Why Buying Million-Dollar Digital Real Estate Does Not Make Sense

Digital real estate is the hottest thing in town at the moment. Last year, the sales of digital land topped $500 million on the fourth biggest platforms, and there were multiple million-dollar digital real estate deals in, for example, Decentraland, Axie Infinity, or The Sandbox. With $85 million in sales in January this year, we can expect 2022 to be a record year for digital real estate.

With an infinite supply of digital land across an increasing number of virtual worlds, you would expect low prices, but that is not what is happening. Prices are at an all-time high, and the more the metaverse is in the news, the more this will probably continue.

In addition, digital real estate brokers are jumping on the bandwagon as there is an opportunity because plenty of people have no idea how to purchase digital real estate but still fear missing out. Whether that is a good thing remains to be seen. There will also likely be a few scams here and there where people pretend to be brokers but then disappear with the money or with the land. When it comes to digital real estate, we are amidst a gold rush.

Digital Real Estate and NFTs

When buying virtual real estate, you are really purchasing a non-fungible token (NFT), which proves the ownership of that piece of digital land. According to Jason Cassidy, founder of the Metaverse Group and the company that bought a piece of land in Decentraland for 618,000 MANA (roughly $3.2 million at the time of purchase), buying digital real estate is like buying real estate in Manhattan in the 1900s. Except that it won't take 120 years for it to explode in value, but merely 5-10 years.

Many people are very bullish when it comes to digital real estate and its importance. While some argue that digital real estate is all about location, location, location, similar to in the real world and that you want to be in an area with a lot of foot traffic, celebrity neighbors, and a prestige area that raises the value of your virtual real estate, I hold a contrarian view.

A Contrarian View on Digital Real Estate

The current trend is that digital real estate moguls and brands are snapping up digital land for millions of US dollars across the various virtual worlds, either to rent it out to others, to exploit commercial activities on top of it, or to build a virtual shop or head office to connect with (future) consumers.

Although this might be a good idea at this moment, and brands that want to step into the metaverse should purchase small amounts of land across a variety of virtual worlds to become familiar with the metaverse, it also comes with its challenges. As the founder of Second Life, Philip Rosedale said in a tweet in 2021: “When virtual land is owned outright (on blockchain), malicious owners will extort each other by putting offensive content on small highly-priced plots in popular spaces.”

Watch for it next: When virtual land is owned outright (on blockchain), malicious owners will extort each other by putting offensive content on small highly-priced plots in popular spaces. This is not a stable solution - we saw it happen long ago in @SecondLife

— Philip Rosedale (@philiprosedale) December 5, 2021

Rosedale saw this happening 20 years ago in Second Life, and if it happened then, it will likely happen this time again. So, you have just spent $2-3 million on a plot of land in Decentraland, and before you know it, someone could buy a small piece of land close by and put up a massive billboard displaying something offending. Since it is decentralized, there is nothing that you can do about it. This would certainly give you a bad night’s sleep.

Artificial Digital Scarcity in a World of Abundance

More importantly, the concept of artificial scarcity when it comes to digital real estate does not make sense to me. Why do you have to do deal with neighbors in the first place?

While land can be useful in virtual worlds to prevent spam or low-quality content, this can also be achieved in an infinite digital world by staking tokens instead of purchasing artificially scarce land in a grid-lock pattern.

Digital real estate is a made-up construct. Of course, there is nothing wrong with that; we have all kinds of made-up constructs in society that work very well. For example, money is an artificial construct that had a rather positive impact on humanity (or a very negative impact, as some would argue). However, in the metaverse, you are not bound by physical limitations. There is unlimited space, and if you need to go somewhere, you can simply teleport to it. Why would you want a finite piece of land in an infinite space?

The grid layout and scarcity in these virtual worlds are artificial. I might understand it as a fund-raising activity for new platforms, which sounds eerily familiar to the ICO boom and dust in 2017/2018, but there is no other reason why you would want to limit yourself in an infinite digital universe where you can just teleport from one experience to another, never having to deal with any bad neighbour.

Out-dated Virtual Worlds

A problem with digital real estate being sold for (a lot of) money is that it is quite common for players to be done with a game and move over to the latest shiny virtual world. Soon, the once-thriving virtual world becomes deserted, removing all the fun because the virtual real estate is no longer maintained.

The same happened in Second Life, where the earlier users who bought virtual land left, didn’t maintain their digital property and new users had to buy on the outskirts, far away from where the action happened. As Robert Rice, an early AR/VR pioneer and entrepreneur, shared with me, the better option would be to lease out virtual land by requiring interested parties to stake their crypto, which is automatically returned at the end of the lease period if they decide not to renew it. This way, the owner gets his money back while the land becomes available again to new users to build something nice on top of it and maintain a thriving virtual economy.

Moreover, the platforms of today will not be the platforms of tomorrow. The next version, more advanced, with better features and capabilities, is undoubtedly already being developed, so unless Decentraland, or any other platform for that matter, is able to continuously reinvent itself, which is not only a technical challenge but for decentralized platforms also a community challenge to make sure a majority is aligned, a million-dollar investment could be losing its value quickly.

Final Thoughts

Despite my contrarian view on digital real estate, I am sure that FOMO will continue to drive up the prices for digital real estate. Until prices will come crashing down because there will be so much supply of digital real estate that it will outstrip demand (which is not unlikely seeing how many virtual worlds are under construction, all trying to capitalize on the boom in digital real estate) or because people will start to see that buying digital real estate for millions of dollars simply does not make sense.

This article is part of my research for my fourth book, available for pre-order now: Step into the Metaverse: How the Immersive Internet Will Unlock a Trillion-Dollar Social Economy.