I have spent my entire professional career devising novel ways to invest in real estate, and recently I have been spending a lot of time in Decentraland. For many years, my colleague TJ Kawamura has been pushing me to look into blockchain-based digital real estate, but it wasn’t until recently that it all clicked for me. Digital real estate has become a legitimate asset class, one worthy of investor consideration and one I believe is likely to appreciate exponentially over the near term.
Not only is digital real estate capable of delivering outsized returns due to its alignment with the rapidly growing crypto-investment universe, but it also appears likely to become a viable store of wealth, almost like real-world art and real-world real estate. Digital real estate exists inside virtual worlds, each its own “digital nation” with a system of clearly delineated, irrevocable property rights. Buying land today in virtual worlds feels a lot like buying land in Manhattan back in 1750. It is also insulated from the COVID-induced volatility of the real-world real estate industry.
In virtual worlds, players interact with the world, or “metaverse,” while inhabiting an avatar’s body. They can chat with other users, earn cryptocurrency by playing games and gambling, buy art in galleries, attend concerts and events, and do lots of other things. There are other crypto-based virtual worlds, including Somnium Space, Cryptovoxels, Axie Infinity and The Sandbox (which has not yet launched), but Decentraland is the fastest-growing and most developed of all of them. (Editor's Note: Digital Currency Group, CoinDesk's parent, is invested in Decentraland.)
Decentraland is a multiplayer role-playing game developed by two Argentine software engineers, Estaban Ordano and Ari Meilich. The world centers around a plaza, called Genesis City and, unlike most video games, has no set purpose other than to become a virtual world developed and owned by its users. It shares similarities with early virtual games like SimCity and Second Life, and newer multiplayer games like Minecraft and Fortnite.
What distinguishes Decentraland is that its economy is based upon a cryptocurrency. All of the parcels (called “LAND” in the game) except for roads and plazas can be bought, sold and developed by the users of the game using “MANA,” Decentraland’s own crypto-token. (MANA itself has a market capitalization of about $225 million, a more than fivefold increase since its launch in 2017.)
As of February 2021, MANA prices have increased 321% in the past year.
LAND ownership is an NFT recorded on the Ethereum blockchain using the ERC-721 standards (the same as CryptoKitties) which makes it both easily transferable and less prone to fraud. The game’s developers have set a cap of 90,061 on the total number of LAND parcels which will ever be minted. LAND parcels are nonfungible because every parcel has a different set of (x,y) coordinates.
There is also a secondary market where LAND can be bought and sold, and a supporting economy of contractors willing to design and build on these virtual parcels at very real-world prices. Enough people believe that this virtual real estate is scarce and holds value that they are spending meaningful amounts of money on it. For this reason, its ownership has become something of a status symbol among early adopters.
Beyond status, ownership represents something greater – a contribution to the fabric of the Decentraland community. Where and how you develop your parcel has an enormous impact on how players in Decentraland will interact with your LAND. They become spaces where people can engage, explore, build, and socialize, mimicking real-life social interactions while also driving up the LAND’s value.
This has led to a multiyear history of price appreciation in Decentraland real estate. In 2017, the year Decentraland launched, LAND parcels sold for about USD $100 per parcel. In 2019, a portion of the “Genesis Plaza” estate called Estate 331 sold for about $80,000, becoming the second-most expensive nonfungible token (NFT) of the year. Last month, the price of an undeveloped parcel of land had increased to roughly 8,000 MANA (approximately USD$1,400), a 14-fold increase in just three years. Since the game’s launch, there have been more than 50,000 secondary LAND sales totaling $30+ million at an average price of $560, so these data points are not outliers. Today, the total value of all the LAND is about $100 million – and growing.
Investing in digital real estate captures all the positive aspects of derivative trades (asymmetric reward-risk) without the bad (recourse margin/debt), and is also an uncorrelated asset class that offsets market volatility. Although it was previously believed that cryptocurrencies (especially BTC) were like digital gold, backtesting has shown that crypto assets behave differently from gold, equities or bonds. Hence, it's an extremely useful portfolio diversification tool.
There are many reasons I believe digital estate may continue to appreciate.
The best-performing asset of the last decade was not Amazon or Apple stock; it was bitcoin, an asset that trades completely outside the traditional banking system. Crypto – once regarded as a folly reserved for gamers and coders – has become so mainstream that anyone with a smartphone can buy and sell it, and large financial institutions are finally following suit.
The rise of NFTs
Investment in virtual real estate occurs through the purchase and exchange of nonfungible tokens (or NFTs), a special type of cryptographic token which represents something unique; non-fungible tokens are thus not mutually interchangeable. This is in contrast to cryptocurrencies like bitcoin that are fungible in nature. Each NFT is distinct, it is indivisible and it is not interchangeable.
Although not as liquid as some cryptocurrencies that trade on larger exchanges, virtual real estate NFTs are exchangeable on NFT marketplaces through transactions that are much more streamlined and transparent than real-world real estate transactions.
Instead of a traditional deed or title which is cumbersome to transfer, ownership of virtual real estate is recorded on a decentralized ledger through an NFT. Holders are the perpetual owners of their digital items, even if Decentraland shuts down or is abandoned by the developers.
Evidence of adoption and acceptance of NFTs as a proxy for ownership can be best demonstrated by the depth of the market and the enormity of some of the recent transactions, including a $1.5 million sale of property in the metaverse Axie Infinity this month.
The quest for resilient assets will continue in this environment of low interest rates and high inflation, making crypto-assets seem less risky than some real world asset types.
