5 Unanswered Questions About Virtual Real Estate
Food for Thought and Guidance for Researchers
I’ve been writing daily about virtual real estate (“VRE”) for months now. It’s been fascinating to watch it emerge and begin to evolve. A lot of development has happened, but some very important, basic questions remain. I have written about all of them to varying degrees, and I gathered them here to try to bring them into starker relief for the community. I hope that presenting them in this fashion will inspire someone to work towards finding answers, or at least spark some discussion. Let’s dive in and look at the first.
#1: “How much are plots of virtual real estate being leased for?”
Anyone who reads my work regularly is aware that this is something that I have been harping on for a while. We know that parcels are being rented on platforms like EnterDAO’s “Landworks” and in individual transactions, but we don’t know how many or for how much. I’ve heard anecdotes from a few landowners of getting about a hundred or two per month from their tenants, which is pretty amazing. But, anecdotes are not a good basis for making investment decisions.
What we really need is comprehensive data. Specifically, it would be good to know what percent of listed parcels get leased and how much they tend to lease for. If what I’ve heard from my tiny handful of sources is typical, it suggests there could be a very nice return on investment for virtual landlords.
I hope that’s the case, but my suspicion is that not much money is being made leasing virtual real estate. The reason I say this is simply that nobody is out there trumpeting their success. It seems to me that, if users were earning a great deal through Landworks, the people at EnterDAO would surely want to make sure the community knew it. Similarly, if a brokerage or VRE company were helping owners make excellent returns, they too would be advertising that fact. Because things are so silent, I presume the results have been mostly lackluster, but it would be good to have actual figures.
I also believe having this rental information would ultimately help to stabilize prices somewhere. Investors considering buying land to lease would have to compare the return they could get from VRE to the return that they receive on their other investments. They would have to make a calculation like, “If I have $10,000 that I can put in stocks, gold, virtual real estate, etc., which one will bring me the best results?” If the returns made on VRE are comparatively lower and it carries higher risk, its price will drop — and vice versa. There will finally be a reason beyond speculation and hype for virtual real estate to exist at a certain price point. On that basis alone, this may very well be the most important unresolved question in the field.
#2: “How independent from one another are the values of VRE and cryptocurrency?”
For someone like myself who’s engaged in traditional real estate, the volatility of virtual real estate and cryptocurrency just boggles the mind. The value of the US Dollar tends to move only a couple of percentage points each year,¹ whereas cryptocurrencies can frequently move more than that amount in a matter of hours. If I were to invest in a real-world rental property, I would have essentially zero concern that the currency underlying that investment would suddenly crash. But, this just isn’t the case with VRE. It’s totally possible that the currency used to transact in a given virtual world will crash. People who have bought virtual land have put thousands of dollars into play, and they would surely like to know to what extent a change in the value of the substrate currency will affect their investment.
Luckily, early indications are that NFT values are only somewhat connected to the movement of the cryptocurrency market. We saw this during crypto’s latest bear run, when NFT values did not drop nearly as far as the currencies they were purchased in. While ETH dropped in value by approximately 50%, the top 100 NFT collections saw a fall of only a fraction of that amount: 15% or value.² That’s surely a positive sign, but what’s true for NFTs generally might not be true for VRE specifically. Some research is needed here.
The data required to make this determination already exists, though. Someone would just need to put in the work. You could gather the data for the price of ETH over time as expressed in USD and make a graph out of it. Next, graph the sale prices of one type of virtual real estate in USD during that same time frame. From there, you simply overlay one on the other. This would allow you to see the degree to which their prices’ motion matches or follows each other. Do this for a few different platforms that transact in ETH, and you can begin to form a picture of the asset class as a whole.
I’ve thought about attempting this one myself, but I have to admit that I just don’t possess the quantitative skills to analyze a correlation. Still, I’m certain that someone out there does. Someone doing the legwork here would be of real benefit to the community. So, if you’re so inclined, go for it! Bring us an answer!
