A Real Estate Boom in the Metaverse is Coming

If Irina Karagyaur is correct, 2022 will see the beginning of a gold rush in virtual land, especially as a “more efficient and scalable future for the intersection of blockchain and real estate is being built as we speak – and it’s not solely confined to the Ethereum blockchain.”

As I’ve mentioned in previous articles, the future of NFTs is a multi-chain one. This solves the limitations of the Ethereum blockchain and enhances its usage, and we will see “unimaginable opportunities” in every corner of commerce. Alternative chains, such as Solana, Tezos, Polkadot, Kusama, Cardano and many others make more diverse use cases possible and they answer issues such as scalability, network congestion and the ability to truly fractionalize ownership, so that NFTs become usable and transferable in the Metaverse. It may also mean that NFTs are able to “break out of the confines of traditional digital collectibles,” and be part of the ‘real world’. But while NFTs have been until now primarily focused on collectible memes, art, sports and luxury goods, Karagyaur argues that the potential for real estate to be modernized and made more efficient on the blockchain is powerful, inevitable even.

Buying and selling real estate is a time-consuming business, as well as an expensive one. But with virtual real estate in open metaverses, it will be possible to use peer-to-peer transactions alongside smart contracts that automate and speed up every part of the process. For example, property asset transactions, can be executed in minutes instead of weeks or months.

Furthermore, Karagyaur points out, “virtual real estate can unlock liquidity via decentralized global markets that enable tradable assets and allow for metaverse assets to be used as extractable collateral to fuel innovative methods of lending in decentralized finance (DeFi). Potentially, owners of digital homes may be able to use them as collateral for loans, and it may be possible for owners of a valuable piece of virtual land to exchange it for a property or land in the real world.

Most importantly, Karagyaur claims that Ethereum’s network, whicle it is the dominant smart contract blockchain, will not be enough to host all this activity. This is why the talk about multi-chain development is so important. As she says, “Although Ethereum layer 2 solutions (add-ons that help the network process more transactions) work well, new blockchains have seen exponential growth and promise fertile new ground,” and there is plenty of room for the creative builders that are looking beyond Ethereum.

Some well-known names, such as Snoop Dogg, are already investing millions of dollars in virtual real estate, and Fortune magazine calls it “a multi-trillion dollar opportunity”. For the younger generation it is possible that their first property purchase will be in the Metaverse, an idea that the Boomer generation may struggle to comprehend. Of course, there is a lot of work to be done before we get to that point, and there are some who believe it is a ‘pie in the sky’ notion, some criticising it as ‘novelty’ driven by hype and speculation, whilst others argue that buying and selling real estate requires legal due diligence, and they can’t see how that might be possible in a virtual world. And of course there is the real estate sector itself, which may not be too keen on seeing their old-fashioned but profitable business model turned on its head. Still, as Karagyaur says, “real estate NFTs promise the ability to democratize property ownership, a space that has historically excluded a majority of the world.” It’s just a potential market at the moment, and building it will take time, but it’s not too difficult to imagine the day when it’s a reality.

Luxury NFTs in the Metaverse

The NFT market is a hot one that is predicted to get even hotter, especially if Morgan Stanley is correct. In a note published last Tuesday, it said luxury-branded non-fungible tokens could become a $56 billion market by 2030 and could see “dramatically” increased demand thanks to the Metaverse. Added to this, the general NFT market could grow to a roughly $240 billion market by 2030, with digital collectibles from luxury brands making up 8% of the space by that time.

The analysts at Morgan Stanley said that in 2021, luxury brand NFTs only accounted for around one percent of the market’s transaction value. They said, “We think this is about to change. The metaverse will likely take many years to develop; however, NFTs and social gaming present two nearer-term opportunities for luxury brands.”

Balenciaga and Gucci make an early entrance

Early ventures into this area for the luxury brands include Balenciaga launching Fortnite outfits in September 2021 priced at 1,000 v-bucks, which equates to approximately $8. Earlier, in May 2021, Roblox, a global gaming platform, hosted a virtual Gucci exhibition where players could purchase digital models of real Gucci products for a small amount of in-game currency. Once the exhibition ran out of products, the gamers began to put up the branded NFT items for auction, inflating their cost tenfold. As a result, a digital version of Gucci’s Dionysus bag sold for 350,000 Robux, or roughly $4,100, which is $700 higher than the retail price of the real-life version.

Currently, the best-exposed companies in the run up to the coming of the Metaverse are soft luxury brands, including ready-to-wear, leather goods and shoes, rather than items such as jewellery and watches.

