I Don't Know...Why People Are Buying Digital Land
More than meets the eye
A recent CNBC headline caught my eye: “Metaverse real estate sales top $500m and are projected to double this year”.
Despite being engaged and fascinated by the world of NFTs and crypto, digital real estate has so far been a step I haven’t taken, a rabbit hole that I haven’t yet gone down.
As I read the article, a couple of things stood out and didn’t feel quite right. Firstly, the article suggested that a boom was sparked by Facebook’s rebrand to Meta. Secondly, the article was almost solely focused on the financial speculation and investment side of digital real estate.
Having spent some time exploring ‘web3’ over the last few months, I knew that there would be more to it than is at the core of the article and the media coverage.
To explore this further, I spoke to Luke (@metaverski) who works full-time in this space and runs his own consultancy advising companies on their transition to web3 and the metaverse. After our conversation, it became even clearer that digital real estate and virtual worlds are about so much more than financial speculation and Facebook.
To address the obvious, of course there is a financial angle to the movement and the numbers speak for themselves. The CNBC article focused on the ‘Big4’ metaverse platforms – Sandbox, Decentraland, Cryptovoxels and Somnium – and there is little doubt that investors are seeing potentially outsized returns when buying virtual land. Republic Realm paid $4.3m for land in Sandbox and are clearly confident that it will prove to be a savvy investment in the long-term.
There has been somewhat of a land rush in these 4 worlds and investors who get into the right ones early will win big. Many are already priced out, with the smallest and cheapest available plots of land in Sandbox and Decentraland already going for more than $10,000.
(If you want to see what these worlds look like before reading further, I suggest going to Decentraland’s homepage and having a look around - https://decentraland.org/)
My first question for Luke was centred around understanding how this demand has come about. What is it about these virtual worlds that make people want to spend time there in the first place? Luke’s explanation made this click in a way that hadn’t before. We discussed games we had played in the past and agreed that spending time in virtual worlds wasn’t, in fact, a new thing. I’d spent enough time as a teenager playing PlayStation games with large maps (such as Grand Theft Auto) to know that it’s easy to enjoy spending time in worlds that exist only online.
Perhaps even more obviously, Luke and I didn’t meet in person. We met virtually, over zoom, as most meetings have been over the last couple of years. Gaming, working and socialising has been almost entirely virtual over the last two years, so it should come as no surprise that these worlds are emerging, and that people are spending more time in them.
Luke explained the combination of “FinTech, consumer, gaming and social” being at the core of these virtual worlds. “They’re really just 3D websites” he explained. “In the future, we’ll spend less time on 2D websites like we do today…virtual worlds will not only give places for us to socialise, but also give a place for creators to share content, host events and provide a much more immersive virtual experience than they can today”. Technology is improving to such an extent that these 3D worlds can provide a much richer online experience than the websites that we associate with our traditional view of the internet, and the experiences are only going to improve over time.
I was starting to get my head around what attracts people to spending time in these virtual worlds, and realised that I had done it for hours on end myself. Although they don’t look or feel the same, the time I spent on Facebook, Call of Duty and MSN Messenger fulfilled the same purpose as the virtual worlds are doing now.
This also began to help me understand why people would buy digital land. If you consider these virtual worlds as 3D websites, and your plot as a piece you own, it makes sense why they might be worth the investment, both for investors and for someone that plans to spend time there.
Not only does land ownership give you an asset that may be worth more in the future, but it also gives the owner voting rights on decisions made affecting the world. At the time of writing there are 763 proposals being voted on at governance.decentraland.org, from whether certain spots should be added to the map as ‘places of interest’ to whether your avatar should be allowed to get a tattoo. Thinking back to some of the games I played, or websites I spent time on, voting on or proposing changes would certainly be something that would have been interesting and welcomed.
Just as owning real land does, owning virtual land also opens opportunities for passive income. This could be as simple as renting out the land that you own or giving space to the many brands who are looking for advertising opportunities. Independent creators are also set to benefit from the most welcoming virtual worlds, where they can sell their goods in virtual shops, or DJ at virtual parties.
Most of these factors, from governance to passive income, back to the actual ownership of digital goods, all stem from foundations enabled by web3 technology. Without a basic grasp of what this is unlocking, some of this can be difficult to comprehend. Understanding the promise of web3 also explains why this is all a lot bigger than Facebook.
Web3 refers to the 3rd iteration of the internet, based on blockchain technology. The most significant differentiator is that it adds a layer of ‘ownership’ to how we currently think about and use the internet. Whilst there are already lots of different definitions and explanations of what web3 actually is, the neatest summary I have seen is:
Web1 – Read
Web2 – Read, Write
Web3 – Read, Write, Own
The technology behind cryptocurrencies has made owning digital goods possible and valuable, in the form of NFTs. Land in Decentraland for example is broken up into a finite number of plots and sold as NFTs, where the ownership of the land NFT then unlocks these possibilities. Additionally, most of these virtual worlds have their own virtual currency, which have real world value on secondary marketplaces. SAND, the currency of Sandbox, currently has a market capitalisation of over $4.5bn. This means that money earned in the virtual world can also support an individual user’s real-life needs.
Another key promise of web3 is decentralisation. With typical web2 companies such as Twitter or Facebook, the power and decision making is centralised and controlled by the company itself. If Twitter decides to de-platform someone because they disagree with what they are saying, or Facebook decides to allow certain types of media, there is nothing stopping them from doing so. Even laws and regulation have been slow to catch up with the fast-paced rise of social media.
Web3 protocols such as Decentraland employ a decentralised governance model, with landowners and users voting to make decisions instead of them being made by any central authority. Luke summarised the power of this perfectly, “with web2 companies, we’re asking them not to be evil. With web3, they can’t be evil.”
With no central entity making decisions aligned to their own interests (which are often financial), new economic models can also be developed. Whilst it is still unclear what business models will emerge from web3, without a centralised entity taking a cut of the profits independent creators are set to gain. If these digital worlds continue to emerge and develop with a core concept of decentralisation, the days of YouTube taking 45% of advertising revenue generated by a video should be threatened.
The initial CNBC article heavily referenced the importance of Facebook switching to Meta and how it triggered a virtual land boom for investors. I do believe Facebook/Meta will play a role in the future of these virtual worlds, but perhaps not in the way that is obvious.
If the promises of web3 and decentralisation are realised, it is clear that centralised companies who are competing in this space must up their game. Consumers in an online world are going to be afforded greater choice in where they spend their time and will only do so where they are treated fairly and can be properly rewarded for their time and creativity.
Web3 is about the rise of the creator economy, with decentralisation promising to put the power (and the profits) back into the hands of the individual creator. Spending time in any virtual world that emerges is only worth doing if the people you want to spend time with are there and you can do things that reward you. When it comes to real world real estate, it’s difficult to imagine more being created, but with ever improving technology, creating more and more digital worlds is inevitable, providing greater choice.
The article spoke - correctly - about the risks of investing in digital land. For me, the risk isn’t about whether this is a fad. It seems inevitable that the demand for virtual worlds and real estate is only going to increase as the experience improves and we all continue to spend more time online. The risk here for investors is in looking at this as nothing but a cash grab and not considering what the users of these worlds are looking for. By ignoring the users and the direction of the wider eco-system, alienating users and forcing them elsewhere, investments could quickly become worthless. But buying into the right environment and keeping your goals aligned with that of the wider community, might mean you have bought a piece of the next YouTube or Amazon and be part of a platform that gives birth to the next generation of empowered creatives.