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Investing in Metaverse Real Estate: Glossary of Terms

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Last month, we considered alternatives to traditional homeownership. We worked through all the pros and cons of co-owning a single family home – underscoring the need for legally binding cohabitation agreements. Our team also examined fractional ownership as an “alternative wealth-building strategy” for Millennials who have yet to buy their own home. We proposed fractional investments in condos, co-op apartments, crowdfunded developments and rental properties. This month, the team at Torii is delving into metaverse investing. Though the metaverse is still in its infancy, investors are already snatching up plots of land for millions. Over the next few weeks, we will explain how Millennials can get started in digital real estate investing. We will also weigh the risks of investing in a very new, potentially volatile space. Below, you will find a glossary of terms related to the metaverse and virtual real estate investing. The definitions below should help our readers understand upcoming posts about investing in metaverse real estate. Refer back to this list as you read the Torii blog this March. 

Terms to Know: Investing in Metaverse Real Estate

Blockchain Technology

First on our list of terms to know is “blockchain.” Most readers will have at least a base level of familiarity with blockchain technology. In short, blockchain is a decentralized ledger system that records a series of transactions across a wide network. Though that previously mentioned data is shared between many people, no one person can modify or add to the ledger system without approval.

Data recorded in the ledger is therefore immutable or unfalsifiable. This level of security removes the need for intermediaries like banks and lawyers, enabling peer-to-peer transactions with minimal risk of fraud. The ability to reliably track asset provenance and record transactions makes blockchain technology incredibly attractive to the real estate industry. 

Blockchain was originally developed for Bitcoin, but the technology now supports transactions using many different cryptocurrencies. In their article “What Is Blockchain? The Technology Behind Cryptocurrency, Explained” for NerdWallet, Kevin Voigt and Andy Rosen provide a bit more background. Voigt and Rosen write that each record in a blockchain is a “block” while the timeline of these transactions is the “chain.”

Before it becomes a block, each transaction “is independently verified by peer-to-peer computer networks, time-stamped and [then] added” to the chain. The networks that confirm transactions are called “nodes” while the confirmation process is called “mining.” Miners participate in this process because once the block is added, they receive Bitcoin. According to Wayne Duggan in the article “Bitcoin Mining Definition” for US News, the current rate for “mining a single block” is 6.25 Bitcoins. Once added to the chain, a block cannot be edited or removed.

Web3

Investing in Metaverse Real Estate: Glossary of Terms for Readers

Though time will tell, many market watchers and industry insiders believe the metaverse will be a major element of web3. In his article “What Is Web3 All About? An Easy Explanation With Examples” for Forbes, Bernard Marr explains the connection. Marr writes that “in relation to web3, the term ‘metaverse’ covers the next iteration of the internet’s front-end.” Web3’s front-end is “the user interface through which we interact with the online world, communicate with other users, and manipulate data.” 

In simple terms, web3 refers to the third phase or iteration of the internet, following Web 1.0 (original internet infrastructure) and Web 2.0 (“the user-generated web”). Web 3.0 is in its infancy. As such, Web 2.0 refers to the current state of the internet. Web 2.0 is largely set apart from its predecessor Web 1.0 by the proliferation of UGC via wikis, blogs, social media networks, etc. 

Web 2.0 has greatly influenced the way users interact with the internet and with each other. In many ways, Web 2.0 has had a formative effect on our culture. Writing for WIRED in his article “The Father of Web3 Wants You to Trust Less,” Gilad Edelman notes that many believe web3 will have an even greater impact. Edelman writes that certain people think web3 will not only “represent the next phase of the internet,” but also the next phase “of organizing society.” This makes some sense when considering the internet’s trajectory over the last couple of decades. 

How Web3 Compares to Web1 and Web2

Put quite simply, “Web 1.0 was the era of decentralization” while Web 2.0 is our current “era of centralization.” Today, much of our communication and business activities occur “on closed platforms owned by a handful of super-powerful corporations—think Google, Facebook, Amazon—subject to the nominal control of centralized government regulators.” 

Believers argue that web3 will democratize the internet – and society – by “breaking the world free of that monopolistic control.” Instead of being controlled by corporations and regulators, “platforms and apps built on web3 won’t be owned by a central gatekeeper but by users.” Technologists and corporations involved in virtual world building say that this is the basis of the “metaverse” – the land and resources of which users will own, “develop” and “maintain.” 

BaaS

Next, we define BaaS or Blockchain-as-a-Service. According to Jake Frankenfield in a recent article for Investopedia, BaaS is “the third-party creation and management of cloud-based networks for companies in the business of building blockchain applications.” BaaS providers set up and maintain “all the necessary blockchain technology and infrastructure” their clients need. They also manage back-end operations ad infinitum. 

Demand for these services has grown as blockchain applications have evolved past their original – and best-known – purpose of supporting cryptocurrency transactions. Today, blockchain technology enables all sorts of transactions, including metaverse real estate transactions and those in the traditional real estate industry.

