Technology

Valuing Land in the Metaverse

By Zach Friedman, Chief Strategy Officer of leading digital asset brokerage Secure Digital Markets

In late April, the entire Ethereum blockchain experienced a disruption as users tried to purchase deeds for the Bored Ape Yacht Club’s metaverse project, Otherside. This episode is indicative of the soaring popularity of the metaverse, an industry that has exploded over the last two years , and entered the mainstream awareness in force over the last six months. This acceleration in its popularity and growth arose from a few key catalyzing events: Facebook’s (Meta’s) announcement of its pivot to become a metaverse company, record NFT sales primed for metaverse display and implementation, and a frenzy of blockchain-based fundraising activity, such as The Sandbox’s completed $93M Series B led by SoftBank.

This is just a small sample of the fundamental reasons why now is the time for the Metaverse to shine. With this momentum expected to continue as metaverse ecosystems attract more adoption, investment, and growth more broadly, it’s important for prospective users and investors to consider broad valuation frameworks and mechanisms for buying and selling land within the metaverse. 

The Qualitative Factors to Consider in Land Valuation

Land within the metaverse is often represented as an NFT and is typically sold in larger combined units, known as parcels. The simplest way to approach this land valuation is by looking at fundamental similarities to traditional real estate.

Sizes and dimensions: 

There is a direct relationship between parcel size within the metaverse and the value of the aggregate plot of land. With all other factors being held equal, larger parcels will commensurately be worth more in value than smaller parcels within the metaverse.  In addition to the length and width of land sizes in the context of dimensions, height and associated thresholds is another factor that may drive parcel values in the metaverse.

Location: 

As with traditional real estate, location is everything. Parcels with locations close to major hubs of on-platform activity (e.g. Genesis Plaza in Decentraland) tend to be worth considerably more than those in more isolated or inactive locations across platforms (e.g. plots along external borders of The Sandbox map). 

This location factor also includes proximity to key on-platform features such as in-demand natural landscapes, vibrant commercial areas, and more. It’s worth noting that location in this context differs somewhat from more traditional real estate due to the digital environments being more dynamic. Locations in the metaverse can experience rapid shifts in value due to the amount of money flowing in, creating new valuable locational hotspots. While investments in the environment of undervalued real estate generally increase property value in the real world, the process is more gradual. In the metaverse, location-based property value can shift in an instant with the right buyer, momentum, and influx of activity. Additionally, some parcels across metaverse platforms might be located around features that are more visually and aesthetically appealing relative to others across the metaverse

Utility: 

Some land units offer more utility for users for both niche and broader use-cases than others. For instance, in Upland, specific units offer users the ability to complete specific property collections, treasure hunts, and similar exclusive events that may not be available to users without ownership of the specified parcels. 

Overcoming Obstacles to Valuing Land in the Metaverse

While assessing the value of metaverse properties qualitatively may seem relatively simple and straightforward, there are more thorough, quantitative assessments of land in the metaverse that can help investors understand exactly what they are paying for. But in a nascent industry, those more thorough methods come with their own, unique challenges.

First, it is difficult to obtain all the pertinent input information, such as estimates of net operating income, capitalization rates across different areas or financing methods, and comparable income-generating property market research. This process can be fairly tedious and time-intensive, and may still result in gaps in the data, or data that isn’t particularly useful in terms of actually deriving land valuations. 

While traditional real estate shares these information gathering obstacles as well, valuing land in the metaverse can prove to be increasingly difficult due to the early-stage nature and relatively young infrastructure of the space. 

In addition to the different ways to value land in the metaverse discussed here, there is still significant and in-depth analysis needed to account for broader market conditions and their impacts on build values within the metaverse.

That being the case, working with an experienced metaverse broker can be helpful for making informed decisions. The landscape is constantly shifting, and it’s essential to understand all the macroeconomic factors, as well as nuances of each platform.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.