The Bear Case For Digital Real Estate
Stop Buying Digital Land
Since Decentraland’s ICO in August 2017, virtual worlds have been widely discussed as a potential application within the metaverse, generating over $500 million in cumulative NFT sales. And like most topics in crypto, the topic of scarce, digital land is hotly debated.
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The Digital Land Debate
An important feature – arguably the core feature – of these virtual worlds is that the land is scarce or limited to a certain number of parcels, each individually ownable and customizable.
But, even among crypto investors, there remains mixed sentiment whether scarce, digital real estate will be valuable.
The Case Against Virtual Real Estate
The bear thesis for digital land comes down to a few arguments:
1) Digital land doesn’t have the same network effects as physical land.
2) The most successful virtual worlds have had user-generated content which lends itself to an abundant world without unnecessarily limiting scarcity.
3) There are currently computational limitations to how many users can simultaneously be in a virtual world.
4) Digital land is dependent on experiences, and the value of experiences eventually fades.
Argument #1: Dissecting the Network Effects of Real Estate
If you’ve ever met with a realtor, you know that the three most important factors to real estate investing are 1) location, 2) location, 3) LOCATION. In the physical world, there’s a limited amount of beachfront property whereas virtual worlds possess unlimited amounts of beachfront properties perceived as “beachfront”, only subject to a developer's limitations.
In the physical world, land possesses strong network effects. Physical real estate is uniquely located and is subject to the attributes offered around it. Property in San Francisco is valuable because it offers great weather, a vibrant startup/tech community, outdoor getaways, a solid airport, public infrastructure, good schools, and other opportunities. To get to another piece of land requires driving, flying, and time. Want to attend an event like Coachella? Well you better have a place to stay in Indio, California. Even the city of Indio has developed its own localized network effect, gaining the nickname the “City of Festivals”.
These types of factors compound to create a flywheel for any given city. Los Angeles. Hong Kong. Miami. London. Geographic network effects often correlate with a high cost of living, but people are willing to pay the price of entry to gain admission to some of the most elite, competitive, and successful networks.
Contrast this with land within the metaverse or virtual worlds where individuals can connect from anywhere. Distance is a nonfactor if a user can immediately teleport from one side of the world to the other. People are free from their physical needs, such as food, shelter, and sources of water, as well as physical infrastructure like electricity, hospitals, and schools. An event like Coachella wouldn’t have to be in a similar spot every year and could easily shift to another location within a virtual world. It’s all just bits anyway. The value of location, which is what spins the physical real estate flywheel, is largely non-existent or severely reduced when evaluating virtual land.
Argument #2: User-Generated Content Networks Need Abundance
A successful virtual world – game, social app, whatever – comes down to building the greatest user experiences. The most powerful networks – Minecraft, Roblox, Twitter, TikTok, etc. – have achieved success via building user-generated content networks. All of these networks empower their users to create experiences or content which in turn spins the flywheel that generates more users who consume and produce a greater experience. However, the value of digital land is based on the premise of scarcity. But these limitations could end up capping the user-generated content that has made so many other platforms successful.
Argument #3: Scarce Physical Limitations & World 2 Falador
While the digital realm promises limitless possibilities, those virtual blank canvases are still limited by the physical bits that empower them. Data computation, storage, rendering, bandwidth, and networking all place constraints on virtual worlds. We’ve previously discussed how even the most widely watched virtual experiences, such as Fortnite concerts attracting millions of viewers, weren’t able to be experienced in unison. Instead, virtual concerts are broken up into thousands of experiences maxed out at 50-100 users per experience.
Even MMORPGs (massively multiplayer online role-playing games) like World of Warcraft and Runescape weren’t as massively multiplayer as the moniker suggested. Early Runescape worlds were capped at 2,000 players per “world” (read: server space) and what evolved were worlds for specific gameplay. For example, Runescape World 2 – known colloquially as World 2 Fally – became famous as the world where players gathered in Falador (a city within the game) to trade, barter, or otherwise exchange goods. Other worlds were known for PvP battling, mini-games, or other activities. In the interim, limitations in computation capacity and in the size of experiences will limit the reach of scarce digital land, especially because experiences cannot be replicated across multiple instances without sacrificing the scarcity of land.
Argument #4: Lack of Persistent Value
Even the most successful experience in any given virtual world will likely decay over a long enough time horizon. Large social networks like Facebook have shown recent decay in monthly active users. As fewer people use Facebook, the value of its ad space decreases in value. The same can be said of metaverse virtual worlds that lose users as experiences eventually reach their peak value generation.
While digital land can possess short-lived value via experiences, its value is not persistent like the value of physical real estate – people always need shelter, food, etc. – and as a result its long-term value accrual is entirely dependent on experiences. If the experiences fade and the zeitgeist changes, the value of the digital land would wither or deteriorate.
The crux of this debate is not whether digital space is valuable, it absolutely can be. After all, internet ads are simply rented billboards on websites – i.e., the ownable pieces of real estate on the internet. The question is whether ownable, scarce digital land will accrue long-term value.
Check out the bull case for digital land on Messari.
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