Metaverse Lands: What gives Them Any Value?
The Similarities and Differences Between Web 2 Lands and Web 3 Lands
Disclaimer: The views and opinions expressed in this article are entirely personal and by no means represent views or positions of any entity, and all references in this article are fabricated thus it has zero academic value, so please read this only for your amusement.
0. Introduction
Metaverse lands have always been an elephant in the room for both non-crypto and NFT investors as the former hardly could recognize the existence of a paradoxical nomenclature “virtual real estates,” and the latter, although they already conceded to the concept, are growing dubious about them paying $10K for virtual lands.
Famous Web 3 virtual world projects such as Decentraland and SANDBOX successfully distributed their lands to the public, driving the aggregate trading volume of 300K $ETH which roughly equate to 1B USD, or a quarter amount of S&P500 daily trading volume.
Why would investors put their monthly salaries onto something so intangible, and what drove them to believe the existence of substantial value in such nonexistence? Are metaverse lands be newer, novel forms of the Ponzi scheme brewed from the crypto bubble?
Before we delve into the topic, we must first understand what ‘real’ lands are. We may define real lands in various terms — we may describe in legal terms of metes and bounds, we might characterize them by jargons of immobility and indestructibility, or we could appraise them in an account sense of tangible fixed asset and non-depreciable nature.
However, let us cut all the taxonomy; lands are on which all activities of human lives take place. We grow crops on lands, host commerce on lands, and sleep on lands. We might build skyscrapers for purely aesthetic purposes, but where do we build them on? On lands. We might draw few white lines and hop over them with balls to play basketball, on material ‘real’ lands.
All human activities, let them be economic or amusing, are based on lands, thus lands are as valuable as the activities executed on them, which explains why a residential land in Times Square is priced at much higher value than a land of the same size in Marne. People do more activities in Times Square. Without lands, there is no life.
Now we know why the physical lands are valuable, but why the ‘virtual’ lands? We do not grow crops on virtual lands, so there is no necessity in lands for productive business. Although we plant seeds in Stardew Valley, we do not grow crops on those lands — Stardew Valley crops are inedible. Under the realization of non-productiveness, we fall into the impression that metaverse lands are indeed an overhyped pump-and-dump scheme native to Web 3 industry, needless to say lacking any value whatsoever and everyone buying metaverse lands are passing the bomb.
Nonetheless, digital lands as NFTs might be new, the very concept of digital lands was already prevalent in the Web 2 gaming industry as well. Not all great MMORPGs embraced the idea, but still many MMORPGs introduced some sort of ‘lands’ or ‘housings’ to their players: Ultima Online was the first among them. Sometimes, the land itself became a core part of the gameplay as in World of Warcraft: Warlords of Draenor.
We will first look into digital lands in Web 2 gaming projects, then investigate Web 3 metaverses afterwards, and see why people saw any value in digital lands.
1. Digital Lands in Web 2
Even before the advent of NFTs, people still bought and traded virtual lands on the Internet. Of course, there were no formal markets made for Web 2 virtual lands, so most of the trades were OTC; the primary purpose of the virtual lands were not aimed at, as anyone would have guessed it, productivity.
1. Ultima Online
Date back to 1997, Ultima Online (UO) broke into the gaming industry. UO was a fantasy-themed MMORPG which hosted several thousands people could interact; indeed, UO was partially a social experiment rather than fully a game.
UO also implemented the primitive idea of housings in MMORPGs: A nice-to-have feature with numerous decorative and customizable options, which acts as an effective gold sink. Though for UO, it was a one-time gold sink.
UO had split its servers into “shards,” and the most populated shard was the Atlantic Shard. Houses in UO were simply locations on the world map, so were naturally scarce as newer players could not usurp the preoccupant dwellers.
Despite such scarcity, there was ample ground for everyone to own a house — just not anywhere. When players are outright buying a fully constructed house, they would have to pay perhaps few million Golds in most shards, but once they enter the most populated, the most active Atlantic Shard, players need to spend two-digit Platinums = few billion Golds to acquire an adequate housing, and even with such amount of money, they can only buy a medium-sized house because there are not simply enough rooms for large houses.
Playing in Atlantic Shard does give some advantages to other shards: Easy accesses to shopping areas and much higher chances of joining guilds. However, unlike the real world, housing itself is not a necessity in the UO universe. Housings are merely places to socialize with friendly players, but for that people agreed to spend hundred times more Gold than other shards just to be given an opportunity to invite virtual friends over.
2. Final Fantasy XIV
Final Fantasy XIV (FFXIV) is an MMORPG of Square Enix with a standard, cliche fantasy setup, but at its finest. FFXIV is another prime example of location-induced land scarcity in a digital world — all houses are visitable spots on the world map, thus naturally as the housing occupants grow, there are less available lands to build houses on.
