This time last year, if someone had said, “I’ll sell you a plot of virtual land for 1 ETH,” most of us would have told them to kick sand. Now a year later, most of us are finding that we are the ones kicking sand, and not virtual sand in the Sandbox.
Everyone in blockchain wants to be early, ahead of the curve. To everyone who believes they missed out on the latest blockchain gold rush, virtual land, think again. A more efficient and scalable future for the intersection of blockchain and real estate is being built as we speak – and it’s not solely confined to the Ethereum blockchain.
Irina Karagyaur is the head of metaverse growth at Unique Network, head ambassador for Western Europe of the Polkadot network and also London’s regional co-chair of the Foundation for International Blockchain and Real Estate Expertise. This post is part of CoinDesk’s Culture Week.
The future of NFTs (the technological standard for unique digital assets, like artwork or virtual homes) is multi-chain, a more diverse pathway that solves the limitations of the Ethereum blockchain and enhances its usage to present once unimaginable opportunities that touch multiple corners of culture and commerce.
In this multi-chain future, we will see vast opportunities and diverse use cases made possible by alternative chains like Solana, Tezos, Polkadot, Kusama, Cardano and many others. These chains bring answers for scalability, network congestion and the ability to truly fractionalize ownership, allowing non-fungible tokens (NFTs) to become usable and transferable in the metaverse – breaking out of the confines of traditional digital collectibles – perhaps into the real world.
While you might not immediately associate an age-old industry like real estate with the current technological advancement of blockchain, the potential for this industry to be modernized and made efficient is powerful – even inevitable.
Anyone who has ever bought or rented a property is familiar with the inconvenient, time intensive and expensive process. There are contracts to sign, payments to be made between landlord and tenants, real estate agents and, often, mediating lawyers. These arrangements require multiple transactions, time and money.
With virtual real estate in open metaverses, we can implement peer-to-peer transactions and use smart contracts to automate and accelerate these legal processes. Smart contracts can be programmed to instantly trigger actions and execute orders as required. As a result, property assets, such as buildings, shares or funds, and debt or equity, can be automated in new ways and executed in minutes instead of weeks or months.
Virtual real estate can unlock liquidity via decentralized global markets that enable tradable assets and allow for metaverse assets to be used as extractable collateral to fuel innovative methods of lending in decentralized finance (DeFi).
Through what we hope will be an increasingly open metaverse, users can one day move digital assets and NFTs in and out of virtual worlds. Perhaps their digital homes can be used as collateral for loans. Imagine if you could borrow against a valuable piece of virtual land to acquire physical land?
This world, still being settled, will almost certainly need to be built on more than just Ethereum, the dominant smart contract network.
Since Ethereum’s launch in 2015, smart contracts have gained traction in functionality and innovation. ERC-20 tokens are the most commonly used standard for tokenization. These tokens encode rights of ownership in code. The ERC-721 standard and the more advanced ERC-1155 – the technical standards for NFTs – create digital scarcity. A diversity of protocols and tokens exist on Ethereum, forming the foundation for an open metaverse.
However, the industry is rapidly expanding, and the developments on Ethereum exist on other blockchain networks as well. Although Ethereum layer 2 solutions (add-ons that help the network process more transactions) work well, new blockchains have seen exponential growth and promise fertile new ground. A rich pool of creative builders are looking beyond Ethereum and the network’s exorbitant fees.
As a consequence, the current challenge for the industry is to achieve interoperability between different blockchains. By eliminating the “silo effect” in the blockchain industry, we might finally reach “mass adoption.”
Polkadot, a blockchain I’m financially involved in, is one such alternative chain for this kind of interoperability. Due to its advanced ownership structure, it can enable the transfer of property ownership straight to other addresses, grant or prohibit third party rights to use a property for display purposes and facilitate the exchange of a deed or trust.
There’s undoubtedly a lot of work that needs to be done in this space to realize this future. As it stands, critics say that current eye-popping virtual real estate sales are more of a novelty driven by hype and speculation, compared to something that truly represents unique ownership. Others argue that real-estate – virtual or physical – requires a level of legal due diligence to ensure security and confidence between buyers and sellers.
There will also be apprehension and criticism from the traditional real estate industry, which might not see the value in disrupting their antiquated, albeit profitable model.
Still, real estate NFTs promise the ability to democratize property ownership, a space that has historically excluded a majority of the world. GoBankingRates quoted a research analyst at Grayscale Investments who noted that historically, real-estate value is largely influenced by proximity to shops, services and attractive neighborhoods. It remains to be seen if that may happen too in the metaverse, where players can “teleport around the world, making travel instantaneous and irrelevant to valuation.” Grayscale is a subsidiary of Digital Currency Group, the parent company of CoinDesk.
As time goes on, will profiteering infect virtual land development? Will expensive plots in the Sandbox or Decentraland retain their value? Will people outside of crypto see NFTs as a powerful new tool for ownership, even if you can’t sleep inside a computer?
As it stands, NFT infrastructure is still limited. The technology isn’t there yet to allow for true unique tokenization of properties (especially on Ethereum, where it’s currently close to impossible). A new paradigm will need to be developed in order to take this sector forward.
In the year to come, the industry will see an injection of billions into NFT infrastructure that will support alternative use cases and enable a visible ledger that can be divided or expanded, facilitating a unique representation of individual assets, similar to art and collectibles.
Smart contracts will need to be improved to allow for speed, functionality and scalability. There is great work being done in some sectors – like “Nested NFT Palettes” that allows for sophisticated ownership relationships between holders of fractionalized property.
Regulations are also up for debate. As are the concerns of the traditional real estate industry, which really could be disrupted by free-moving assets – pinned to no single blockchain – that can be used in the real world and digital world alike.
There are social considerations of getting people to value digital property. It’s already happening. But this the new tokenized world – this multi-chain future – will take time. Much like building a house.
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