For artists, brands, and gamers, the metaverse is a living reality. Travis Scott’s Fortnite concert was attended by 27 million; the Vatican is opening an NFT art gallery; JP Morgan just signed a yearlong lease for a digital property.
This swift adoption is a testament to the metaverse’s current and future utility – and is reflected in virtual property pricing. From September 2019 through March 2022, blockchain-based virtual real estate prices grew by 879%. Real estate prices, meanwhile, grew by 39%.
While this comparison is hardly apples-to-apples – the Case-Shiller index tracks physical single-family housing; the Metaverse index tracks digital parcels – it’s nonetheless surprising. In the period studied, virtual real estate prices outpaced physical real estate by 532%. Why might that be?
Let’s dig in.
In this article:
- What’s the utility of metaverse property?
- Where’s the most affordable metaverse housing?
- How long are users holding on to virtual real estate?
- What external factors will determine the long-term value of virtual real estate?
- Blockchain gaming
- Thought experiment: EA Sports on the blockchain
The utility of metaverse property
Blockchain-based virtual real estate (VRE) offers both present-day and prospective benefits to the people who own it. Let’s take a look at both types of amenities.
- Embedded videos, images, NFTs, and objects with interactivity
- In-game single-player and multiplayer activities
- Play-and-earn integrations
- Screen-sharing and twitter spaces-like town hall functionalities
- Access to private events and NFT-gated communities
This last feature – access to private events and exclusive communities – has been a big driver of non-fungible token (NFT) demand to date, and it looks to be translating into sales of virtual real estate. Bored Ape Yacht Club, for example, has always bundled its NFTs with entertainment, socialization and digital community. and they’ve since parlayed that appeal into a $310 million metaverse land sale.
Prospective utilities of virtual real estate
- Price appreciation
- Renting and leasing
- Free airdrops of future NFTs
- Future AR/VR integrations and functionalities
Not all metaverse projects promise every one of these utilities — and there may be some we’re missing — but most offer several from each category.
Where’s the most affordable metaverse housing?
The biggest differences in virtual land prices seem to be between blockchains, not within them. Relative to virtual land on Ethereum, virtual land on Solana has much lower entry-level pricing.
Solana gas fees average $0.00025, a fraction of Ethereum’s $5 to $50. This may make “affordable virtual housing” more practical for holders and developers on Solana.
That being said, almost every Ethereum-based virtual world listed above has recently integrated with Polygon, an Ethereum sidechain that competes with Solana on both cost and speed. So while this gap may be explained in part by transaction fees, it could soon (or already) be explained by differences in popularity or monetization strategy.
How long are users holding their virtual real estate?
The average duration of users’ land holdings varies widely. Across the 11 Ethereum-based metaverses for which we have data about holdings, most signs point to speculative activity.
In 10 out of 11 of the projects we study, users have held their VRE NFTs for less than 25% of the time the NFT collection has been live. In 6 out of 11, they’ve held it for less than 15%. In other words, VRE purchases in most of the above projects would be best characterized as “flipping.”
The biggest exception is OVR Land. OVR Land has the longest holders for three likely reasons: the land is abundant, cheap, and takes time to develop. There are more than 1.6 trillion OVR lands, each one costs just $10 to $50, and when you buy one, what you’re actually buying is the opportunity to overlay augmented reality (AR) experiences on top of real-world geography.
For example, here are two parcels of OVR land listed for sale in France.
But building an AR experience is neither fast nor easy – especially for a solo software developer. This may partially explain why most users are buying and holding, but not often selling. Another possible explanation is that AR feels closer to being realized than VR, which is what most VRE collections have pitched themselves as eventually supporting. In this way, the payoff of holding OVR land may seem to users like it will come sooner than holding land from other projects.
What external factors will determine the long-term value of virtual real estate?
