What should I consider when buying in the Metaverse?
Day to day Lorna advises high net worth individuals on prime and super prime residential property in London and beyond. Increasingly her clients show an interest in the acquisition of digital real estate as well as in the creation of NFTs that represent either virtual land or ownership of real property.
With various industry experts expecting that the Metaverse and the use of Web3 technology will be commonplace within the next five to ten years, Lorna looked at some of the important considerations for those looking to acquire land in the Metaverse, exploring the transaction process and outlining necessary due diligence, and highlighting new opportunities for Web3 technology.
So, what is the Metaverse?
The Metaverse is best described as an alternative digital reality. Virtual land is intangible land that exists solely in a series of digital realms or 3D virtual reality platforms.
Mark Zuckerberg, the CEO of Meta (formerly Facebook), set out Meta’s vision for the Metaverse in his 2021 Connect address which can be found on YouTube. He stated that the potential of the Metaverse is to enhance the existing experience of the internet by moving away from video and the two dimensional screen to a more vivid, immersive, interactive experience; what Zuckerberg calls the ’embodied internet’. The video is a very useful primer for understanding the opportunities in this space.
How can I buy land in the Metaverse?
As the industry evolves so does the expectation that one day we will each have a personal space in the Metaverse to host friends and family as well as be able to attend various virtual venues to enjoy concerts and parties. Indeed there is now an established marketplace for virtual real estate for all sorts of purposes including gaming, retail, leisure and events. Virtual real estate even has a role to play for employers to hold work-related meetings and conferences.
The main way to acquire virtual land is to buy a non-fungible token (NFT) – a digital asset hosted on blockchain technology that represents a plot of virtual real estate. These can be bought and sold online.
The major players in the Metaverse economy at present are Decentraland, Sandbox, Somnium Space and Voxels. These platforms own over 250,000 parcels of virtual real estate which are among the highest priced in the market. When Decentraland held its first land auction in 2017, a parcel of land cost a mere $20; by 2021 those same parcels of land sold for an average of over $6,000. By the start of 2022, prices skyrocketed to approximately $15,000 per land token.
As well as buying directly from platforms there is also a thriving third-party resellers’ market. Platforms like Open Sea and Nonfungible.com act as decentralized estate agents for the digital domain, allowing owners to list their property for sale or rent and facilitating the option to transact via an auction process or by negotiation with buyers.
How does it work?
First you need to choose which Metaverse platform to use – eg The Sandbox or Decentraland.
Then, set up a cryptocurrency wallet ensuring the one you choose supports the Metaverse platform’s blockchain. The two major wallet providers are Metamask and Binance.
Next, connect your wallet to the relevant NFT marketplace.
In order to purchase or bid on land, you will need the relevant cryptocurrency in your wallet. Ethereum is currently the most commonly accepted cryptocurrency.
Select the parcel of land you wish to acquire and agree a fixed price or commence the bidding process.
Following acquisition you can either ‘develop’ the site yourself or hire developers and creators to build it for you. You can also rent existing virtual land.
What should I consider when buying in the Metaverse?
Location, location, location
If you plan on investing in Metaverse real estate, look for areas that have potential for development. Places where people can congregate will be more valuable than those in nondescript areas. Consider plots of land near to, but not within, developed districts. You can score these properties at relatively low prices, build on them, and wait for values to rise.
Lack of regulation
The Metaverse is currently largely deregulated, meaning that the channels for seeking restitution are undeveloped. Therefore, if anything goes wrong (such as the seller turning out to be a con-artist and disappearing with your money) you may find you’re on your own.
Another consideration is the issue of scarcity. Real-world land has consistently increased in value chiefly due to the fact that it is a finite resource, and the population of people with an interest in owning it is constantly growing. In the virtual world, the amount of land available is potentially unlimited. If all of the virtual plots of land on a platform are sold, but there’s still demand from buyers, there’s ultimately nothing to stop the developer creating as many more plots as they need. The big platforms currently have limits on the amount of land – enforcing ‘artificial scarcity’ – but there’s no guarantee this will always be the case!
For bespoke developments you may need to instruct commercial and intellectual property lawyers for advice on digital constructions contract, ownership of design rights, timelines and to help negotiate with a platform for appropriate controls on privacy, security and ‘traffic’ to your venue, as well as for policing behaviour within it.
When it comes to setting the parameters for smart contracts entered into when acquiring or selling digital land, you may prefer to rely on traditional client due diligence checks to ascertain the identity of the counter-party, the source of funds for the transaction and any dispute resolution measures. However, remember that there is very little regulatory guidance for professionals (lawyers, accountants and banks) in verifying the identity of crypto investors so you may struggle to obtain bank finance for a Metaverse project or to use the profits from your Metaverse investment in the real world.
So where does this leave us?
The Metaverse presents a striking but highly speculative investment opportunity which is not for the risk averse. As with any acquisition, it pays to do your homework and make sure you fully understand the process and challenges that come with investing.
Other opportunities for Web3 technology that you should keep on your radar include the application of the underlying technology used in cryptocurrencies – namely distributed ledger or blockchain technologies – in the legal sector.
Blockchain offers a secure, real-time record of transfer and ownership using unique identifiers which takes place without an intermediary such as a bank or company secretary. However the decentralised nature of blockchain raises legal questions around ownership records and the location of virtual assets.
However, if such legal questions can be addressed, businesses may have the certainty they need to innovate. One such application could be smart contracts, whereby the fulfilment of an obligation by one party could be irrevocably recorded on blockchain (for example, the transfer of payment) and automatically trigger the performance of another obligation by another party (for example, the dispatch of goods) without any other intervention. A more ambitious application could be putting the Land Registry in blockchain – enabling swift secure land transactions regardless of currency or jurisdiction. The impact of this if it could be achieved would be immeasurable.
Visit our webpage, to learn about our expertise advising on NFTs, Blockchain, Metaverse and Web3.