Understanding the value of metaverse land

The Metaverse has exploded into the mainstream, reigniting the eternal debate about the value of virtual land. To understand why virtual land could be a great investment over the next decade, we need to first understand how value is derived.

What Defines Value

Value equals the combination of the following:

• Scarcity: This represents how many copies of an item are in circulation. Whether it’s natural scarcity (diamonds) or artificial scarcity (limited-edition Chanel bags), the less of an item in circulation, the more valuable it becomes — as long as there is a market for it (i.e., liquidity).

• Liquidity: This is the demand for the item, which creates speculation. An expensive painting is essentially worthless if no one wants to buy it. Liquidity is influenced by the popularity of the item (i.e., its reputation).

• Reputation. This represents how popular the item or brand is, which creates demand. Whether it’s Ferrari, Picasso, or Hermes, the brand represents a large chunk of the value.

• Utility. This represents what you can do with this item. For commodities, utility is the biggest driver of value, while for high-value items, reputation and scarcity usually take over. For example, a Zara shirt has the same utility as a Gucci shirt for a very different value.

Physical Vs. Digital Estate

The first thing to note is that on Earth, land is not scarce. Assuming a density similar to Manhattan, we could fit the entire world’s population in New Zealand. However, there is an element of land scarcity in individual cities. More people in an area creates a more vibrant economy, which creates more jobs, which attracts more people, and so on — increasing liquidity of the marketplace and creating network effects. This is why the world is organized in clusters with high real estate value centralized in major city centers such as Manhattan or Central London.

It’s not too different in the Metaverse. Consider the Metaverse as a digital universe — or a digital world to fit our previous example. Platforms such as The Sandbox or Decentraland all represent a different city, with a different layout, population, and set of rules. It’s true that new platforms can be created at any time and issue new land, just like new websites popping up on the internet. However, merely creating more land doesn’t instantly make it valuable; without liquidity (i.e., a market for it), reputation, and utility, the land is essentially worthless — just like creating a new city in the middle of the desert. Therefore, it isn’t the total supply of land that matters; it’s the audience that engages with it. The audience naturally aggregates around experiences they value more, which will be scarce — creating clusters similar to neighborhoods.

The Myth Of Artificial Scarcity

In each metaverse platform, just like cities, the land is inherently scarce, as it’s limited in number at inception. Some argue that artificial scarcity — reducing the supply of land to increase prices — doesn’t yield value. This is a flawed argument, as the whole luxury goods industry is based on artificial scarcity by releasing limited editions to drive prices up. Artificial scarcity does drive real value as long as there is a market for it.

Considering the dynamics between creators of content (builders) and consumers in the metaverse, we have an imbalanced marketplace (i.e., an unlimited supply of consumer attention for a limited supply of land and content/experiences). This is different from other platforms such as Instagram where the unlimited supply of consumer attention is matched by an unlimited supply of content (billions of pictures and posts).

Is it really, though? On social media, the algorithm distributing the content is creating the same artificial scarcity where popular posts are promoted more than obscure posts — restricting the total supply of visible content. Once again, it isn’t the total supply of content that matters; it’s the audience that engages with it. As a result, even on social media, the supply of good content that people engage with is scarce, artificially determined by the algorithm.

The Missing Layer Of Utility

The utility of metaverse land represents what you can do with it and how much value you can extract from it. Business models on the land can include selling NFTs such as tickets to events, e-commerce or advertising revenue. The potential revenue that the land can host represents its utility and gives the land value.

Currently, utility is the missing layer for most metaverse platforms. Despite offering intrinsic utility (the ability to sell NFTs or run ads), extrinsic utility is low due to the limited audience and liquidity. As the audience in the metaverse grows, it will amplify its overall utility. Building a business in the metaverse becomes more meaningful with millions of people in it.

Overall, scarcity and speculation are driving value in the short term, but utility is what will drive long-term value in the metaverse.

The Risks

What are the risks of investing in virtual land? In other words, how would land lose value? The answer is similar to real estate — macroeconomic factors can cause a drop in prices.

Similarly, loss in utility can create the same effect. Citizens migrating out of the city would reduce its reputation and liquidity, leading to dead neighborhoods. Just like in a physical city, the metaverse needs exciting experiences and content to retain its users. Users create liquidity, which amplifies the utility and opportunities provided by the land. However, none of this matters if the audience doesn’t have a reason to stick around. It all starts with creating a world that drives value for people via engaging experiences that foster a real desire to consume and come back.

This is why we need more people to build the metaverse and become the building blocks of exciting virtual cities that will unlock the full value of the metaverse.