Real estate agents are selling property in the metaverse. Buyers are purchasing traditional homes with cryptocurrency. Companies are creating non-fungible tokens (NFTs) as digital titles for real properties.
How can you wrap your head around all of these technologies in a way that’s simple and pragmatic? I’m not a software engineer and no expert in crypto. I’ve read enough in this space to give you explanations that techies will probably hate.
But we’re just here to understand the business, not the technology protocols. Let’s talk about these new phenomena without the technical lingo and focus on what they mean in practice.
Under all is the land
Supply and demand: They define how real estate valuations rise and fall. Real property’s finite availability, its scarcity, underpins its value.
Does this scarcity exist in digital worlds? Do digital properties increase in value if a digital title can be purchased for them? Is purchasing these digital assets, or advising others to, a smart decision?
We’re going to look at the hype, the hope, and the skepticism. Let’s get down to brass tacks: what’s the new oil and what’s just snake oil?
Want to learn more about cutting-edge technology’s interface with real estate? Amy Gorce and I will be diving deep on the Tech and Data Track during Inman Connect New York April 19-21.
Starting from the end
The news headlines are mystifying. People are buying digital property rights on the internet. They’ve paid over $1 million for items like:
- Blocky cartoon headshots of people smoking cigarettes
- Drawings of bored apes
- Virtual property in online cities
“The world’s gone mad,” you might say. But maybe it’s no madder than it’s ever been. Why would people pay so much for items which don’t exist in physical form? Potential profits, ego, excitement – is it all that different than a bet on a football game, the purchase of a vacation, or buying the bar a round of drinks?
What can’t be denied is that there’s a current demand for these digital assets. And demand generates money. Who makes the money, and how long that demand lasts, are the questions at hand in the metaverse.
The metaverse is often portrayed as a fully virtual world, but there are many degrees of metaverse. Remember Google Glass, the eyeglasses that displayed information in the lenses as you traversed the physical universe? You’ve seen a metaverse. Have you created an avatar in a game and interacted with others online? Metaverse.
You have connections on Facebook and you share friendships and emotions with them. This is just one component of the metaverse, and it’s not new. What is new are the deeper and more immersive versions of metaverses that we’re seeing today.
These digital experiences are different from your fully physical experiences, but they’re still undeniably real. Whether it’s a full 3D virtual reality experience or a video call on FaceTime, you’ve been experiencing levels of what people are now calling the metaverse for a long time.
NFTs: non-fungible tokens (Don’t quit reading!)
A token can be a “title” for ownership of something. A property title says you own real estate. A Chuck E Cheese token says you own the rights to play one game. A digital token says you own the right to something identified in a digital contract.
Fungible just means identical things can be exchanged for each other. Two Chuck E Cheese tokens are fungible. Two $1 bills are fungible.
Non-fungible things are unique. Each home on your block is non-fungible. Every condo in a building is non-fungible. There are fundamentally different location features of each.
Tokens transferring real estate
So a non-fungible token says you own the rights to something unique. And, yes, ownership of real estate can potentially be transferred with an NFT, in specific cases.
While the actual title to real property is governed by your local county or municipality in the U.S., you can create an LLC that legally owns a property. So you can also create an NFT that owns the LLC, and you can sell/buy/trade it. It’s been done by TechCrunch Founder Michael Arrington and CEO of Propy, Natalia Karayaneva.
Whether it’s a digital picture or an LLC for a piece of property, an NFT can prove your ownership. Just because you own it, doesn’t mean it’s worth anything. Let’s be honest, people buying ape pictures for thousands of dollars are probably going to regret it later.
But trading tokens that govern the ownership of real property is serious business. The environment is currently the Wild West, and the government will make its way into the conversation at some point. Remember that in most areas, property title transfer taxes on real estate sales are major funding sources for government projects. But there’s no government transfer tax guaranteed on an NFT sale. Uncle Sam’s going to come for his cut when he’s out of money to build roads.
But for now, there’s a lot of blue ocean in the viewfinder. New digital means to move property are, without question, preferable to today’s paper-and-stamp practices that still exist in many parts of the U.S.
Cryptocurrency uses cryptography technology to create potentially valuable digital coins. They’re valuable today because people have created demand for them and will use “real” government-backed fiat currencies to buy them.
Bitcoin, Ether, Dogecoin … you can actually buy and sell things with them. It’s an extremely slow, expensive, and clunky experience to transact with them today, but there is the potential of more utility. Newer technologies with better experiences are being built alongside and on top of the current incumbents.