Because the metaverse is such a nascent space, the long-term value of blockchain-based VRE depends on a number of external factors. While most of these factors are hard to foresee, we believe that a couple of them may be:
- Whether AR/VR systems are more interoperable or proprietary
- The pace of adoption of new computing technology
Interoperable vs. proprietary technology
It’s easy to imagine a world where the R&D budgets of companies like Meta (current developer of the Oculus Rift) and Niantic (creator of Pokemon Go, the augmented reality hit) give way to a massive technological lead. The question, then, is whether the fruits of this labor will be broadly shared. In other words: to what extent will these companies’ technologies be open-sourced and accessible to build upon? And will they allow other metaverse companies to connect their projects, or will they create a walled garden within which only they can develop?
Meta had this to say about the subject in May:
The metaverse will be an interconnected system that transcends national borders, so there will need to be a web of public and private standards, norms and rules for it to operate across jurisdictions. There won’t be a Meta-run metaverse, just as there isn’t a ‘Microsoft internet’ or ‘Google internet’ today.
And in June, big-name tech companies like Microsoft, Meta, and Epic Games formed the Metaverse Standards Forum (MSF). This group is meant to create open standards for all things metaverse, including AR, VR, and 3D technology. Other big names include Nvidia, Unity, Sony, and the World Wide Web Consortium (W3).
It remains to be seen whether these companies will build out their metaverse(s) in a fashion that is interoperable with current metaverse projects and blockchain technology. However, there is at least one early indication of a more blockchain-compatible future: Epic Games’ acceptance of crypto games in its game store. While this has limited import to metaverse projects today, it’s extremely important to blockchain gaming – an industry with very similar commitments and aims. We cover these in more detail below.
The pace of adoption of new computing technologies
Assuming some degree of interoperability, blockchain-based metaverse projects stand to benefit immensely from the adoption of VR technology. The more immersive and life-like the virtual experience, the more likely it is for NFT-based ownership to feel tangible to users. So the faster VR technology grows, the better it is likely to be for metaverse land offerings.
Fortunately, the revenue generated from VR-based gaming is growing rapidly. From 2017 to 2021, VR gaming revenue had a compound annual growth rate of 28.5%.
Also, analysts suspect that the VR boom will get only bigger – thanks in part to blockchain technology. Citi estimated in a March 2022 report that by 2030, the metaverse economy could be an 8 to 13 trillion dollar total addressable market. In its report, Citi listed VR and blockchain technology as two of the five key metaverse building blocks:
- Operating systems connecting people and content
- Blockchains that decentralize economic systems and digital asset ownership
- Natural user interfaces e.g., voice control and gestures for greater user immersion
- Extended reality (XR) headsets
- Cloud networking infrastructure.
Blockchain video games, while seldom linked to metaverse projects today, have many of the same ambitions:
- To build more open-ended economies
- To connect individuals and communities
- To push the boundaries of digital ownership
- To decentralize and share the value they create
- To make the virtual world as immersive as reality
They’ve also, like metaverse projects, recently exploded in popularity and funding. DappRadar recently reported that blockchain gaming activity has increased 2,000% over the last year. Furthermore, blockchain-based game companies fundraised $2.5 billion last quarter, up 150% from the quarter before.
But what about traditional games and game companies? What would happen if already-popular games adopted NFTs and cryptocurrency? Let’s take a look and see (with a healthy suspension of disbelief).
A blockchain gaming thought experiment: EA Sports on the blockchain
In fiscal year 2021, Electronic Arts (EA) generated $1.62 billion from its FIFA, Madden, and NHL Ultimate Team offerings.
In Ultimate Team (UT), players assemble, trade, and compete against one another with a squad of athletes, each of which are represented by a trading card. Players can buy packs of 12 to 30 of these trading cards with either points, which can be purchased with real money, or coins, which can be collected for free by playing. Players can then sell the cards they’ve drawn to other players in exchange for coins – but they can never convert game currency into points or real money.
At least in theory. In practice, despite EA’s best efforts, there’s a gray market for these coins that undercuts EAs pricing. For example, to buy an Ultimate Pack – EA’s highest-tier and most expensive pack – players must spend either 2,500 points or 125,000 coins. Bought with points purchased from EA, this pack costs $23; bought with coins purchased on the gray market, this pack costs $6.50.
In other words, this gray market both threatens EA’s main revenue stream and makes “good citizen” players worse off. When third parties sell their coins for real currency, EA gets nothing – but players get three times the value for money.
