Is Metaverse Land a Good Investment? Read This First

David Marsanic

@DavidN

DecentralandInvestMetaverseSandbox

The Metaverse land grab is reaching bubble proportions. Despite the staggering valuations, is the Metaverse a good investment?

The Metaverse is coming, and everyone wants a piece of it. But most investors are looking in all the wrong places.

Major titles like Decentraland and Sandbox have serious structural issues that could seriously limit their potential to attract a gaming audience. But there is hope, as a different audience could make up for it.

The Metaverse, an immersive universe of virtual and augmented reality worlds, could soon take more of our time than the physical world. As a result, it could offer more opportunities, both for users and developers. Options to create, build, earn and meet and play. Not constrained by physics in the same sense as our reality, it could also become much bigger than the physical world.

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And this is not some far-fetched futuristic dream—the tech to power it, whether smart glasses or VR googles, is already here. But unfortunately, the software is missing – the applications that could justify a $1,000 VR headset investment.

The developers are jumping in to meet that demand, mainly due to the enormous business opportunities the space brings. A recent report by JP Morgan highlights just how big the Metaverse will be. Specifically, the bank estimates that the Metaverse industry could reach over $1 trillion in revenues.

The bank even joined the Metaverse itself to be a part of that. They launched a lounge in Decentraland’s Tokyo-themed shopping district, complete with NFTs and a lion roaming the first floor.

Metaverse Investments

More importantly, the bank explained why the Metaverse would become a business success. As people spend more and more time online, the perceived importance of the digital world will shift. As a result, virtual assets may become as real as real-world assets.

This is already happening. In 2021, people spent $54 billion on virtual goods. These are, for example, video game cosmetic items. Profile picture NFTs are another example of that trend. For instance, in January, a rare Bored Ape with gold fur sold for $2.8 million.

As the Metaverse becomes more interactive, the opportunities will become even more significant. Metaverse games are at the forefront of this development. Games have the peculiar quality of getting us hooked just for the joy of playing.

These types of games could be what gets most people to join the Metaverse. That’s why businesses big and small want to own a piece of it. Now, thanks to blockchain tech, they can.

Metaverse Land Grab

Blockchain games like Sandbox and Decentraland allow players to own assets, including land as NFTs. The non-fungible tokens prove their ownership – written into the blockchain.

This has significant benefits to traditional centralized social and gaming platforms. Tech companies like Facebook and Apple have faced accusations of engaging in monopolistic practices. In any case, a centralized platform puts one entity above all else. Companies like Microsoft or Facebook could, at their sole discretion, favor one company over the other, change their terms in a way to impact business, etc.

Companies are much more willing to invest in decentralized platforms for all those reasons. That is why many major companies jumped on the trend, buying up land to establish their Metaverse presence. What followed can only be described as a digital land grab. Celebrities, blockchain firms, and venture funds rushed into digital real estate.

Most sales came from the Big Four players in the Metaverse – Sandbox, Decentraland, Cryptovoxels and Somnium. Collectively, these games saw some $500 million in land sales. In addition, digital real estate funds emerged, such as the Metaverse Group, a subsidiary of Tokens.com. In November, the fund invested $2.4 million in digital real estate in Decentraland.

Crazy Valuations

As a result of the land grab, prices shot through the roof. Decentraland and Sandbox demonstrate this best. All land in Decentraland is divided into plots, the smallest land units. A plot is the size of 16x16m, or 256 meters squared. There are 90,601 of these plots in the game, and the cheapest one goes for $11,000.

Sandbox is much larger, with 166,464 LAND plots, each 96x96m or 9216 meters squared. Unfortunately, the cheapest plot in Sandbox goes for $10,000. What is more, Sandbox is still not even available to play yet.

Going by land alone, these games have staggering valuations. But that’s not all, as they also have their native tokens. SAND has a market cap of $4,5 billion, while MANA has a market cap of $6 billion. Regarding their coin market cap, the two tokens are in 35th and 29th place, respectively.

These game tokens are larger than Ethereum Classic, which forked from Ethereum back in  2016, after the infamous DAO hack. They also lead Monero; a cryptocurrency focused on privacy.

How Risky is Buying Land in the Metaverse?

However, there are indications that these digital land prices might be inflated, and that’s putting it mildly. Companies are buying up land because they expect to profit from it later. These profits ultimately rest on their potential yield.

Land in Metaverse games could increase due to player demand for housing in these plots. Moreover, gaming companies might want to use it to make their play to earn games. Advertisers may want to buy digital billboards or other types of advertisements, while businesses might want to set up shops for both virtual and physical goods and services.