In plain terms, Blockchain-as-a-Service “​​functions like a sort of web host, running the back-end operation for a block-chain based app or platform.” Frankenfield and other industry experts believe BaaS could be “the catalyst that leads to the widespread adoption of blockchain technology” across many different industries. Today’s “major players” in the BaaS space include Microsoft, Amazon, R3 and PayStand.

NFTs or Non-Fungible Tokens

Investing in Metaverse Real Estate: Glossary of Terms for Readers

Chances are, you’ve heard of NFTs. If you follow pop culture or politics, your first exposure to NFTs – short for non-fungible tokens – might have been when Melania Trump minted and auctioned her Head of State Collection for 1,800 Solana. Traditional real estate investors tempted by the new and emerging world of blockchain-enabled transactions might have first heard of NFTs when Propy auctioned the title of an apartment in Kiev as a non-fungible token. Either way, NFTs are a hot topic of conversation in 2022 – especially as they pertain to virtual real estate investment in the metaverse. 

To understand why, one must first understand how NFTs work. Like other crypto tokens, NFTs are issued on a blockchain like Ethereum. However, in his article “How NFTs Could Change Real Estate” for Entrepreneur, Samuel Leeds writes that NFTs differ significantly from crypto coins. Unlike cryptocurrency, NFTs are each “totally unique rather than being identical and interchangeable with each other.” 

NFTs for Metaverse Real Estate and Traditional Real Estate 

Before investors started buying up land in the metaverse and companies like Propy began using NFTs to represent ownership of real property, NFTs were mostly assigned to digital art. As Propy and other companies like it have demonstrated, NFTs could represent ownership of non-digital assets like real estate.

Leeds believes the most practical application of this would be in “fractional ownership.” The way it would work is that property owners “could sell part of their property to a large number of small investors by issuing tokens on the blockchain.” These investors could either hold onto their tokens and rake in rental income, or they could profit off the sale of their shares.

Of course, this could easily apply to fractional metaverse real estate as well. In fact, each parcel of “land” in the metaverse is already represented by an NFT. ​​Virtual real estate funds and virtual real estate investment trusts will also be traded through NFTs. For example, Metaverse Property announced that its metaverse REIT will trade through an NFT backed by its metaverse real estate portfolio.

Cryptocurrency

Investing in Metaverse Real Estate: Glossary of Terms for Readers

Cryptocurrencies – the most famous of which are Bitcoin, Etherium and Cardano – are also supported by blockchain technology. In fact, blockchain technology was originally invented to support Bitcoin. Jon Healey explains the origins and applications of cryptocurrency in his article “A beginner’s guide to cryptocurrency” for The LA Times. Healey writes that cryptocurrency was initially “billed as a digital version of money that didn’t depend on banks and was impervious to governmental interference.” As mentioned above, each bitcoin in circulation “started as the payment some person awarded him or herself for doing the computer-intensive cryptographic work required to record transactions into the blockchain” – also known as “mining.” Unlike US dollars – which the Federal Reserve can issue more of whenever it sees fit – there is a cap on bitcoin. The number of bitcoin in circulation will never exceed 21 million. 

Investors believe this scarcity will drive the value of each bitcoin higher and higher over time. Skeptics argue the opposite, noting that crypto’s “wild price swings [will likely] deter most people from jumping on the cryptocurrency bandwagon.” As of early 2022, cryptocurrency has yet to be widely adopted as an actual currency by individuals, businesses or governments. However, all virtual real estate world transactions will be conducted with cryptocurrency. As Rabindra Ratan and Dar Meshi write in an article for The Conversation, “the metaverse is money and crypto is king.”

Crypto Wallet

A crypto wallet is kind of like a bank account only the account holder has access to. Users store cryptocurrency and digital assets in these “wallets.” Technically, it is the information about your digital assets and cryptocurrencies that are stored in the wallet – almost like a debit card grants access to a bank account filled with cash. Kendall Little elaborates in her article “A Crypto Wallet Can Help Keep Your Coins Safe. Here’s How to Decide If You Need One” for TIME partner NextAdvisor. First, Little notes that there are two ways to store digital currency and assets: placing keys in an account or placing keys in a crypto wallet. According to Little, crypto wallets can be “software connected to the internet…or a completely offline device.” The former is referred to as a “hot wallet” or “software wallet” while the latter is a “cold wallet” or “hardware wallet.” 

Quoting CryptoConsultz founder Nicole DeCicco, Little writes that “‘all you need to transact in crypto is two things: your wallet address [or public key] and your private key.’” Remember, crypto is not stored in your wallet, but access to the coins is – just like a bank account with a debit card. In this analogy, the public key is “like your bank account number” while your private key is like your PIN number. You might share your public key freely as it allows transfers between parties. However, you would never share your private key (your “PIN number”) with anyone else. In short, the keys allow you to “send or receive cryptocurrency while keeping your private key encrypted.”