I’m concerned about the real-world real estate industry. Retail, office and hospitality rents and occupancy have plummeted, and their future outlook remains bleak. Single-family homes and apartments seem impervious to the pandemic, but how much more can their values rise while still remaining somewhat affordable against the backdrop of stagnant wages? Real estate remains one of the planet’s greatest stores of wealth and hedges against inflation, but even the most unflappable real estate advocates are questioning how to value real estate today.
It’s still early days for virtual worlds.
Early versions of Decentraland were clunky, but the game has improved a lot since its launch, and players have noticed. LAND owners have invested considerable time and money building elaborate architectural structures, games and wearables for the game. The game’s developers continually release new features; they operate with unparalleled transparency, giving the community a full look into what features, rollouts, and improvements to expect for Decentraland’s future on a publicly viewable Trello board.
The discussion boards in-game and on Discord and Reddit are very active. The secondary market for in-game purchases like land and wearables show signs of increasing liquidity and meaningful volume. Every time I revisit Decentraland, I see more users and more interactivity. At the same time, in-game asset prices are trending upwards.
That being said, today Decentraland still feels sparsely populated and most LAND remains undeveloped. Some of this feeling of sparseness is because the game was built to accommodate a large user base which has not yet materialized, and so it is played across multiple servers. This system was borrowed from the likes of Minecraft and Fortnite where hundreds of thousands of people play at any given time and so play occurs across multiple “servers” to avoid feeling overcrowded. As a result, a player may only encounter a handful of other players in Decentraland on a typical visit.
To some, this reality might seem disconcerting. (Where are all the people?) To me, it feels like a tremendous opportunity to get in early, at the beginning of a new utopia for self-proclaimed misfits. The total addressable market for such a paradise? Nearly infinite and entirely defined by the creativity of humankind.
Virtual socialization is inevitable
Virtual worlds are not new. Both Second Life and Eve Online, virtual worlds designed for adults, launched in 2003 and attracted millions of users at their peak. Players built complex economies within those games. But, both games rose to popularity when the real world was still very much rooted in real-life interaction, and have since declined in popularity while the new crypto-based upstarts have been growing. Those games were just a bit too early.
Since then, human interaction and socialization has become overwhelmingly virtual; most people have moved their social and business relationships to their phone or laptop. If ever there was a tipping point when people would choose en masse to socialize on computers rather than in person, it is now, during a global pandemic that has driven us all online. These new habits will become permanent behavioral and cultural shifts, irrevocably changing what we consider normal and acceptable.
There are many examples of this shift toward less real-life interaction, including the rise of Clubhouse, one of the fastest-growing startups of 2020, which is a cross between podcasts and a 1980s party line. It is an entirely virtual – and audio – social experience that is growing like wildfire.
When we invest, especially in real estate, we must attempt to predict the future – a future 10 or more years down the road. In 10 years, today’s children will be young adults and their preferences will dictate what becomes mainstream and normative.
Both of my own children are completely addicted to video games set in virtual worlds – specifically Minecraft, the best-selling video game of all time. (For example, if I ask my children if they would rather play with their friends or play Minecraft, they will always, without fail, choose the latter.) Their Minecraft addiction – and that of millions of other school-age children – has been fueled by nearly a year of online schooling that has resulted in excessive amounts of screen time and access to video games.
Minecraft and similar games are shaping how children interact with technology and with each other. Decentraland and the other adult crypto-based virtual worlds are designed to attract players who have aged out of the children’s games, for the teenagers and young adults who seek deeper human connections based more upon socializing and transacting than on treasure hunt and enemy slaughter. The user experience (UX) of the adult games uses the same conventions as the children’s versions.
Virtual real estate: new players, new rules
In 2004, Ailin Graef, better known by her avatar’s name Anshe Chung, began amassing virtual real estate in Second Life. She started with less than $10, and became famous for becoming the first avatar to achieve a net worth of more than USD $1 million from business dealings conducted entirely inside a virtual world. Much of today’s excitement about virtual real estate and NFT speculation can be traced back to the mythology surrounding Anshe Chung.
The key to speculating on land in the virtual world is to learn the new rules. The old rules, the ones that favor the already-rich, no longer hold true. The old real estate adage “location, location, location” implies that values are set by their proximity and visibility, but in virtual worlds, players can teleport to new locations using cartesian coordinates, so visibility and foot traffic matter much less.
What matters in the virtual world is bringing humanity and life to something flat and pixelated, drawing players somewhere, and then encouraging them to return and interact. (These settlements are often called “clusters of content.”) In the virtual world, ingenuity and design matter far more than location and budget.
Decentraland’s developers have taken a very thoughtful and light-handed approach to building the game’s foundational layers. New projects and partnerships are already underway to make this virtual world a sophisticated and engaging alternate reality – one that will likely become as ubiquitous and addictive as Facebook and Instagram are today.
The winners in Decentraland will not just be one person. And that, right there, is why it will succeed. By leveling the playing field, Decentraland has set itself up to be a winner in the race to build the perfect virtual world – a utopia.
For all these reasons, I’m convinced that digital real estate is an investment opportunity worth considering. While this asset class is still extremely risky and a full loss of principal is a probable outcome, it may make sense for risk-tolerant investors to allocate a small portion of their alternative investment portfolio to this nascent asset class.
What’s more, participants in this virtual economy will learn it is an exhilarating time to participate. The possibility of escaping to a new world and reinventing yourself will always hold an allure, even to the stodgiest among us. When coupled with colorful graphics, art, music and new friends from around the world, it’s easy to understand why Decentraland is becoming more popular.
Early movers in virtual real estate have the ability to get in at prices that are still affordable compared to real-world markets. Like early movers in fast-growing places in the real world (Florida's The Villages; Austin, Texas; Las Vegas), those who invest early and hold for the long term will benefit.
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