This is where present valuations become problematic. For now, actual revenue potential seems very limited. For now, the user base for these games is minimal. It’s complicated to estimate whether they will attract a large player base. Sandbox is not even out yet.

Predicting whether a game will be successful is very difficult. What is more, established Metaverse games may soon face substantial competition, both from centralized projects and other decentralized Metaverses.

Celebrity Hype

Probably the most significant indications of the bubble are the staggering valuations of land in the neighborhood of celebrities. Unlike the real world, Decentraland allows users to teleport. That means that there’s no advantage of being closer to any plot. Instead, users can just input the coordinates and instantly move to any part of the map. Despite that fact, one person spent $450,000 for a single plot next to Snoop Dogg’s virtual mansion.

Established games like Decentraland and Sandbox have their advantages. They have a strong head start and a powerful brand. They have attracted influential corporate names that might attract developers to join their ecosystem. Devs will likely ultimately be the driving force behind making the game more engaging for players.

Moreover, the sheer volume of investment makes it so that many people have a vested interest in the success of these projects. Digital real estate funds and other significant investors will likely do whatever they can to make their investment profitable. With robust financial backing, these games may prove to be a success in the future.

Artificial Scarcity in Metaverse Land

However, there are indications that most major existing metaverse games have flawed models. Moreover, the incentive structure in place may make changes to these models extremely difficult.

The first issue is the barrier to entry to much of the gameplay. In sandbox-type games, players want to build and otherwise make their mark on the environment. Decentraland and Sandbox will allow players to do that for a minimum of $10,000. However, as only landowners can change the landscape, players will have to buy a plot to do that. For most, that is prohibitively expensive.

What is more, there is no reason why land in metaverse games should be scarce. For example, sandbox games like Minecraft are set in an infinite procedurally-generated space. Applying this model to a blockchain game would allow an endless number of players to stake their claim on land plots for virtually free.

However, that would make metaverse land a not-so-attractive investment. Developers of Metaverse games intentionally introduced artificial scarcity of land to make buying land seem more appealing to investors. Unfortunately, many metaverse projects have put fundraising concerns ahead of gameplay. This could hurt them in the end.

Ultimately, games with the largest active player base will win out. Games with huge players floors will have significant network effects that keep the players engaged. That’s why games should be concerned with making barriers to entry for new players as low as possible.

With a $10,000 entry point for a significant feature of the game, Sandbox and Decentraland will be at a considerable disadvantage. However, it is only a matter of time when substantially bigger, or infinite metaverses join the competition. Then, these games will be able to copy all the best features of the older games while allowing players to buy land for virtually nothing.

Structural Flaws in Metaverse Land Governance

Still, supporters might say that games like Decentraland and Sandbox can change. Since a lot of money is at stake, developers could add more land to the game. Unfortunately, that is very unlikely to happen. Specific structural challenges will make adding land very difficult.

The best way to see the challenges these games face is through a structural model of layers of incentives and development. First, the individual players on the top use the game. Then, below, some landowners can create minigames for these players to engage with. These games, however, rely on the core mechanics of the game. Below the mechanics is the governance layer, to be decided by most investors in the game.

Each of these layers is more challenging difficult to change than the former. For example, while landowners can easily set up minigames for players, changing the core mechanics is a greater challenge. But the most significant issue is the incentive structure for the owners.

Simply put, why would landowners want to create more land? Making more land will very likely impact the value of their land even if the game’s future is at stake, and with it, their entire investment. In the short run, the hit they would take might be too big to bear.

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VIP Metaverse Experience

While artificial scarcity inland is a huge limiting factor, the projects might turn it in their favor. This will require turning the games into a sort of VIP experience. 

That is where Sandbox and Decentraland have an advantage. These projects already have the most prominent celebrity and corporate names on board. Tech-savvy celebrities like Snoop Dogg and Paris Hilton are already there. In addition, Snoop Dogg has land in the Sandbox, where he plans to hold private parties.

I’m entering the #metaverse with @TheSandboxGame !! #TSBxSnoopDogg #NFT https://t.co/DZvSV4NNSc pic.twitter.com/zoa87iDhRl

— Snoop Dogg (@SnoopDogg) September 23, 2021

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Instead of focusing on a sandbox experience with a clear disadvantage, these games could focus on celebrity engagement. By giving celebrities the tools to monetize interactions with their fans, existing blockchain games could create real revenue potential for landholders.