But what if, instead of maintaining a closed-loop economy and forgoing this revenue leakage, EA minted their trading cards as NFTs, which could then be sold between players on a secondary market? How would this alter their revenue – and create new ways for players to make money?
For one thing, it would introduce a new revenue stream for EA. Usually, when an item is minted as an NFT, a portion of every sale is passed back to its creator as a royalty. UT already features a 5% transaction fee on its player-to-player market – so this is hardly unprecedented– but today it’s not an actual revenue stream. Instead, it’s a “gold sink” – a way to prevent coins from hyperinflating.
For another, it would heighten the concept of rarity. While no cards in today’s UT economy have a predefined supply, this is the de facto standard for NFTs – and a key reason why they can fetch such high prices.
Lastly, it would give UT players the ability to make money. This is win-win: if players can sell their cards for cryptocurrency, they can earn back some or all or even multiples of their original spending; if EA enables these trades, they can collect a small slice of every sale price.
Modeling Ultimate Team with NFTs
We now construct a simple financial model for both EA’s revenue and Ultimate Team players’ earnings in a game mode reimagined with NFTs.
- 25 million active players. Ballpark estimate based on EA statements.
- $65 annual player spend. Ultimate Team revenue ($1.62 billion) divided by active players.
- 5% resale royalties. A common rate for NFTs.
- NFT primary sale price = secondary sale price. Some cards will surely rise in value following their primary sale while others will fall, so for simplicity’s sake, our model assumes that in aggregate, all cards’ secondary sale prices will equal primary sale prices.
- Annual resale volume. Our model projects NFT sales revenue for both EA Sports and its UT players at three different possible levels of annual NFT resale volume: 100%, 300%, and 500%. 100% resale volume would mean that for every $1 of annual player spend on primary NFT sales, there is $1 of secondary market sales. 300% would assume $3 of secondary market sales, while 500% would assume $5.
|EA revenue: UT x NFTs||Annual resale volume|
|Annual EA Sports revenue assuming $65 per player spend on primary card sales||$1,706,250,000||$1,868,750,000||$2,031,250,000|
Interpretation: NFTs could generate significant additional revenue for EA Sports. Under our lowest resale volume model (100%), in which players spend $65 on NFTs and engage in $65 worth of secondary market activity, EA generates $1.7 billion in annual revenue – $81 million more than they do today. At 300% resale volume, EA generates $1.87 billion – $244 million in additional revenue. And at 500% resale volume, EA generates over $2 billion in annual revenue – $406 million more than today.
But how do the players fare?
|Player earnings: UT x NFTs||Annual resale volume|
|Annual player revenue assuming $65 per player spend on primary card sales||$1,543,750,000||$1,381,250,000||$1,218,750,000|
Interpretation: Introducing NFTs could create a first-of-its-kind market for players to profit. Under our lowest resale volume model, players collectively realize $1.54 billion in annual earnings – none of which they realize today. At 300% resale volume, players’ earnings fall to $1.38 billion. And at 500% resale volume, players’ earnings rest at roughly $1.22 billion. In this model, players’ total earnings fall as resale volume rises, because more resales means more fees, and our model assumes no increase in card value upon resale on average — again, some cards will rise in value, while some will fall. However, total player earnings could increase if the average card price rose over time, as is the case with many NFT collections generally.
It’s worth noting that in this model, primary sales would still be EA’s main revenue driver. But the secondary sales, while accounting for only a fraction of EA’s $1.87 billion in revenue, would benefit players immensely. Even if we relax the assumption that the NFTs hold their original value, players of Ultimate Team could still walk away with hundreds of millions in earnings collectively – a far cry from the $0 they earn as “good citizens” today.
Furthermore, because in this model players recognize that they have a chance to resell their cards for a profit, it may attract an even higher annual player spend than our original $65 assumption.
The metaverse is fast approaching
All trends point to the metaverse. Virtual real estate now offers real-world utility; VR technologies are coming closer to reality; and blockchains are imbuing digital ownership with meaning.
We’re thrilled to be working with companies at the intersection of these three trends to build trust into blockchains, games, and the metaverse. When these trends finally collide, it will be a fascinating time to be extremely online.
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