Housings in FFXIV unlocks some nice utilities not limited to: Votes, mounts, guilds, and teleports, which should imbue the lands with intrinsic values related to the actual gameplay. Though there is one simple matter that troubles the entirety of land value — those benefits are not exclusive to owning houses. In fact, players can do the exact same actions by joining guilds founded by other players. Moreover, there are ample lands for everyone to grab a house, so there is no scarcity issue induced by artificial distance, as teleports are not time-consuming. Thus, barely no difference exists between having a house in the urban or in the suburban area.
Nonetheless, lands (houses) in FFXIV are traded in a range of free and few bucks depending on location. Why so? Because housings in FFXIV are not for actual use cases as in a real life, but instead are means of self-expression and aesthetic swagger, and these seemingly useless features drive the land value in this fantasy world.
3. Runescape
Runescape’s player-owned house (POH) is the core sink for the world of Gielinor, as although anyone could own a house anywhere, she is charged fees for moving houses around, and it requires lots, lots of money to completely decorate a house with rooms and furnishings.
Again, houses give accesses to teleports and storage services, which are not exclusive to house owners, so lesser value here. The main reason driving players to construct and furnish houses is House Party, which is simply a party that a player can hold at her POH. In terms of leveling efficiency, houses are useless; yet, players decided to spend the majority of their in-game earnings on their houses for the sole intention of socializing.
4. Lost Ark & Black Desert
Lost Ark and Black Desert are also very popular MMORPGs that has land (house) systems, and are pushed into the same category since both have untradable houses with unlimited supply. Players may pay for furnitures in their houses, but not for the houses themselves.
These two games are yet another examples of aesthetic purpose-only houses.
5. Web 2 Lands Summary
Web 2 lands are not necessary for core gameplay, they are usually made for sidequests and artistic satisfaction. Still, people spend time and money to get their houses on digital worlds, even though the houses provide absolutely no utility and people do not “own” them. A mere sense of ownership and a place to socialize with digital friends were enough reasons for people to spend.
One characteristic that stands out in most Web 2 lands is “multidimensionality.” Web 2 lands does not behave like physical lands: There could be multiple lands on the exact same location. Peter and Sally could be at the same coordinate in the world map, and would witness different houses. In Web 3 lands, such multidimensionality is mostly gone, and Web 3 games began to adopt unidimensionality — or one land at one location — more like the actual world.
2. Digital Lands in Web 3
Lands in Web 3 usually are not called digital lands, but instead are called metaverse lands. But cut the glossary, it is of no importance. Metaverse lands in Web 3 are primarily driven by projects selling “parcels of lands” on their Cartesian “world map,” which means land scarcity is driven by proximity and unidimensionality, as opposed to many Web 2 games that had multidimensional housing features.
Another core difference between Web 2 and Web 3 lands is that, Web 3 lands usually play a much more crucial role in the actual gameplay; lands themselves give accesses to restricted game features (SANDBOX Creators), or sometimes lands are fundamentally required to play the game (League of Kingdoms P2E Game Mode).
1. SANDBOX
As the name explicitly suggests, SANDBOX is a sandbox-style game on the Ethereum network, now migrating to the Polygon network. SANDBOX players are largely divided into two categories: Creators and Players. Creators purchase LANDs and may freely build games and exhibitions on them as Minecrafters do, and Players travel through different LANDs, navigating stories and experiences provided by Creators. A parcel of LAND accompanies social utilities as it does in Web 2, but in Web 3, it also gives some economic benefits since as more people interact with LAND X, the owner of LAND X earns revenue in $SAND.
LANDs exist on a Cartesian plane, so naturally they are scarce, and every parcel of LAND has a big brand attached to it as “Partners,” making LANDs’ scarcity to scale with the brand recognition and the spatial proximity to the Partner brands. Why? Bigger brands has a larger foot traffic, LANDs closer to bigger brands are more likely to share those visitors, and more visitors equate more revenue generation for LANDowners. Seems quite familiar, as the LAND economy mimics the real world economy.
Now, why introduce such an artificial scarcity? By applying multidimensional lands, wouldn’t there be much more Creators and thus much more UGCs? Uploading UGCs on Youtube is available for everyone with near infinity, and everyone is having fun with Youtube. But there is one scarce resource in Youtube: Home screen slots.
In this perspective, SANDBOX LANDs are somewhat similar to advertising spots on Youtube Home screen — only so much can be displayed on that screen, so even though it is possible to stack much information in there, consumers’ attention would be severely deteriorated after a few glance. If we look at SANDBOX LANDs as a huge digital billboard, then we naturally can understand its value if more people come to play SANDBOX. And such value is only achievable with scarce resources, so think of the seemingly unnecessary artificial scarcity as the incentive to drive in better Creators.
2. Decentraland
Decentraland is very similar to SANDBOX in its concept, but it is more decentralized in its governance, and its land pricing is consistent at 1,000 $MANA regardless of location. Not much to say here, not because Decentraland is in any way inferior to SANDBOX, but because two games are developed on the same thesis, speaking of Decentraland’s economy would be simply tautological.