#3: “What are the effects that individual features have on property values?”
Every parcel of land is unique. It has its own location, size, characteristics, and so on. This makes it quite unlike commodities such as gold, wheat, or oil. One cannot simply consult a ticker feed and determine their land’s market value. Instead, one has to perform some rather in-depth analysis to figure out what the value of a given parcel is based on its particular features —in short, an appraisal. If we could answer the question at the top of this section, it would become possible to begin appraising the value of virtual real estate. This is because one can finally perform adjustments of sold comparables. Without going into too much detail, this is a necessary step in the “comparable sales method,” which is the primary approach to appraisals in the real world. As things stand at the moment, it’s beyond our abilities to do this with VRE because we don’t have the base-level knowledge of the value that individual features carry.
Knowing that requires “matched pair analysis.” ³ You essentially find two completed sales in which the primary difference between the two properties is the presence of a single feature. After doing some math, the difference in sale price between the two indicates the worth of that feature in isolation. You’ll have to repeat this with many paired sales to create a clear picture for that feature, but one does eventually emerge. When this process has been undertaken for a variety of them, it becomes possible to adjust comparable sales and therefore appraise properties. We have the sales data to start that work now, but nobody with the knowledge to do so has yet taken up the task.
And it’s worth taking up! The capacity to accurately appraise properties will likely unlock more, higher-order capabilities. For instance, greater certainty about property values allows for lenders to offer more competitive financing. Insurers can do the same. Finally, more clarity on property values should lead to a more stable market, since people are more certain about what to offer or accept in exchange for land. And, we would all benefit from that.
#4: “Who will police and adjudicate the Metaverse?”
Any time power is distributed among more people, there tends to be a tradeoff in terms of agility: things become fairer, but we become less able to respond quickly to certain problems. This is sort of widely and intuitively understood. Indeed, democratic countries usually provide for “emergency powers” to be granted to their elected officials in times of crisis. They recognize the need to respond quickly to an unfolding situation, but they understand that their usual mechanisms aren’t well suited for it, so they make a temporary change. Still, despite this particular disadvantage, democratizing power has been a huge net positive over the course of history. And as time passes, we see more of it.
Now, with Web3, we suddenly see this trend playing out in new and interesting ways. Things like currency control, online platforms, and even the governance of certain businesses are now on the table for division and distribution. It seems to be the next step in the evolution of our society, and such decentralization has become a touchstone within the culture of the Metaverse. There are pushes everywhere to “open up” organizations that wish to participate in it and decentralize the authority they may come to hold.
Meanwhile, online environments are an absolute breeding ground for griefing, fraud, sexual harassment, racism, and all sorts of criminality. The Metaverse, although young, is certainly not immune. Even when Facebook’s “Horizon Worlds” metaverse was in beta testing, they were already receiving reports of female users being sexually harrassed and virtually “groped.” ⁴ Among those of us who have been around Internet culture and online gaming, nobody’s surprised. Outraged and irritated? Sure. But not surprised. Over and over, it’s been made clear that people simply will not behave in an anonymous (or even semi-anonymous) virtual environment.
These behaviors present problems that require a response. But, in these new, decentralized contexts, who has that ability? It’s not clear that anyone has the authority to stop a user of the open Metaverse that’s engaged — right at that moment — in doing something illegal or abusive. I have previously reached out to many of the founders of the major metaverses to ask them about their policies. I wanted to know what they can do if a landowner engages in things like trolling, abuse, or crime on their property. I never received a response from any but Arkdev of NFT Worlds, who deserves credit for answering. But even he admitted that they don’t possess much recourse. If someone with the proper connections could ask how these sorts of situations will be managed on the other platforms, it would be good information for the community to have! From there, we could at least begin to take precautions and eventually create awareness of “best practices” for both platforms and users alike.