Metaverse

Investing in Metaverse Real Estate: Glossary of Terms for Readers

The idea of a virtual world closely integrated with our physical world has been around for decades. After all, the first VR headset was invented in 1968 and the term “metaverse” dates back to a 1990s dystopian novel. Believers in the burgeoning metaverse believe it will democratize property ownership, industry, investment and so much more. 

In 2022, however, “the metaverse” is a brainchild of huge tech companies like Facebook (now part of Meta), Google, Apple and Microsoft. These companies helped transition the internet from Web 1.0 to Web 2.0. Now, they plan to usher in a new iteration of the internet – one that dissolves the boundary between real and digital worlds even further. Today, the metaverse’s future is fairly unknown and investment in it is highly speculative.

Brian X. Chen explains in his article “What’s All the Hype About the Metaverse?” for The New York Times. Chen writes that “technologists have long dreamed of an era when our virtual lives play as important a role as our physical realities.” This yearning spread from technologists to users during the COVID-19 pandemic when travel was limited and many of us were asked to shelter in place. In the digital world, users would create avatars of themselves that could visit each other, enjoy virtual vistas and – of course – spend lots of real world money. 

As the metaverse develops, technologists believe activities in the virtual world will become more seamlessly integrated with real life. Put simply, there will be a lot of cross-over between digital and real worlds – and we won’t notice the difference as much as you might imagine. Whether the metaverse completely transforms our culture remains to be seen. However, early investors hoping to get in on the ground floor are already spending millions on virtual land. 

Virtual Land

Investing in Metaverse Real Estate: Glossary of Terms for Readers

As you might have guessed, virtual land or “digital real estate” is property in the metaverse represented by an NFT. Virtual property in these virtual worlds can be virtual houses, virtual office buildings, virtual plots and more. Some plots in these virtual worlds have twins in real world real estate. For example, international fine arts company Sotheby’s recently purchased mirror locations of its real life auction houses in the metaverse. In his article “Here’s how to buy digital real estate in the metaverse” for Fortune, Marco Quiroz-Gutierrez explains how virtual land is bought and sold. 

Quiroz-Gutierrez writes that “plots of ‘land’ are represented by X and Y coordinates on a map that makes up the entirety of a metaverse world.” All plots are represented by NFTs, which are sold through the platform’s direct marketplace “or by a secondary marketplace.” All purchases of digital real estate are recorded on the platform’s blockchain, ensuring the provenance of your purchase and proof of sole ownership. 

Valuing Virtual Land in the Metaverse

Investors spend real money – usually in the form of cryptocurrency – on digital plots of land. Virtual land – or digital real estate – is appealing to some investors because it is immune to many real world problems like natural disasters and political conflict. Buying metaverse real estate is very similar to investing in real world real estate. For example, a metaverse real estate agent might even help you buy metaverse real estate or sell real estate later on.

However, these plots of land are really just “intangible spaces within a virtual world.” Though there has been a recent metaverse real estate boom, future value remains highly speculative. This is because the value of virtual real estate in each world depends on how popular each platform is and how much land is available. According to Quiroz-Gutierrez, “there are only a limited number of plots of ‘land’ in the two biggest metaverse platforms, the Sandbox and Decentraland, and both companies have said that they will never create more.”

Why the Metaverse Real Estate Market Could Be Volatile

As with Bitcoin, the creators of these metaverse platforms hope scarcity will drive up the value of commercial and residential real estate in their digital worlds. The fact that crypto is the basis of most virtual land deals further complicates the value of digital real estate. Writing for Forbes in her article “Should You Invest In Metaverse ‘Real’ Estate?,” Nicole Lapin explains.

Lapin reminds us that “digital real estate isn’t intrinsically valuable, or backed by a tangible asset.” Most real world property is appraised based on comps, which is why unique properties are almost always harder to price and sell. As it stands, there are no historical property sales for a metaverse real estate agent to assess when determining the value of a plot of land.

This is at least somewhat responsible for the current boom and potential volatility moving forward. Furthermore, cryptocurrency is not widely accepted across industries and its value is constantly thrown into question. Given the volatility of cryptocurrency, “this digital real estate market, by extension, will also likely be a volatile one.” 

Fractional Ownership

In our recent post “Fractional Ownership Helps Millennials Enter Real Estate Market,” we explain how investors who are not in a position to buy a house can start owning – and profiting off – property. Put simply, fractional ownership is “when multiple co-owners purchase real property together.” Each co-owner has a legal right to use and/or sell a certain percentage of the physical property — not just a share in the corporation that owns that property. The percentage of ownership each co-owner has usually corresponds to the amount of money they invested in the property. Condos, co-ops, rental properties and crowd-funded development projects can all be examples of co-ownership. REITs and funds are not traditionally considered examples of fractional ownership.