Lending in the Metaverse: What Does the Future Hold?

Woman using virtual reality goggles.

If you’re wondering how alternative lending fits within the metaverse, you’ve come to the right place.

Although it might still seem science fiction, big players in finance and tech are finally waking up to realize the potential of financial services in the metaverse. In fact, JPMorgan became the first bank to enter the metaverse in February 2022, investing in a lounge in the Decentraland metaverse.

In this article, we’ll get into what lending in the metaverse means for SME lenders: the opportunities, the challenges, the risks, and what the future has in store for the industry.

What Is the Metaverse?

Broadly speaking, the metaverse is a collection of virtual and augmented reality spaces, where people—digitized by avatars—live, work, shop, game, and interact with others. With a simple PC or mobile device, anyone can access the metaverse.

More importantly for financial institutions, the metaverse is a digital economy. As the metaverse develops, banks and lenders will find more and more opportunities within its domain.

Bearish estimates suggest the metaverse will be an $800 billion market opportunity by 2024, while bullish estimates have it reaching beyond $12.5 trillion.

To understand the potential for SME alternative lending in the metaverse, let’s first clarify the underlying concepts of Web 3.0 and decentralization.

What Is Web 3.0?

web 3.0 icons

Web 3.0, the third generation of the internet, is a decentralized online ecosystem. This means that web applications are developed and owned by users themselves, rather than by centralized platforms such as social media companies, search engines, or large financial institutions.

Blockchain-based technologies are at the core of Web 3.0, strongly backed by machine learning (ML) and artificial intelligence (AI), as smarter, more adaptive applications are being developed.

Just as social networks rule interactions in Web 2.0, the metaverse is where everything happens in Web 3.0. And with no central entity that intervenes, transactions within the metaverse are truly peer-to-peer (P2P).

This has a range of benefits, including:

  • Financial Efficiency: no intermediary third party intervenes.
  • Unrestricted Transactions: no regulations to limit transaction type or volume.
  • Increased Fraud Prevention: an extensive network of computers verifies every transaction. 

The biggest financial institutions see merit in this technology, and some have already taken the plunge. J.P. Morgan has invested in a piece of Decentraland, while HSBC has purchased digital land in the 2D mobile game, Sandbox.

Sandbox and Decentraland are the metaverse’s two largest virtual worlds in terms of transaction volume, with $350 million and $110 million in 2021 alone. Moreover, the average price of digital land has grown from $100 per plot to $15,000 between January and December 2021.

As more players enter the metaverse and the transactions continue to grow, so does the need for digital asset financing—this is precisely where alternative lending can capitalize on the metaverse opportunity.

What Does Lending in the Metaverse Currently Look Like?

The metaverse is a rapidly growing space of direct P2P interactions, where users exchange digital assets such as crypto, NFTs, and metaverse real estate.

As it becomes more and more popular, everyone wants to capitalize on the boom. And just like in the “real” world, people in the metaverse will rely on loans to get in on the action. Alternative lending (particularly through alternative asset classes) is a way of accelerating the adoption of and development in the metaverse. 

Metaverse loans are, in essence, still loans. This means that they keep the same elements of “regular” loans, such as collateral, covenants, or amounts, albeit with their Web 3.0 nuances.

Where metaverse loans differ from regular loans is in the practical and legal mechanisms behind enforcing collateral. The lender will need to hold the administrative keys to the digitized asset and design the contracts to reference intangible virtual property.

Again, replicating the “physical” economy, the first and most evident place to start is real estate. Securing a piece of digital land in the metaverse is a sure way of investing in the metaverse. Metaverse mortgages are already very real and profitable.

And where there’s property, there are businesses waiting to emerge. To help them prosper, financial services in the metaverse must rise to the occasion. Here is where SME lenders can start to play the game.

What Does the Future Hold?

The metaverse is already a world where people can interact, shop, and invest. 

It seems familiar enough, but it’s essentially a parallel economy, where transactions are made in cryptocurrency (which is not backed by fiat currency) and other digital assets. 