3. League of Kingdoms
Now, Web 3 games utilize digital lands in two ways, one is the aforementioned sandbox-style building ground, another is an in-game item to unlock a new game mode. League of Kingdoms (LoK) is a free-to-play mobile MMO strategy game, with its uniqueness in the P2E feature which users can activate by purchasing LoK lands.
Lands are displayed in Land Portal, and each land has Dev Points, which dictate the amount of resources earned, and players may monetize the resources through NFT marketplaces. Naturally lands with higher Dev Points are more profitable, and if land X is adjacent to land Y with high Dev Points, land X can enjoy trickle down effects. In short, location matters.
Though not productive of any physiological necessities, LoK lands, with limited supply and economic incentives, possess intrinsic values as long as people pay to catch fun in the game.
4. Web 3 Lands Summary
As NFTs arrived to give Internet the actual ownership, Web 3 lands naturally came to play much more crucial roles in gameplay. Lands acts as exclusive passes to core gameplay, rather than mere cool looks.
Another thing that differentiates Web 3 lands to Web 2 lands is the economic incentive in owning lands. As lands become more valuable as more people flood in, landowners are economically incentivized to provide better contents to enjoy a larger foot traffic, which would hopefully result in a virtuous cycle.
3. Physical lands vs Digital Lands
W e need physical lands for basic survival activities. Physical lands form the basis for food, commerce, and shelter. In this sense, digital lands do not make any sense as they neither produce food nor provide shelters. Digital lands are rather luxury goods, not in the strictly economic sense of price elasticity but rather in the common sense of a last priority, as digital lands come handy only after all basic necessities have been satisfied through physical lands.
What gives digital lands value? Regardless of Web 2 or Web 3, people have already spent money on digital lands. Thus it is not NFTs nor trustless ownership that gives digital lands value — people bought digital lands even before they could claim any verifiable ownership!
The common utilities digital lands provide are: Social gatherings and showcasing aesthetic pleasure, which pertain to rather higher hierarchy of needs. As the metaverse experience becomes more immersive, the willingness-to-pay for digital lands increase exponentially — we can easily hear of how kids nowadays meet up at Fortnite instead of at a store. If gatherings at digital worlds become the norm, it would not be unlikely to witness paying thousands of dollars to advertise on a digital land on which millions of people would pass by. When there is revenue, than there is value. Digital lands are valuable.
Of course, such metaverse could happen in Web 2 as well, as what we only need is an immersive experience which achievable with superior graphic cards and well-thought fun gameplays rather than trustless blockchains. Nonetheless, if digital land X is valued at $1M, Sally would not want to put her entire net worth in the hands of an uninsured game studio which could go bankrupt, or could easily expropriate her land with a few lines of code. Here blockchain technology comes into play, as Web 3 makes Internet of Value. Storing her valuable land X in the blockchain, although there is no guarantee of retaining the land’s dollar value, there is guarantee of Sally claiming her ownership to her land permanently.
Web 3 lands tend to trade at much higher premium to Web 2 lands because they have certain characteristics which their counterparts do not. Web 2 lands are only meant for private, small-sized gatherings without economies of scale. Web 3 lands, on the other hand, are headed for a much larger audience — a larger human network resulting in an exponential increase of network effects.
Also, Web 3 spirit advocates value sharing. Sally is willing to pay $100 for a plot of digital land X, on which she would build a beautiful cottage. Her house became so popular that hundreds of people would regularly pay visits to land X only to examine her cottage. Commercial activities derived from her cottage earned $500, and $250 is passed onto Sally — value sharing. Had she built the house in Web 2, then she simply paid $100 for her fun experience. In Web 3, if she knows that she would earn $250 from her initial investment, then she would feel comfortable paying $350 for the land even her original enjoyment was only worth $100.
In the end, the word “land” reminds of a productive asset, thus people are inclined to think digital lands are a scam, as they are innately unproductive. Nonetheless, as more people are onboarded to metaverse, the value of digital lands must grow in tandem with the network effect.
We all know entities would spend thousands of dollars for a 5-second advertisement in Youtube. The same psychology applies to digital lands, as they are just modified versions of Internet advertisements. People come because it is fun. Money come because people are here.
4. References
- https://www.gamedeveloper.com/design/land-value-tax-in-online-games-and-virtual-worlds-a-how-to-guide
- https://www.egirlcapital.com/writings/121401201
- https://a16zcrypto.com/metaverse-real-estate-digital-land-value-to-users/
- https://forum.uo.com/discussion/8339/the-high-price-of-living-on-the-atlantic-shard
- https://www.pcgamesn.com/final-fantasy-xiv-a-realm-reborn/ffxiv-housing-prices-locations-types
- https://latestgamestories.com/2022/01/07/big-houses-in-final-fantasy-xiv-sell-for-more-money-than-a-ps5/
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1655084
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