Widening the luxury market

NFTs will also open up brands to the possibility of earning in “perpetuity” thanks to smart contracts, which capture a percentage of each sale for the owner, as opposed to the physical world wherein the profit only comes from the first and initial sale. The analysts said, “The metaverse will more than likely allow brands to appeal to an even broader audience,” adding that the average age of Roblox players is 13, while women generate 70% of sales in the luxury brand market, but that as the Metaverse develops the luxury brands will gain exposure to ever-younger customers, and more importantly, male customers.

The importance of the immersive experience

One reason that luxury brands stand to do so well in the Metaverse is the ‘immersive experience’. As Constantin Kogan writes at Cointelegraph, “The personal avatars that users utilize will wear clothing and use items as manifestations of individualization and personal expression, much like they would in the physical world — this opens up a really exciting opportunity for premium brands.” For example, in the aforementioned Roblox’s gaming and creation system, “one in five players will change their avatar every day, much in the same way a person gets up and gets dressed every morning.” Together with Fortnite, these platforms provide some insight into the emergence of Metaverse malls.

As our physical world still maintains a capital on luxury fashion brands due to their dependence on the physicality of clothing to connect with their customers, the success of Gucci and Balenciaga are only examples of what could be. It seems luxury will always have a home in the Metaverse, but as it is early days, this is not to say that the brands we now know to be in that category won’t be out-performed by the creation of desirable goods and the arts in general. As Kogan says, “As the rules and economic landscape are yet to be full-formed in this exciting new digital frontier, and everyone has a unique opportunity to find success.”

Money in the Metaverse

Over the past year, DeFi and NFTs have been making the case for the potential of blockchain technology. Many of them used the Ethereum blockchain, known for its smart contracts, which are an essential part of the decentralised ecosystem. Indeed, as Edward Oosterbaan writes in Coindesk Insights, “scalability products that can increase performance in response to changes in processing demands are starting to unlock the vast potential Ethereum holds,” adding that Vitalik Buterin, a co-founder of Ethereum, has his eyes firmly set on decentralising social media, gaming and anything else that comes along.

Ethereum is the main place where crypto lending and trading takes place, for example, you’ll find Uniswap and Aave there, and the emergence of second-layer platforms that are built on top of Ethereum, such as Arbitrum and Optimism, “will drag down transaction fees and open Ethereum to decentralized social media platforms like Reddit.”

Ethereum’s native token ETH

The interesting part of this is that in all the use cases mentioned, users will need to own Ethereum’s native token ETH. Indeed, ETH is the key to unlocking this particular blockchain space, whether you want to launch new apps, use existing ones, or send tokens to different wallets. Furthermore, ETH “has become a unit of account and the most common pairing on decentralised exchanges (DEX).”

Oosterbaan believes “the definition of money will become much broader than its fiat limitation today,” especially if alternative base layer protocols, such as Solana and Avalanche, are successful. He says, “We are already seeing protocols raising capital, and investors measuring their portfolios against ETH instead of dollars, or even stablecoins, and that it could “potentially become a currency of the metaverse.”

Oosterbaan reflects that digital assets are a much better investment than fiat currencies at the moment, but more importantly, he points out, “the larger the Ethereum ecosystem grows, the better the currency ETH becomes.”

Currently there are more speculators in crypto than actual blockchain users, but that is changing thanks to Ethereum’s potential for use with DeFi, NFTs, validation, social media and more. Coinbase has already reported that it has seen a major shift, as more people make use of blockchain technology by taking their tokens off exchanges. This is a sign that people increasingly want to interact with applications on the Ethereum blockchain. It has also benefited the cheaper blockchain alternatives, such as Polygon.

Ultimately, as we move towards Web 3.0, the definition of money will become more fluid as the digital economy grows, and as Oosterbaan says, “This fits perfectly with the narrative of the metaverse, where the line between the digital world and real life becomes thinner and thinner.”

NFTs and DeFi are the keys to a functioning Metaverse

When Facebook announced it was investing $10 billion in the development of a ‘Metaverse’, a platform based on augmented and virtual realities, the term suddenly started appearing in multiple headlines. However, Facebook didn’t invent it: the term first appeared in Snow Crash, a 1992 sci-fi novel by Neal Stephenson. In the book humans interact with each other and with software agents, such as avatars, in a three-dimensional space that acts as a metaphor for the real world. It might have been fiction 30 years ago, but now it’s fast becoming a reality.

What is the ‘Metaverse’?

