it. It is a radical departure from the single-platform business models that store value in their walled gardens to the one in which open platforms allow participants to profit from user-generated value with an economic stake in their online existence.

The metaverse represents the blend of the physical world and the virtual, with assets owned within a decentralized structure and value distributed among participants through decentralized payment systems, cryptocurrencies and governance tokens. But is every metaverse built on a decentralized structure? The answer is no—not all of them.

A centralized metaverse is one in which the activities of participants, their interactions with others and their ability to engage in business activity are set by the choices made and the rules set by the platform’s owners. The content created by the community of users is the property of the entity that owns the platform. They are not free to own any pieces of the digital world, and their privacy is handled by the platform owners.

In a decentralized metaverse, however, participants or inhabitants are unencumbered by the many restrictions that exist in a centralized metaverse. This includes the creation of immersive experiences, ownership of the content they create and the freedom to conduct business activity in the form and manner of their choosing across dispersed networks. Participants also bear the responsibility to protect their privacy. So, three factors play a dominant role in determining the decentralized nature of a metaverse: distributed networks, permissionless participation and decentralized ownership.

A driving force behind the emergence of the metaverse in the digital asset universe is the use of metaverse crypto tokens for participation in the metaverse economy. The tokens enable users to offer a specific service or benefit from it; they can also contribute to the development of decentralized applications within the metaverse. As with other tokens, metaverse tokens are cryptographically secure and protected and can process transactions almost instantaneously. Both non-fungible tokens (NFTs) and fungible tokens are used for a variety of transactions in the metaverse and run on the Ethereum blockchain, the underlying infrastructure of the metaverse.

The most widely used tokens in the metaverse are ERC-20 tokens. They are fungible tokens that meet the technical standards for smart contracts as well as the key guidelines for issuing any new token on the Ethereum blockchain network. The tokens that represent the incumbent metaverse ecosystems such as Ape (APE), Sandbox (SAND), Wilder World (WILD), and Decentraland (MANA) are ERC-20 tokens.

ERC-721 tokens, on the other hand, are non-fungible and represent a class of assets as opposed to a particular type of asset (ERC-20). ERC-721 tokens are a standard for NFTs, which ensure an individual’s ownership of an asset with its distinct value and properties, making them non-interchangeable with other tokens. NFTs often represent digital artwork, virtual real estate and goods, or unique in-game items within the metaverse. They make it possible for participants to monetize their digital content, such as music and artwork.

To enable a functional and secure metaverse, the scalability of the Ethereum blockchain needs to improve. Therefore, a growing number of layer 2 scaling solutions are being utilized in the metaverse that can increase the speed and volume of transactions and help reduce gas fees. For example, Hellven, a metaverse social platform, has partnered with Arbitrum to improve throughput and liquidity. Another example involves two heavyweight players in the metaverse and layer 2 solutions, respectively: The Sandbox and Polygon.

Last summer, The Sandbox, which is a subsidiary of the Hong Kong-based game software and VC company Anomica Brands, decided to migrate its smart contract to Polygon for higher transaction speeds, reduced gas fees, better user experience and greater scalability. The pace of adoption of layer 2 solutions in the metaverse is expected to continue, making the ecosystem more efficient with greater adoption rates and subsequently larger transaction volumes. This has already captured the attention of established players in traditional finance (TradFi).

Once relegated to the world of science fiction and cute-looking avatars, the immersive and virtual world of the metaverse has garnered attention from financial institutions. With a user base and audience that are young, tech-savvy and in the early stages of their financial lives, metaverse offers banks unique opportunities to interact and build relationships with a digitally native and growing consumer base who have long embraced fintech. It is also equally important for the banks to be able to tap into this pool of talent for their future waves of hiring.

Leading institutions in TradFi from different parts of the world have started to build presence in the metaverse. They include such established names as J.P. Morgan Chase, DBS, HSBC and Kookmin. For example, J.P. Morgan set up shop on Decentraland under the brand Onyx by J.P. Morgan, which, according to the company, is “a blockchain-based platform for wholesale payment transactions.” In March last year, HSBC announced the purchase of land on The Sandbox to engage with existing and new clients and offer them novel experiences through emerging platforms.

In Canada, incumbent financial institutions TD and RBC are conducting metaverse pilot programs to understand the technology and stay ahead of the game so that they can offer immersive services to their customers effectively . TD’s program this year ran from January to April, which included pilots in customer experience.

Kookmin and DBS, two banking giants both hailing from Asia, have entered the metaverse and started to offer various services. South Korea’s Kookmin Bank offers its own native metaverse-based financial services as well as one-on-one customer service. It also has plans to expand its services to include employee training and financial education for young consumers. As for DBS, Singapore’s biggest bank, it announced its entry into the metaverse by purchasing a large plot of land on The Sandbox to develop interactive experiences aimed at promoting a more sustainable world.

The above dynamics in the banking sector go beyond setting up shops and buying land in the metaverse. The growing market capitalization of metaverse tokens as well as the economic potential of Web3 have led many investors, including professional investors and high-net-worth individuals (HNWI), to seek a better understanding of Web3 technologies and the economic potential they hold. This includes interest in metaverse ETF and metaverse index products. Moreover, this growing interest is manifesting itself in financial and wealth management advisors to educate themselves about a wide range of cryptocurrencies beyond the two incumbent assets: bitcoin and ether.

The impact of the metaverse on the financial services sector is a representation of the next evolutionary stage in banking and capital markets. A driving force behind this evolutionary stage is the big shift to investing in digital assets by millennials, Gen X, and Gen Z clients. Underlying these dynamics, a report by Capgemini entitled “Wealth Management Top Trends 2023” revealed that 70% of HNWIs globally have invested in digital assets, including more than nine out of 10 HNWIs younger than 40 choosing cryptocurrencies as their favored asset class to invest in.

Their high rate of digital literacy and adoption of new technologies have compelled the financial industry to recruit specialized talent who understand next-gen wealth perspectives and their investing attitudes. And to serve the growing shift in investing in digital assets, the market is witnessing the development and launch of firm wide or industry wide digital asset education and curricula for financial advisors and wealth managers.

As a leading global crypto index provider, CoinDesk Indices (CDI) offers index products to institutional clients, ETF companies, trading firms and market makers. Our index and data products include single token indices, broad market indices, sector indices, systematic strategies and staking products.

The CoinDesk Metaverse Select Index (MTVS) is one such product. MTVS is part of CDI’s broad market and sector indices and is based on the CoinDesk Digital Asset Classification Standard (DACS). The constituents in MTVS must be included in DACS to be eligible for inclusion in the Index.

MTVS is designed to measure the market capitalization weighted performance of some of the largest digital assets classified in the Metaverse Industry Group, under the Culture & Entertainment Sector, that meet certain trading, liquidity, and custody requirements. At present, there are five assets in MTVS. They are as follows:

ApeCoin (APE)

Decentraland (MANA)

Axie Infinity (AXS)

The Sandbox (SAND)

Enjin Coin (ENJ)

For more information about our broad market and sector indices, and our broad market benchmarks and investible sectors, contact us at sales@coindesk-indices.com.