How to take loans in the metaverse

The loan market in the metaverse could become a huge opportunity for lenders, who are still biting their nails to figure out how to structure them for this space. 

A report by a reputed news agency has predicted that the metaverse could become an almost $1-trillion opportunity by 2024 itself.

Inside the metaverse -- Source: CitySignal.com.

This comes as people around the globe have started shifting to the metaverse in a big way. 

Basically, the metaverse 3.0 is something that allows you to buy, sell and develop digital assets in a virtual world. Here, each of the buyers can become the owner of a piece of that world.

And, the sudden growth in demand for digital assets is leading to an escalation in prices in the metaverse. Currently, buying virtual plots in the metaverse is possible only via the crypto route.

This is because fiat currencies come with huge transaction fees, and may need the involvement of a third party to facilitate global transactions. On the other hand, cryptos can be traded globally directly from point A to point B.

Any plot purchase in the metaverse through cryptocurrencies is facilitated via the decentralised finance (DeFi).

If you go to a bank to take a loan for buying a plot in the metaverse, your loan will surely get rejected.

But as the idea of the virtual gains momentum, more and more “metaverse developers” are waiting to grab this “mega opportunity.” They plan to hand-hold enthusiasts and entrepreneurs in a bid to get them to invest in the metaverse.

What is the metaverse?

Many today are baffled and ask what the metaverse actually is. The concept of the metaverse doesn’t have a clear definition. People are still trying to understand it and clarity will come only with time.

In Internet 2.0, we saw the dominance of Google, YouTube and Facebook.

But in the next version of the Internet — that is 3.0 — the metaverse is set to rule. The metaverse is something that would be 100 per cent virtual. You can party online, buy a home or even go for a holiday in the virtual.

There are also games like Runescape or Second Life on the metaverse, where you can create avatars after setting up an account online and your avatars will represent you in the games.

This is different from the games you played earlier. It is so much more real. Here, people can form their own communities and conduct their social and business interactions digitally.

The metaverse is a place where people can play, socialise, work, relax or even transact from anywhere in the physical world, like buying or selling land.

For instance, someone from the US and another person from India can be on the same virtual plane.

What are AR & VR?

In the metaverse, virtual lives merge with our real lives, and via virtual reality (VR) and augmented reality (AR), we get an almost “real” experience.

Anyone with a smartphone can have access to augmented reality or AR. In AR, you are in real life, which morphs into a colourful virtual world. Here, you can add virtual items like a fairy moving around you or even a pink-coloured virtual desert, which you can see at a distance. AR is basically adding the virtual to a user’s real-life experience.

Meanwhile, virtual reality or VR takes this concept to another level, producing an entirely computer-generated simulation of a virtual world. Here, the difference is that you are part of the virtual world — in contrast to AR, where you are in the real world.

In VR, simulations can create any visual or place that a person can imagine. A user will have to use gadgets such as computers, sensors, headsets and gloves to get into this virtual world.

Land prices in the metaverse

In 2021, the average price of a parcel of virtual land went up 100 per cent or doubled in just six months from July 2021 to December 2021 — from $6,000 to $12,000.

This was across the four main Web 3.0 metaverse platforms, which are different worlds in the virtual space. You can choose to visit one or more of these worlds.

Some important metaverse platforms are:

Decentraland

Decentraland was one of the first platforms to chart a viable proof-of-concept for the metaverse. This resulted in the platform’s market domination. It rolled out its metaverse platform in 2020, and in less than two years, it has become hugely popular.

Decentraland is a virtual reality (VR) platform where people can interact with one another, create content and earn money, mainly through investments, and other digital assets.

HyperVerse

The HyperVerse is one of the top metaverse (virtual) platforms. It comprises a string of planets that are not owned by any single company or person.

It is a cosmos that comprises millions of different universes. Each individual in the HyperVerse is called a Voyager. People here can generate tokens, interact with one another and even explore the world as a group.

