Metaverse Virtual Land Boom — the Future or a Bubble?
Note: this article was first published at Business Times Singapore at Link
As a fan of “Snow Crash”, the 1992 science fiction novel by Neal Stephenson, I naturally became a fan of the metaverse — a virtual reality world where users interact, game and experience things as they would not in the real world. My fascination with the metaverse motivated me to follow closely the development of early crypto project Decentraland, one of the leading metaverse platforms powered by the Ethereum blockchain. .
What intrigues me is that even in the absence of mass user adoption or market fit, the metaverse thesis has exploded in popularity over the past 12 months. This spike in popularity was initially fuelled by the NFT hype. It subsequently peaked in October 2021, when Facebook was rebranded as Meta, symbolising the technology conglomerate’s transition towards building products and applications supporting the realisation of a metaverse reality.
In recent months, we are starting to see more and more consumer brands dipping their toes into the metaverse space. Standout headlines include “Gucci buys virtual land on The Sandbox” and “Adidas has entered the metaverse”. Does this virtual real estate concept hold long term potential and is it a worthy investment opportunity?
What is the metaverse?
The metaverse is touted as the future of the Internet, developing alongside the broader Web3 revolution. Web3, itself an evolution of the World Wide Web, revolves around two key concepts. These are the democratisation of data ownership away from tech conglomerates, and a decentralised, open source infrastructure.
To me, each phase of the World Wide Web’s evolution adds greater value to both users and creators by reducing friction, through enhancing the ease of accessing or creating newer and/or richer experiences. After all, the process of evolution must be founded upon improvements from a previous state.
Defining the metaverse is not as simple. A common explanation invokes the infinite body of rich and immersive virtual experiences that users can enjoy. If we accept the premise that Web3’s value-add stems from reducing friction for both users and creators, then it would be safe to determine metaverse’s value based on its ability to:
- Enable frictionless access to rich and immersive experiences for users
- Reduce barriers for building new and immersive experiences for creators
To visualize the potential of the metaverse, we can look towards the ever popular online gaming platform and game-creation system, Roblox. In Roblox, players can easily and instantaneously change their user experience by switching between games and servers. The universe of experiences for the players is endless; only limited by the creators’ imagination. For creators, there are almost no barriers to entry. Access to both the Roblox gaming platform and the Roblox (creators) studio is completely free and effortless. Creators are able to build new games and user experiences (which are only limited by the game engine’s technological limitations), and with zero cost outlay.
The result is over millions of rich immersive experiences that are easily accessible with a few clicks, and frictionless. I am not saying Roblox is the metaverse as we now know it, as it is not built on a decentralized infrastructure. However, Roblox and its frictionless experience for users and creators give us a glimpse of what is possible with the metaverse.
Having a mental playbook of the positive experiences that existing applications can bring about, let us now switch gears and zoom in on real estate-themed metaverse projects such as Sandbox and Decentraland, to see if they offer the same experiences. Do these virtual land projects add value by enabling frictionless experiences for users and creators alike?
The problem with virtual real estate… is that it’s still constrained by conventional value judgements
We first note that retaining some rules of our physical world within the 3D metaverse — such as individual motor action and range of movements — is necessary for the metaverse experience to be relatable and immersive for human users.
However, this sets up a dilemma as one of the critical underlying purposes of a metaverse reality is to transcend physical and resource constraints present in the real world. This is especially true when most metaverse enthusiasts seek out virtual experiences simply because the latter are impossible in the real world — think flying or role playing games.
There are many pathways and platform designs capable of enabling an immersive experience in the virtual land market. Yet, both the prevailing, and most prominent virtual land projects such as Sandbox and Decentraland might have prioritized Tokenomics and bolstering virtual land prices over immersive experiences for users. Thus, instead of creating a metaverse economy that removes much of the friction we experience in the real world, many existing constraints (land scarcity, transportation inconvenience, location-based pricing etc) are reinforced in these metaverse projects to support virtual land pricing.
Some may call this true immersion, but will the majority of metaverse users be content with simply a carbon copy of the real estate market? I highly doubt it. Moreover, with instant gratification a characteristic of the modern age, how many users will have the patience to manually navigate over distances just to access new experiences?
Hence the appeal of existing virtual real-estate themed projects could be short-lived or narrowly targeted — merely one out of many possible types of immersive virtual experiences in the metaverse.
“Ain’t nothing going on but the rent”
Decentraland already has carved out districts for gambling, shopping, fashion and the arts. “Rather than try to create a universe like Facebook, I said, ‘Why don’t we go in and buy the parcels of land in these metaverses, and then we can become the landlords?” Andrew Kiguel, a co-founder and the CEO of Tokens.com, told the New York Times in October last year.
Tokens.com has “broken digital ground” on a tower in Decentraland, and is also developing a virtual commerce hub for luxury brands, on a plot it acquired for US$2.5 million in Decentraland’s fashion district, the NYT reported.
From the creators’ perspective, a virtual land-centred economy seems to motivate location based rent-seeking rather than creativity and creation of novel applications on the platform. This limits the creator’s ability and capabilities in a few distinct ways.
First, the speculative pricing of virtual land imposes significant upfront costs for creators, who must purchase / rent a plot of virtual land before they can build their own applications. This contrasts significantly with free creator platforms in Web2 such as Tiktok, or Roblox. Secondly, the virtual real estate concept transposes physical land constraints and thus, confines the creators’ capacity to build within the fixed dimensions of the purchased plot of land. Evidently, the same limitations in the physical world seemed to have been embedded in the digital realm.
Perhaps, these limitations are the reason why we have yet to see novel and diverse experiences being created. Applications built on Sandbox and Decentraland thus far are limited to NFT exhibitions, casinos, mini-games and the like. Many of the owned parcel estates still remain empty, implying that most of the purchases were motivated by short-term profit maximisation, enabled by high turnover of virtual land estates.
The future of the metaverse lies in immersion. For virtual land projects like Sandbox and Decentraland, a Catche22 situation needs to be carefully navigated, which is that existing projects’ focus on physical real estate market dynamics creates much friction for users / creators, thus going against the internet’s evolution to enable frictionless experience for all.
My guess is that the current growth of virtual real estate should be better classified as real estate simulation games — merely one possibility within the millions of possible metaverse experiences. Virtual land assets in such a gaming sphere can command some kind of price traction. Whether virtual land can sustain value potential is an entirely different matter.