Bitcoin at Starbucks
Will cryptocurrencies become popular, broadly used currencies in everyday business? It’s difficult to say. Governments have, by and large, not played their inevitable cards on crypto yet. Today, it’s mostly people who are already deeply embedded in crypto enthusiasm that are buying items with them.
The only people I personally know who spend cryptocurrencies regularly today are using them to purchase other crypto assets or evade government detection – no joke. They’re sending money back to their family in foreign countries and don’t want the government to take a slice.
And those crypto real estate purchases we hear so much about: they’re mostly agents hyping a transaction where a buyer sells off crypto to pay in dollars for a home. There are platforms now, though, where a true crypto-for-title transaction can take place. They’re still rare.
Web3: A truly decentralized digital world
People are talking about Web3, the purported third major life cycle of the web. The vision of Web3 is that governments and huge corporations would no longer control our digital experiences. Instead, individuals could own and control their own data and destiny on a decentralized network by the people, for the people. Imagine a web where everyone is connected to everyone else but there’s no big platform that everyone is forced to connect with to get some desired digital experience.
Decentralization, in its purest form, does give power to individual contributors, but its complexity makes it expensive to do well. So true decentralization is actually rare across the spectrum of topics we’re covering. There are for-profit companies centralizing services to make them more easily accessible to consumers. Corporations still control almost everything today as far as consumers are concerned.
Blockchain (I Promise This Won’t Hurt)
Blockchain technology is at the root of most of these potential innovations (but not all). We don’t need to spend a lot of time on it, except for knowing that it creates distributed systems, which can have a central authority or be fully decentralized. It’s not hype, though it is sometimes overhyped.
You can imagine it as similar to how you use Google Docs to allow many people to edit a document at the same time on the web. They all have a record of what the document looks like now. They all have the ability to look at the history of all changes made by all participants on the document and that history is stored on Google’s servers, the central authority.
Imagine now if Google Docs was turned into open-source software: we’ll call it Boogle. Everyone installs Boogle on their own computer and they all connect to each other directly across the web without Google in charge anymore. This is decentralization.
If every person was constantly downloading the state of the document on their personal computer, they could always look back at the historical record of who changed what on their own device. No individual could hide what had happened in the historical records. Everyone is an owner of the immutable (unchangeable) truth.
This is essentially how blockchain works. Each node (computer) on the network has its own copy of the ledger (transaction record) and they all share updates with one another. One node can’t change history without the others knowing and agreeing.
Blockchains of many colors
So a cryptocurrency like Bitcoin operates a decentralized system where all users are in control. But blockchains can also be private, permissioned, tightly controlled networks.
For example, the Real Estate Standards Organization (RESO) is analyzing a model where every MLS in the country could contribute to a national Unique Licensee Identifier service via their own nodes on a blockchain network. This kind of service doesn’t exist in the U.S. today, as state agencies keep their own broker/agent license records and do not collaborate with one another. Agents who work and live in multiple states have disjointed records across MLSs, associations, brokerages, and vendors.
In a distributed ULI model, each node would be able to submit new license data and receive updates from the system. The MLSs could maintain some independence on their own systems while the central organization would be the overseeing data cop to ensure accuracy in distributed updates. Each MLS would know that nothing was being changed by the central authority without their knowledge as they’d have an unchangeable copy of all historical events.
Blockchains can be used by traditional companies in highly controlled environments, as well as in fully decentralized services. There are many different blockchains.
How sticky is your web?
Location, location, location: in real estate, proximity to high-demand amenities creates value. A property is networked to things based on its location: property structures, nearby schools, high-speed internet, beaches, employers, family members and more. For each individual, this network has an effect that influences what value they put on that piece of real estate. The more value the network provides to the buyer, the more they’ll pay.
These network effects are the key element to the value of digital assets, though focused on the people in your network. You might hate Facebook, but you can’t leave because your cousins put their new baby pictures there. Ancestry.com draws its users back over and over because more of their family continues to join, thereby improving the service’s value.
People continue buying iPhones for many reasons, one being that group messages with friends and family break when the only non-iPhone user responds with a message of the wrong color bubble. Your human network is sticky, and it creates lock-in for the products that hold it.
