It is slightly ironic that the bank whose CEO made so many derisory remarks about cryptocurrencies should be the first to stake its place in the Metaverse. I am of course talking about America’s largest bank, JP Morgan and its CEO Jamie Dimon. Yet here we are: JP Morgan has opened a lounge called Onyx in Decentraland, a virtual world based on blockchain technology. By the way, Onyx lounge refers to the bank’s suite of permissioned Ethereum-based services.
At the same time as making this announcement, it released a paper titled Opportunities in the Metaverse, which it claims will help businesses “navigate the hype vs. reality.” It is certainly worth a read, and makes clear for many the differences between Web 2.0 and Web 3.0. If you ever need to explain the difference, the table on page 4 is the equivalent of exam pass notes and will save you hours of trying to come up with your own answers.
Clients are interested
Christine Moy, JPMorgan’s head of crypto and the metaverse told Coindesk, “”There is a lot of client interest to learn more about the metaverse. We put together our white paper to help clients cut through the noise and highlight what the current reality is, and what needs to be built next in technology, commercial infrastructure, privacy/identity and workforce, in order to maximize the full potential of our lives in the metaverse.”
As the JP Morgan paper points out, Decentraland is attracting big brand names. Samsung opened a ‘metaverse’’ version of its New York store there, and Barbados set up a metaverse embassy as well. Much of this activity is thanks to the acceleration of interest in non-fungible tokens (NFTs), as well what is described as “a breathless advance into the metaverse, a catch-all for immersive gaming, world-building and entertainment, fueled by integrated commerce applications.”
Metanomics, or the economics of the Metaverse, are firmly in JP Morgan’s sights. Its paper points out that the average price of a parcel of virtual land doubled in the latter half of 2021, jumping from $6,000 in June to $12,000 by December across the four main Web 3 metaverse sites: Decentraland, The Sandbox, Somnium Space and Cryptovoxels. It added, “In time, the virtual real estate market could start seeing services much like in the physical world, including credit, mortgages and rental agreements.” Furthermore, JPM believes that DeFi collateral management could well come into play, and that this could be done by decentralized autonomous organizations (DAO), rather than traditional finance companies.
Money to be made
JPM sees the Metaverse as a money maker. There will be entertainment, virtual fashion designers (Nike has shoes covered for now) and there is going to be a massive amount of advertising spend, with the bank citing a prediction that in-game ad spending is set to reach $18.41 billion by 2027.
Of course, as the title of the paper suggests, JPM wants to avoid the hype and be clear about the reality. So, it does have criticisms of the Metaverse in its current form. For example, it says the overall user experience and performance of avatars, as well as commercial infrastructure need improvement.
And why is JP Morgan well placed to offer advice about the Metaverse? The report makes the case, saying, “We believe the existing virtual gaming landscape (each virtual world with its own population, GDP, in-game currency and digital assets) has elements that parallel the existing global economy. This is where our long-standing core competencies in cross-border payments, foreign exchange, financial assets creation, trading and safekeeping, in addition to our at-scale consumer foothold, can play a major role in the metaverse.”
A DAO (Decentralized Autonomous Organization) is defined as an organization represented by rules encoded as a transparent computer program, controlled by the organization’s members, and not influenced by a central government, or any other centralised entity. As the rules are embedded into the code, no managers are needed, thus removing any bureaucracy or hierarchy hurdles.
In more basic terms, a DAO is also a way of organizing people globally into a movement, without their knowing each other, establishing your own rules, and making your own decisions autonomously, with all of that encoded on a blockchain.
Blockchain enables automated trusted transactions and value exchanges, but even so, internet users around the world want to organize themselves in a “Safe and effective way to work with like-minded folks, around the globe”, according to Ethereum.
Bitcoin is the original DAO
Bitcoin is the first example of a DAO. It has programmed rules, functions autonomously, and is coordinated through a consensual protocol. But it is the growth in DeFi protocols that have really shone a light on DAOs again.
Smart contracts are essential
For example, with a DAO, financial transactions and rules are recorded on a blockchain using smart contracts, thus eliminating any need for third party involvement in the transaction. The smart contract is very important because it represents the rules of the organization, and is where all information is stored. No one can edit the rules without people noticing, because DAOs are transparent and public. A DAO, unlike the current way in which we form companies by registering them and giving them legal status, needs none of that. A DAO can be structured as a general partnership.
According to Cathy Hackl at Forbes: “DAOs envision a collective organization owned and managed by its members with all of them having a voice. Many analysts and industry insiders affirm that this type of organization is coming to prominence, even potentially replacing some traditional companies.”
What DAOs are used for
So far DAOs are being used for many purposes such as investment, charity, fundraising, borrowing, or buying NFTs, all without intermediaries. For example, 3LAU is a DAO organization in the Metaverse that provides fractional ownership of NFTs, including songs. While DAOs are not exactly mainstream yet, they do seem to be picking up steam with many creators, and large brands and businesses need to keep an eye on them.
This month, prominent DeFi projects have shown a strong recovery after January’s slump. According to Coingecko,, “The combined capitalization of DeFi tokens sits at $121B, having bounced 16.7% since posing a local low of $103.7B on 3rd February.”
As an example, Terra (LUNA) has jumped 7% in the last week, and is the sector’s top token with a market cap of $23.5B. Furthermore, the sector’s combined TVL is up 11.5% since February began according to DeFi Llama, and is currently at $221B.
Despite this, Ethereum’s network activity is slower. The Defiant says, “The weekly burn rate dropped to roughly 7 ETH every minute from 8.34 ETH, and is down nearly 42% in the past month. OpenSea, a favoured NFT marketplace, was the largest source of burnt ETH, with 12,384 ETH wiped from circulation so far in February.
Analysts predict excellent year for DeFi
Some analysts are predicting that DeFi will take centre stage in the crypto world this year. And, according to Gunnar Jaerv, the COO of digital asset services firm First Digital Trust, traditional financial institutions will drive growth for DeFi this year. Jaerv observed that the sector has matured, providing the basis for a strong appetite for it. He also added his own explanation for that: “If you look at what’s happening around up today. It’s actually largely commercial. It’s Enterprise.”
A Consensys report published on 1st February also noted that the total number of unique DeFi addresses had produced steady growth amid the market downturn. It commented that the data was “a worthy pulse on the overall health of the DeFi ecosystem, suggesting price action would begin to recover should unique addresses continue to grow.”
A few days earlier, Huobi published a report offering a view on the idea that institutions will drive DeFi growth. It predicts institutions will converge on protocols offering under-collateralized lending solutions. Huobi also anticipates the recent growth in the low-cost Layer 1 and cross-chain dapps will accelerate during 2022.
Some analysts see challenges
Those who think DeFi will face challenges this year include JP Morgan. A report published 3rd February predicts DeFi will soon face a regulatory reckoning. It says: “the governance tokens of leading protocols including Uniswap, Synthetic, and Compound constitute unregulated “pseudo-equities” that “provide token holders with claims on future cash flows generated on DeFi protocols.” Michael Cembalest — JP Morgan’s chairman of market and investment strategy commented, “These are not registered as securities even though they sure act like them.”
As ever, it’s a question of whom to believe.