Metaverse real estate: Are you struggling to understand why so many people are snapping up virtual land? Expert Tatiana Revoredo breaks it down for you.
Many of us sat back and watched as investors snapped up land in the metaverse. Some transactions were completed via auction. Or, the investor bought land at a pre-determined price in virtual worlds like Decentraland and The Sandbox. But why are they buying this virtual land?
The established virtual worlds use the “skeuomorphic” approach to guide the acquisition of digital real estate. Skeuomorphs make something new feel familiar in an effort to speed up understanding and acclimation. They have elements that were used in the original object, but have no purpose in the new system. For example, many new electric cars don’t need a grill on the front of the car to cool down the engine using airflow. But they have ornamental versions of grills anyway, so the car doesn’t look weird.
In this context, just as land in the physical world is scarce, it must also be a scarce resource in virtual worlds.
Virtual land prices (which in 2017 were around $20 each) have had an upward trend over the years, taking a significant leap forward with “the 2021 NFT tsunami.”
Land now sells in the metaverse for between $6,000 and $100,000. It can even sell for $4.3 million. This amount was paid by a virtual real estate development company called The Republic Realm, for a property in The Sandbox.
What led to the explosion of virtual real estate prices?
As we have seen, virtual lands follow the same approach as the real world. They tend to appreciate in value because their supply is limited.
Land at The Sandbox is scarce, with a supply of 166,464 lots available, each 96 x 96m2. The SAND, its native token, soared nearly 14,000% in 2021, trading at $5.15.
Likewise, the Decentraland metaverse, which is governed by an autonomous decentralized organization (DAO), has 90,601 plots of land, but only about 44,000 of them are allocated for private purchases and sales.
Each Decentraland lot is a non-fungible token (NFT) and is 16 x 16m2 in size. The land is quoted in MANA, the platform’s native token. MANA’s price has risen more than 4,300% in 2021, reaching $3.41.
Undoubtedly, the immutability and demonstrable scarcity provided by NFTs contributed to the appreciation of virtual real estate. But the real reason for this explosion in digital land prices in recent months goes beyond that.
What has really impacted the online real estate market? Why has the price of some plots been driven up by 14,000%? It is because virtual worlds will become the metaverse; more specifically, a fully functioning metaverse. This has the potential to fundamentally alter the way people interact with the digital world and transcend it, merging it with the real world.
What drives an investor to pay millions for land that doesn’t exist in the physical world?
In this online space of interconnected 3D worlds, people (using avatars) will be able to socialize, work, shop, play and much more. And, for a real estate investor, owning a well-used space adds value to the investment.
Add to that, a recent Grayscale survey pointed out that in the near future, the estimated turnover in the metaverse will be around $1 trillion. People can generate multiple income streams from their land.
The potential to make money from virtual real estate at this projected level adds value to a virtual land, and leads an investor to pay millions for it. It involves three factors of appreciation: scarcity, utility, and consumption.
Scarcity: Users acquire the virtual land plots, which are limited in quantity (value due to scarcity).
Utility: The limited number of landowners defines how it will be used. Or, if it will only be a mere investment (valuation for utility/valuation for scarcity).
Consumption: The third factor is related to how users of virtual worlds will consume content created by landowners (valuation through consumption).
Metaverse real estate: What should an investor evaluate before buying?
Remember that virtual worlds follow the skeuomorphic approach, mirroring the physical world.
In the same way, an investor in the virtual real estate market uses all the traditional metrics that they would use in the real world. These include the location, the possible traffic that a certain virtual street will have, the social media announcements of the projects that will be developed in the virtual worlds, and anything they think can generate some income.
For example, a plot of virtual land might have an owner who has not yet worked out what they want to create on the land. This land will certainly be of less value to an investor than a land located on Decentraland’s Fashion Street, intended for holding fashion shows with luxury brands such as Louis Vuitton, Gucci and Burberry.
Ergo, both virtual land and real land have the same big question – who are your neighbors and what are they doing?
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