It’s important to think about the stickiness of these network effects when evaluating digital assets’ long-term value. Will people stay interested in them and for how long? Without physical assets attached, their entire value is based on the digital demand of humans, which can be a finicky thing.
Your metaverse neighbor: Snoop Dogg
So back to “real estate” in the metaverse: digital neighborhoods and cities are being built.
The demand for digital items is real. My kids buy video game logos and specialty wheels with their allowance to impress complete strangers playing online somewhere across the world. Digital property is, without a doubt, valuable.
Metaverse property has supply and demand repercussions like the physical world, except that supply in the metaverse is completely arbitrary and controlled by creators of software, while supply of physical real estate is constrained by geography, materials, labor, and government regulation.
When someone buys the lot in Decentraland next to Snoop Dogg for $1 million, maybe they’re crazy. But maybe they’re just making a bet on demand. If metaverse traffic flocks to Snoop’s block, the ability to leverage that high profile location could be lucrative: advertising on digital billboards, for example, could be profitable for a person with a plot of “land” in the right location.
Agents rush in, as they always do
Some agents are promoting the specious link between real property and digital land sales. Should real estate pros be giving advice to consumers about buying digital property? Probably no more than your Bitcoin maximalist cousin should. At a minimum, the ethical implications of purporting to have metaverse expertise via a real property brokerage license loom large.
There’s also a need to abide by securities sales and anti-money laundering laws. Just ask RE Consortia’s CEO, Teresa Grobecker, who consults on the intersection of law and distributed ledger technology. Not just anyone can sell investments to the public. Caution is warranted at this stage.
It ain’t real estate, but it is a gold rush. Remember who gets rich in physical gold rushes? It’s more pick and shovel salesmen than prospectors. There’s money to be made in the metaverse property game, but if the bottom falls out, there’s no land to land on.
Who Can You Believe?
Jack Dorsey, recently departed CEO of Twitter, has been working with his successor to incorporate decentralization elements onto the platform. He’s also CEO of payment company Square, which he renamed Block (chain). Dorsey says there’s nothing more important to work on in his lifetime than Bitcoin.
Elon Musk publicly touts his investments in Ethereum and Dogecoin. Jack Black, Eminem, Rob Gronkowski, Martha Stewart, Shaquille O’Neal and Mark Cuban have all sold NFTs. If you’re looking for successful, rich, famous or brilliant people to substantiate a belief in the future of decentralization and metaverse valuations, they’re not hard to find.
They might be right. The valuations for these bets could go to the moon. They could also melt down to nothing as the little guys are the last ones holding the bag. Successful people often famously don’t know any better than you do.
“The idea of a personal communicator in every pocket is nothing more than a pipe-dream fueled by greed.” Andy Grove, CEO of Intel, 1992.
“There is no chance of the iPhone ever gaining significant market share.” Steve Ballmer, CEO of Microsoft, 2007.
“Subscription models for music are bankrupt. I think you could make the Second Coming of Jesus himself available on subscription and it wouldn’t be successful.” Steve Jobs, CEO of Apple, 2003.
Finding the Balance
At this stage of the web’s evolution, it’s probably better to not have all the answers. The bets you make on metaverse properties or NFTs are speculative and there’s no reason to label them anything else.
There are substantial reasons to be a skeptic when it comes to comparing digital property to physical real estate. There are significant concerns about the government’s future scrutiny of investments in untaxed and unregulated securities and property transfers. This isn’t a game, and the government always gets its bite.
There are echoes of past financial frenzies where the rich and powerful got out early and the average Joes were left having evaporated their retirement savings. In addition, the unsustainable energy crisis that crypto technologies could inflict on the world are not to be ignored.
But it would be inadvisable, also, to dismiss the possibility that these new (and old) technologies could become critical utilities in our lifetimes. Many of the world’s most valuable companies only produce digital products. Video calls from across the globe on your mobile phone are an everyday thing today but were science fiction not so long ago.
This brave new world is filled with the same innovators, evangelists, hucksters and scam artists as the old one. Real estate professionals who intend to do business in this space should be explicit about the risks involved. This isn’t investment in real property, and it’s not a game where everyone wins. Sometimes fortune favors the bold. But for every Amazon, there’s a pets.com.
Carpe diem, caveat emptor.
Sam DeBord is CEO of Real Estate Standards Organization (RESO). He has served as the National Association of Realtors President’s Liaison for MLS and Data Management, President of Seattle King County REALTORS, and Managing Broker for Coldwell Banker Danforth.