Broadly speaking, the technologies that make up the metaverse can include virtual reality—characterized by persistent 3-D virtual worlds that continue to exist even when you’re not playing—as well as augmented reality that combines aspects of the digital and physical worlds.

Metaverses, in some limited form, have already been implemented in video games, such as Second Life and Fortnite. It is also a digital economy, where users can create, buy, and sell goods. 

It’s all about Web 3.0

Nobody knows yet exactly what Web 3.0 will be like eventually, but we do know that it will allow individuals to use the Internet without giving up their privacy and valuable personal data. The downside of Web 2.0, which is where we are now, was that users were providing the companies that controlled platforms, such as Facebook, with personal information and data. This contributed significantly to the platforms’ profits, as they sold this data to third parties without the knowledge or agreement of users.

Web 3.0 would remove this theft, as many see it, because it will be made possible by decentralised networks, such as those of Bitcoin and Ethereum. In this system no single entity controls a platform, yet we will be able to trust them because every user and operator on the network must follow a series of hard-coded ‘consensus protocols’. Blockchains with smart contracts, such as Ethereum, EOS and Tron, are leading the way in building this new iteration of the Web.

But Web 3.0 has even more innovations to offer. The networks will allow ‘money’ or ‘value’ to be transferred between accounts. Furthermore, as Decrypt points out, “On Web 3 money is native. Instead of having to rely on the traditional financial networks that are tied to governments and restricted by borders, money on Web 3 is instant, global, and permissionless. “

NFTs are the key to accessing the metaverse

Non-fungible tokens (NFTs) will be critical to making the vision of integrating the digital and physical world by giving a unique identity to avatars or digital items, writes lawyer Michael Tomasulo. He goes on to say: “For example, an NFT-supported avatar would be comprised of all the user’s prior digital interactions and experiences (effectively reflecting their digital “life”) and possessing all the digital items the user has accumulated (which would themselves be backed by NFTs). In effect, NFTs give users and items an “identity” within a virtual space that is completely independent from a developer’s control of the code.”

Due to the explosion of interest in art-based NFTs, there is likely some confusion over their potential use. Chief amongst their potential is NFT-controlled access to the metaverse. In the future world of Web 3.0 all the processes and protocols will coalesce into a central, interoperable space offering finance, communications, game worlds and much more. Crucially, NFTs in the form of real life identities tied to a digital avatar, are one way to access this metaverse world. As Decrypt says, “In time, the metaverse may even develop an independent state of its own, presided over by various DAOs.” (A DAO is a dentralised autonomous organisation).

And in terms of DeFi (decentralised finance), peer-to-peer lending and trading, could take on the role of a virtual financial system while NFTs represent our keys, ID cards, and passports.

The marriage of DeFi and NFTs

It’s important to remember that all NFTs are unique and can’t be swapped/traded or replaced with another NFT of equivalent value. This makes an NFT an illiquid asset, meaning that finding a seller or buyer would be harder compared to traditional cryptocurrencies.

Romi Kumar at Hackernoon points out that although we have seen a meteoric rise in the NFT Market, clocking over 2000% in just a little over a year, the segment still remains highly illiquid. He suggests that problems in the NFT sector may be solved by combining NFTs with DeFi applications (Dapps) and that those working on this have seen “results that are truly splendid.”

Suppose you bought an NFT at a price of 2 ETH during a specific period when that NFT was popular. A year later you decide to sell it, but your NFT is now unfashionable, and you struggle to find a buyer, let alone make a profit. The problem is that you can’t exchange it for anything else because it’s non-fungible, whereas ETH or BTC can be exchanged for fiat currency or products, because they are fungible.

DeFi can solve this NFT problem. With Defi in play, NFT owners can fractionalise the asset so more than one person can own fractions of it. Furthermore, it will create a liquid environment for NFTs because you can use fractional selling.

For example on Werewolf, a DeFi platform with Dapps, including yield farming, a decentralised exchange (DEX) and a blockchain game, users can access a dedicated NFT marketplace. Here there is an auction system and a raffle-style competition pool. An NFT holder can start a competition, deciding the minimal entry price, minimum and maximum number of entrants, and a period to run the pool. The seller sells the NFT faster, and the winner only has to pay a fraction of what the NFT was worth.

While many may still see NFTs as a passing fad, industry leaders have realised that incorporating blockchain technology with NFTs for integration into the Metaverse is the missing piece in the creation of a ‘Functional Metaverse’. This is one where the way people interact with and transcend the digital world, merges with the real world. And DeFi will play a central role in making that fully functioning Metaverse happen.