Obviously, the coming developments in blockchain technologies will play a vital role in the evolution of the metaverse. But, we can be sure that SMEs will always need financing, both in the real world and the metaverse.

As metaverse real estate plants its roots, businesses will begin to bloom. And as vital as alternative lending has proven to be for SMEs in the real world, metaverse loans will also become both common and essential as the metaverse economy grows.

The Role of Digital Assets

bitcoin and nft icons

Digital assets aren’t just a fad—there are very real advantages to operating with them. 

Digital assets are a true reflection of what Web 3.0 and the metaverse stand on: they are exactly what (and how) the new economy needs to work.

To begin with, as they’re transacted on the blockchain, there is no need for an intermediary, which allows for efficient and fast transactions. They’re a decentralized ledger, with no central entity that regulates and limits their value. They’re interoperable, as their function and state do not change when transferred.

Understanding these advantages, companies are already bringing financial services in the metaverse to life: payment rails and digital wallets, just to name a few. And, as previously highlighted, metaverse real estate rules the market— in 2021 alone, the industry saw a 700% increase.

As digital asset transactions become more mainstream, alternative lenders will find opportunities to provide valuable capital to businesses with concrete Web 3.0 strategies.

Potential Risks for Lenders

Although the metaverse and digital assets present multiple opportunities for alternative lenders, these opportunities don’t come without risks. 

We already have examples of crypto projects that did not pan out as planned. Lenders can minimize these risks by conducting extensive research and due diligence before committing to crypto-based lending. However, this is easier said than done, given the novelty of the concept, the volatile nature of the metaverse, and the lack of regulatory oversight.

Even though Web 3.0 and the metaverse have been a sort of Wild West, with no central regulatory body, there might eventually be a marshall in town. For lenders, more regulations can mean (as it always has) more complications, risks, and, ultimately, costs. 

Lastly, digital assets are volatile. While Wall Street is infamous for its ups and downs, it has nothing on the wild volatility of digital assets. As the technology continues to develop, it will have its fair share of successes and failures, bringing the market along for the ride. 

3 Tips for Lenders Looking To Get Started in the Metaverse

Icons of futuristic building, magnifying glass, and handshake

So, how can SME lenders get ready for the coming metaverse boom? Here are three actionable strategies to consider as we wait for metaverse technology to catch up with its potential. 

1. Build a Metaverse Footprint

In metaverse spaces like the aforementioned Sandbox and Decetraland, SME lenders can make a mark by getting involved in metaverse real estate. 

Of course, this means paying for land. But the entry price for establishing your footprint is now much more affordable than it will probably be in the future. Some estimates suggest that the CAGR of digital real estate will be as high as 31.2% over the next six years, compared to the CAGR of traditional global real estate at around 5.2% over the same period.

2. Observe the Competition

Look no further than the largest financial institutions and study their metaverse and Web 3.0 strategies (which are surprisingly aggressive in many cases). The spaces in which they invest are likely to be far less risky, with better-projected growth than other promising, but untested, metaverse spaces.

3. Reach Out for Partnership

The metaverse and its decentralized nature are ripe for partnership opportunities with other businesses that are also looking to capitalize in this new space. SME lenders will find willing businesses and partners eager to expand into this new market of metaverse loans.

Onyx IQ: Future-Proof Your SME Lending Business

If you’re an SME lender, you might be able to capitalize on the metaverse lending market sooner than you think. As more businesses realize the value of digital assets, metaverse transactions will become staples in their financial portfolio.

In many cases, SMEs will require additional capital to transact in the metaverse. With traditional banks likely continuing their stringent credit policies, you can step in to help these SMEs grow and profit.

As the scope of SME lending expands, the underwriting and lending process as a whole will evolve and become more complex. Using automated tools to facilitate the operation of your lending business will not only help you handle a greater volume of applications but also help you navigate a new lending landscape.

Onyx IQ is a dedicated alternative lending platform designed to upgrade your business’ speed, efficiency, and scalability. Check out the Onyx IQ website to learn more, or sign up for a demo!