First off, thanks to Nir.eth, part of the team at NFT platform Yup.io, who gets credit for bluntly stating a worry that has been nagging me for years.
This is not just a valid question, but a white-hot and vital one that has been tearing around Crypto Twitter in recent days. Yuga Labs, creators of the Bored Ape Yacht Club, this week completed the sale of “Otherdeeds” for virtual land plots in its planned “Otherside” metaverse project, netting a staggering $285 million for the company. The floor price for Otherdeed NFTs has dropped as much as 12% since the sale, which feels like a top signal in a space where similar “blue chip” mints have often seen rapid post-launch runups.
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Why is land valuable, anyway?
Of course, metaverses will face the issue of copycat proliferation. There are dozens of metaverse projects spinning up right now, and as Multicoin Capital's Tushar Jain recently pointed out, they can all sell "land."
But the issues raised by Nir and others in recent days are much more fundamental, and may point to flaws in the model regardless of the competitive landscape. Above all, the idea that geographic space in a virtual world will accrue value in the same way as real-world land seems to miss some truly fundamental distinctions.
In the most basic terms, real-world land values are based on location and utility. A piece of real-world land is valuable based on how long it takes to get to other locations you want to go, which is why land in Tokyo and New York are among the most valuable in the world: They’re close to cool stuff. This geographical reality is inextricable from the scarcity of real-world land since each piece of land has an entirely unique geographical location relative to every other piece of land.
The problem for buyers of metaverse land, then, is very straightforward: In a 3D digital world, all distances are fake.
See also: Get Ready for the 2022 Metaverse Real Estate Boom | Opinion
There’s no inherent reason that any piece of virtual land should be more valuable based on its location, any more than a web address is valuable because it’s “closer” to another. In a virtual world, you can just teleport your avatar to any location, instantly. As another Twitter user observed, this means shoring up metaverse land values would require imposing entirely artificial restrictions on users, making the experience worse and ultimately deterring the users that are the real source of a metaverse’s value (on which more in a second).
Then there’s the second value of real-world land, its practical utility. In the real world, that can include things like whether it has the right soil or water sources for farming or other natural resources. But again, there’s no such thing as a “natural resource” in a metaverse, so making virtual land track the value structure of the real thing would involve tying certain rights to it.
In a thread critiquing the land-sale model, Nifty Island co-founder Charles Smith points out that the most obvious move here is tying the right to create content to land ownership.
But implementing this fix to shore up land values would have the contrary effect of harming the user experience and, in turn, scaring off creators who make shared worlds appealing and valuable. “Look at minecraft, roblox, and even youtube,” Smith went on to ask. “Would these platforms be better if the right to create on them was limited to a tiny number of land holders?”
Nifty Island has been vocal about excluding land sales from its model. At the very least, that suggests an appealing option for investors looking to diversify across different funding models.
The financial skeuomorphism trap
In light of this critique, you could describe the entire idea of investing in metaverse land as a form of “financial skeuomorphism.” Skeuomorphism refers to the tendency to design digital products in ways that mimic the physical world, and was a particularly hot topic in interface design during the early development of the iPhone.
Over time, visual skeuomorphism in interface design has faded as people get more used to the differences between digital and physical objects. The same could very well happen with metaverses, with the added twist that a bunch of people just invested $285 million, not in Yuga Labs stock, but in the financial equivalent of a drop-shadow app icon.
See also: Is 'Meta' Already Giving Up on the Metaverse? | Opinion
And while Apple was able to move away from skeuomorphism gradually, metaverse projects wedded to the valuations of their land plots may have swallowed a poison pill they can only expel directly into the faces of their investors. To prop up land values, developers may have to impose artificial limitations that harm the user experience, and eventually, the actual value of the system. Conversely, making a metaverse easier to move around or create content within would almost inherently harm land values.
So far, this may simply be a case of founders moving so fast they haven’t entirely thought through the implications of their basic models. But the less generous interpretation is that they’re exploiting the skeuomorphic biases of buyers – using the metaphor of "land" in a way that implicitly exaggerates the inherent value of the virtual objects they’re selling and laughing all the way to the bank.
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