First of all, I would like to thank Nir.eth, a member of the NFT platform Yup.io team, for bluntly expressing a concern that has plagued me for years.
Hopefully you understand why this is not only a valid question, but a red-hot and important one that has been making the rounds on Crypto Twitter in recent days. Yuga Labs, creators of the Bored Ape Yacht Club, this week completed the sale of "Otherdeeds" for virtual properties in their planned "Otherside" metaverse project, raising an incredible $285 million for the company. The base price for Otherdeed NFTs has fallen by as much as 12% since the sale, an important signal in an area where similar "blue chip" coins have often seen rapid increases after launch.
Why is land valuable in the first place?
Of course, metaverses face the problem of the proliferation of imitators. There are dozens of metaverse projects in the making, and as Tushar Jain of Multicoin Capital recently noted, they can all sell "land."
But the issues raised by Nir and others in recent days are much more fundamental and could point to weaknesses in the model regardless of the competitive landscape. In particular, the notion that geographic space in a virtual world appreciates in value in the same way that land does in the real world seems to overlook some really fundamental differences.
In the real world, the value of a piece of land is based on its location and utility. The value of land in the real world depends on how long it takes you to get to other places you want to visit. This is why land in Tokyo and New York are among the most valuable in the world: they are close to cool stuff. This geographic reality is inextricably linked to the scarcity of land in the real world, as every piece of land has a completely unique geographic location compared to every other piece of land.
So the problem for metaverse land buyers is simple: in a 3D digital world, all distances are fake.
There is no inherent reason why a piece of virtual land should be more valuable because of its location, any more than a web address is valuable because it is "closer" to another. In a virtual world, you can simply teleport your avatar to any location, instantly. As another Twitter user noted, this would mean imposing entirely artificial restrictions on users to increase the value of a metaverse, which would degrade the experience and ultimately discourage the users who are the real source of a metaverse's value (more on that in a moment).
Then there is the second value of land in the real world, its practical utility. In the real world, this might mean, for example, having the right soil or water sources for agriculture or other natural resources. But again, there is no such thing as a "natural resource" in a metaverse, so virtual land would replicate the value structure of real land by having certain rights attached to it.
In a thread criticizing the land sale model, Nifty Island co-founder Charles Smith points out that the most obvious step here is to tie the right to create content to land ownership.
However, implementing this solution to support land values would have the opposite effect of harming the user experience and, in turn, discouraging the creators that make shared worlds attractive and valuable. "Look at Minecraft, Roblox and even YouTube," Smith continued, asking. "Would these platforms be better if the right to create on them was limited to a tiny number of landowners?"
Nifty Island has explicitly said it would exclude the sale of land from its model. At the very least, that suggests an attractive option for investors seeking diversification across different financial models.
The financial skeuomorphism trap
Given these criticisms, the whole idea of investing in metaverse land could be described as a form of "financial skeuomorphism." Skeuomorphism refers to the tendency to design digital products to mimic the physical world, and was a hot topic in interface design especially during the early development of the iPhone.
Over time, visual skeuomorphism in interface design has waned as people have become accustomed to the differences between digital and physical objects. The same could happen with Metaversen, with the added effect that a bunch of people just invested $285 million, not in Yuga Labs stock, but in the financial equivalent of a Dropshadow app icon.
And while Apple has been able to gradually move away from skeuomorphism, metaverse projects tied to their property valuations may have swallowed a poison pill that they can only throw right in the faces of their investors. To shore up property values, developers may have to introduce artificial constraints that hurt the user experience and ultimately the actual value of the system. Conversely, a metaverse that is easier to navigate or create content in would almost inherently hurt property values.
So far, this could simply be a case of the founders moving so fast that they have not fully thought through the implications of their basic models. The less generous interpretation, however, is that they are exploiting the skeuomorphic biases of buyers - using the metaphor of "land" in a way that implicitly exaggerates the inherent value of the virtual objects they are selling, and laughing up their sleeves in the process.