It’s uncertain who will police malicious actors in the Metaverse, but it’s absolutely certain that they will cause serious damage. Up until the creation of the NFT, the losses within online worlds have been limited to one’s time or to their enjoyment of the play experience. When someone repeatedly bothers you, it’s frustrating, but you don’t actually lose anything of material value. Even if someone directly cons you out of an item in a game like World of Warcraft, you’re not actually suffering financial damage. Web3 changes that. Now an NFT can be worth many thousands of dollars, and if someone cons you out of it, that damage is potentially life-altering.
Even if you don’t lose your land, it’s easy to imagine ways in which other people could ruin its value. Suppose the developers suddenly make a cash grab and flood the market with new parcels for sale. It would almost certainly crash the value of any existing ones. Or, what if they make a poorly thought-out change to the platform — something so bad that causes people to lose interest and abandon it altogether? Can the devs be held liable for the financial damage they caused? Even a garden-variety Internet troll could buy or lease the land next to yours and put up something that drives away business. Perhaps just a big billboard with an arrow that says “RUG.” What is your recourse there? Can you do anything at all about it? Even if you were to pursue the troll for the damages they caused you, which courts would have jurisdiction? It’s not easy to see how one either stops or punishes bad Metaverse actors.
#5: “Will virtual real estate appreciate like physical real estate?”
This question might be the FUDdiest of the group. When we look at the physical world, we see that its real estate tends to appreciate over time. That is to say, land and structures typically grow in value as the years pass, even when you take inflation into account. Most economists believe that this is a simple function of supply and demand — just on a very large scale. There is a limited supply of land, but populations keep growing, so prices go up. Neither half of this dynamic is the same for virtual worlds, though.
In the Metaverse, despite what some articles claim, it should be well understood that the supply of land is not fixed. The developers can always add a smart contract creating more parcels if they so choose. We simply trust them to maintain whatever scarcity they commit to. Moreover, new virtual worlds are opening regularly, and that creates alternatives in the marketplace. Such options don’t exist for physical property. In the real world, you can always move to another country, but there’s no alternative to Planet Earth. Supply in the context of virtual worlds is quite different.
Demand is also more complicated. Because there are alternatives to any given virtual world, we find that the user population within them tends to follow a curve of growth and then decline. Even in the most popular of MMOs, where the user population is high for many years, this is the arc it follows. ⁵ ⁶ I was unable to find a chart that directly showed users on Second Life, which is perhaps the most similar to our current metaverse platforms, but it appears to have generally followed the same up-and-down curve.⁷
I see no reason that our present metaverses should have a different fate. If the populations of all virtual worlds increase and then decline, why wouldn’t the number of people in The Sandbox or NFT Worlds fall off when a flashier or better iteration emerges? I predict that we will see the same arc in virtual real estate, with values going up, leveling off, and then decreasing over a span of years as people move to alternative worlds. But, this is the one question on my list that we can’t test. We simply have to wait and see how it all plays out.
For me, these are the five primary questions about virtual real estate that remain unanswered. I sometimes wish I had the math skills to be able to resolve them for myself, but alas, I really am just a writer. Perhaps someone else can take up the task? As developments emerge, though, expect me to write about them here. There’s a long way yet to go before we really know what we’re dealing with.
1 — https://www.statista.com/statistics/1032048/value-us-dollar-since-1640/
2 — https://fortune.com/2022/01/31/crytpo-crashing-some-nft-collections-sustained-value/
3 —https://appraisersforum.com/forums/threads/matched-paired-analysis.151233/
4 — https://www.technologyreview.com/2021/12/16/1042516/the-metaverse-has-a-groping-problem/
6 — https://www.reddit.com/r/wow/comments/acqhph/i_estimated_subscriber_numbers_using_google_trend/
7 — http://www.gridsurvey.com/
If you enjoyed this article, please follow me here on Medium! I publish as often as I can about topics related to virtual real estate and the Metaverse, and I would be happy to have you as a reader.
