The Pattern #4: Of metaverse lending, virtual lands and losing the plot

Mayank Jain   /    Head - Marketing and Content    /    2022-04-01

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Welcome to the new financial year! With the new financial year come ever-increasing fuel prices, costlier cars and a new 30% tax on cryptocurrency related income. If this wasn’t enough, there’s also the Ukraine war, supply chain blocks and a semiconductor shortage plaguing every industry from diagnostic device availability to new mobile phone launches. 

Amid the din of all-around struggle, there are greenshoots albeit virtual ones. The web3 hype-train is unstoppable. In fact, the trains are running so fast that people are buying land - in the metaverse - through loans - provided in crypto currencies. Whoosh!

At a time when retail and business lending are both suffering and credit offtake isn’t exactly healthy across many industries, there’s a surge of people investing in plots of land in the metaverse. These plots can sometimes go upwards of $4 million. To help ease the burden on the buyer(s), there are real companies providing digital loans for metaverse purchases. 

One of those is EasyFi whose COO Anshul Dhir says that the return on the land in metaverse is higher than buying a physical plot. He also compared it to buying a piece of land in Manhattan in the 1940s. Moreover, the company EasyFi is building lending protocols to facilitate decentralized financing of virtual assets without the involvement of any physical bank. 

So why should virtual land composed of bytes and pixels cost more than a physical piece of land that you can see, touch and use to build a fort? Here’s how Mr. Dhir answered that question. 

“Return on investment (ROI) is anytime higher as compared to real world plots. In the metaverse, ROI can go as high as 1000 percent and in a very short time,....Blockchain minimizes any chance of real estate frauds such as forced cancellation, selling without authorisation, fake promises, and even delays in possession.”

Confession: Reading this piece and many others around virtual real estate left me stumped. I couldn’t make head or tail of why would someone buy virtual land at exorbitant prices and pay interest, EMIs and charges all in cryptocurrency. Even the collateral for such loans can be one’s cryptocurrency holdings that can be pledged to the lender. Why, though? 

Realization: Trying to make sense of the metaverse, web3 and DeFi movement is a bit like trying to predict the cost of onions 50 years down the road. Any reasonable attempt at coming up with an answer can be blunt-forced by ‘zombie apocalypse’ and thus rendered meaningless. This isn’t to say that these ideas, solutions, and companies are purely hype-driven, but rather, there’s a certain amount of creative imagination at play that’s difficult to decipher - especially for outsiders. 

This leaves us with the question of why are people buying land in a virtual world when most of us don’t even understand it? 

Two things: 

  1. There’s a likelihood that the number of web3 startups and solutions would currently outnumber the inhabitants/consumers of that world. This means that a lot of these products and solutions are not only being produced and consumed by the early-adopters but also being built for a certain set of people who will eventually be the beneficiaries of the gold rush, if and when that happens. Exhibit A: Bitcoin, the flag-bearer of decentralized finance, is so overwhelmingly concentrated in the hands of a few that less than 4% of currency users hold more than 97% of the total supply. 

  2. The era of outsized positive returns is now waning. We’ve seen interest rates turn negative, yield curves go upside down and all financial assets taking turns crashing. This environment leaves very little opportunity for large investors of any reasonable scale to make money.  As a result, VC funds are bigger than ever - hunting for that one big bet. The bet need not come from the real world either. As a result, web3 startups are raising outsized amounts from investors. Meanwhile, the builders of the web3 infrastructure are doing everything they can to keep innovating and bring as much of the real world into the virtual domain as possible. Like most infrastructure, the first movers are often the long-term owners. Early bird gets the worm.  So, it’s not surprising that NFTs, crypto tokens and digital real estate have all become instruments of investment and speculation - just like art and exotic wine.

Should you take a cryptocurrency loan to buy virtual land? 

While hype is good and chaos leads to creative innovation and building of ideas and infrastructure that was previously beyond comprehension, it’s perhaps best to hold on to our precious money in these times than chase returns. There aren’t free lunches, at least in the real world. 

Meanwhile, there’s reason to hope that as the web of web3 expands, the companies will focus energies on bringing people aboard the metaverse train. This doesn’t just mean selling NFT tickets, it also means building the necessary ramps and escalators and information centers that make people feel safe during this voyage. 

Big small stories

This was an unusually quiet week for the world of FinTech in India. 

We did see the new Cred ad campaigns come out, Tata announcing its new super app ‘Neu’ and many, many, many April Fools campaigns including Razorpay’s Buy Now Pay Never. 

However, the big news came from the stables of new reports that suggest that Indians are most likely to prefer to use Buy Now Pay Later services. More than 28% of Indian consumers said that they planned to use BNPL for their purchases, according to the data published by the Economic Times. This is higher than 10% in the US and the 17% global average. 

Clearly, BNPL could do for the digital economy what cash on delivery once did for e-commerce. My colleague Shamolie wrote this piece explaining how embedding BNPL helps improve customer retention, the holy grail in the world of commerce. 

Moreover, there are also murmurs that HDFC Bank is building its own BNPL strategy to bring new customers into its fold and also improve its offerings in the small-ticket and short tenured credit. 

“We see BNPL as two things – it’s an area where people will look at small tickets, small tenure loans as a means to getting on to the lending bandwagon….We give them a short tenure loan, a small ticket size loan. We observe their behavior and then upgrade them to say a credit card later,” said Parag Rao, Group Head – Payments, Consumer Finance, Digital Banking and IT at HDFC Bank.

If you are wondering why the country’s biggest bank is jumping on to the bandwagon, do read this piece by my colleague Anna who wrote this brilliant article describing how the rise of banking-as-a-service products such as BNPL is a fire alarm, not the actual fire. Banks would do well to not step aside and give a walkover to new-age challengers. Read the piece here

One last thing that stood out to me was this data published by MoneyControl around the funding trends in the Indian startup ecosystem. While Bengaluru residents will be relieved to know that the city maintained its top spot as the hub of most funding announcements, it was interesting to see that the highest number of deals happened in the B2B space.

To be specific, the B2B software space saw a whopping 77 deals in Q1 2022, more than any other sector. This points to the increasing traction and investor interest in SaaS, BaaS and PaaS models. In fact, my colleague Aparna went so far as to predict that even the B2B marketplaces are in for a SaaSy future. You can read more about it here.

Meanwhile in central banking: Four years ago, RBI had asked banks to replace existing cash cassettes in the ATMs. This was being done to install new lockable cassettes that cannot be tampered with while the cash is in transit. Three years later, the banks missed the deadline and got it extended to March 2022. And they missed the deadline yet again and now we’ll have to wait till March next year to see if those new cassettes actually make it to the ATM. 

That’s all for this week. Plugging some interesting stuff I came across for you to catch up on. 

Reading list

  1. RBI insisting on geo-tagging of payment terminals to deepen financial inclusion. Read it here

  2. The long, twisted history of your credit scores. Read it here.

  3. India Inc has a zombie problem. Read it here

  4. Changes in the new financial year for taxes and rebates. 

  5. Apple and its FinTech strategy is one worth watching out for. Read about it here

Fin.

See you next week. 

Cheers, Mayank