The Sandbox

The Sandbox is a blockchain-based game. It is a metaverse platform where investors can buy, sell and trade in virtual land plots.

The Ethereum blockchain is the foundation of Sandbox. The developers of this platform have created their own Ethereum-based token called SAND. SAND tokens permit investors to pay for gas charges on the Ethereum network. This platform is primarily popular for its stability and security.

Nakamoto

By using the Nakamoto token, investors can buy virtual land, construct buildings, and do many other things. It is one of the first metaverses that will be rolling out a real in-game economy. The team behind NAKA tokens has launched the NAKAverse. Here, investors can buy virtual land and construct buildings, among many other things.

Metaverse developer

There is already a metaverse developer, TerraZero. TerraZero claims that it has issued one of the first mortgages in the metaverse.

This is for a $45,000 parcel of ersatz land in the entertainment (virtual) district of Decentraland.

There’s a real estate investment trust (REIT) in the metaverse. For buying property in the metaverse, people have already started taking loans against non-fungible tokens (NFTs).

What are NFTs?

NFTs can neither be replaced nor interchanged because of their unique properties. NFTs are considered digital assets. They are basically Internet collectibles and comprise art, music and games. They come with an authentic certificate created by blockchain tech, like in the case of cryptocurrencies.

NFTs have special features:

Their value is paid by cryptocurrencies. Suppose an NFT’s pricing is $100,000, and if you agree to pay the price, you can buy it from the creator or the holder by paying in cryptos like Bitcoin.

This way, we see that NFTs have value in the metaverse. So, in the immediate future, if you want to take a loan to buy property in the metaverse, you can do so by paying in Bitcoins or other cryptocurrencies or NFTs.

So, NFTs can be used to take loans in the metaverse. Also, they cannot be forged or manipulated.

For instance, Cryptopunks is a well-known NFT. You can buy, sell and store 10,000 collectibles with proof of ownership in the metaverse.

Lending in the metaverse

Owing to prices of properties and other items skyrocketing in the metaverse, this has created a big opportunity for lenders to offer loans to those who want to borrow to buy property or other digital assets in the metaverse.

A metaverse loan may not be given by banks in the immediate future.

But some start-ups in the finance sector or even investors with big bucks could sniff mega opportunities and enter the metaverse loan space.

Or, loan seekers in the metaverse may have to trade deals via blockchain, that is, by using cryptocurrencies or NFTs. Also, cryptocurrencies or NFTs could be used as collateral in the metaverse.

There is a saying that money is not there in the metaverse now but it is there in building it.

Large companies and celebrities are already there in the metaverse and small companies are still figuring out how to enter it.

One big question comes to mind. If virtual plots cost the same as real-world plots, and are so costly, why would people buy land in the metaverse?

The return on investment or RoI is very high in the metaverse. Say, you buy land for $100,000 in the real world. The value may reach $200,000 in, say, five years.

But if you bought that land in the metaverse, in five years, probably its value could touch $10 million.

And, this will create demand in the metaverse and lenders will flock to give you money and hope to make a quick buck.

Some issues before loans are given in the metaverse:

How do you know you are not being scammed? There should be measures in places to ensure transparency.

Also, in the metaverse, the transaction is via cryptocurrencies, which many countries are yet to recognise.

So, what happens in those countries that still prefer a ban on cryptos? How can people invest in cryptos there?

Will governments discourage banks and financial institutions to give loans in the metaverse by keeping NFTs or cryptocurrencies as security?

There has to be a clear definition as to which digital assets would be considered genuine in the metaverse.

Also, what mechanism would be employed to establish ownership of digital assets and what rights would an owner have?

Cryptocurrencies are highly volatile. Their value may plummet in a very short period. So, there is a chance of default. What happens then? Would any warranties come with cryptos?

READ ALSO | What are NFTs and how to secure loans with them

Conclusion

So, in the metaverse, people may be baffled about how to take loans, but maybe in about five years, if this online reality really shapes up, demand for this space will see an unimaginable surge and so will the number of lenders.