Welcome to the Meta-DeFi-Crypto-Verse Economy
Mary lives on a five-acre farm near Seattle with her three horses, two cats and a flock of chickens. At the age of 41, she makes her living in the real world as a farrier, shoeing horses – for which she dropped out of the world of commercial finance, giving up careers on Wall Street and in fintech.
To supplement her equestrian income, Mary trades digital assets. She owns, for example, a non-fungible racehorse token that she enters in online races in the metaverse, a reality parallel to our own which has been described in the Wall Street Journal as "an extensive online world transcending individual tech platforms, where people exist in immersive, shared virtual spaces."
Tech companies, particularly Facebook, have hailed the metaverse as the next evolution of the internet, with CEO Mark Zuckerberg highlighting his intent to turn Facebook into "a metaverse company" on a recent investor call.
When her NFT horse wins, Mary gets paid in some form of digital currency, to be converted into fiat currencies, or redeployed into more online assets.
"I trade assets in the digital world to support my life here in the real world," she told me. "My goal is not to have to work in the real world at all."
Mary belongs to a growing legion of metaverse denizens for whom digital currencies and markets are just as relevant as the fiat currencies or the New York Stock Exchange.
In 2020, when COVID-19 shut down the economy in a rural province of the Philippines, a gaming entrepreneur named Gabby Dizon began lending our characters in a game called Axie Infinity. Members of his community used those characters to earn tokens in the game, which could then be exchanged for local currency. The game caught on quickly in the Philippines, where players can earn a multiple of the local minimum wage.
Thus began the phenomenon of "play-to-earn" and the creation of Yield Guild Games ("YGG"), with more than 1.5 million daily active users (an estimated half of whom are from emerging markets) having earned over $8 million by "combining NFTs, DeFi and gaming to deliver ... a new model of employment in the Metaverse."
Announcing $4.6 million investment in YGG, venture capitalists Andreessen Horowitz pointed to "a largely untapped economic opportunity in emerging markets to provide jobs by building a virtual economy in the digital world."
How far we have traveled in a short time from the world view of former Federal Reserve Chairman Alan Greenspan, who once said: "You really have to stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven't been able to do it."
For the Greenspans of the world, blockchain technology, decentralized finance, non-fungible tokens and the economic activity they are making possible are as intellectually impenetrable as quantum physics. The headline of a recent issue of the Economist focused on decentralized financed borrowed aptly from Lewis Carroll's Alice in Wonderland: "Down the rabbit hole."
Critics have described it as "totally self-absorbed, all about providing different ways for people to speculate on cryptocurrencies." "A solution in search of a problem." "The financial services equivalent of self-driving cars that can do just about everything but stop at red lights." One commentator joked, in a recent column, "Maybe one day DeFi will find a real use."
Well... it already has.
On a wealth- and asset-weighted basis, the Greenspans of the world control most of the assets and operating companies supported by our financial system. But the future of finance belongs to the Marys and the Gabby Dizons, for whom the appeal of digital finance is precisely the fact that it exists outside or alongside the world of conventional finance and centralized institutions.
The potential benefits of this alternative system, according to the International Monetary Fund, lie in creating "more inclusive financial services." Or as the New York Times puts it, "Crypto finance gives people long excluded by traditional institutions the opportunity to engage in transactions quickly, cheaply and without judgement."
The biggest negative is that the system as it exists today is rife with outright criminal behavior: fraud, manipulation, abuse, money laundering.
Meta-DeFi-Crypto-Verse finance is clearly here to stay. And as YGG demonstrates, it even has potential to be a force for good. But to realize its full potential, it needs to integrate into the conventional financial, legal and regulatory infrastructure that undergirds financial capitalism.
"If it's going to have any relevance in five to 10 years," SEC Chairman Gary Gensler has said, "It's going to have to be within a public policy framework."
The challenge will be how to accomplish that without squashing energy and the torrent of innovation behind this latest iteration of alternative finance.
Baird does not currently recommend the purchase of cryptocurrencies, products that attempt to track cryptocurrencies or cryptocurrency custodians and won't until there are more secure and cost-effective ways to gain exposure to this asset class.