I wrote a piece explaining what gives NFTs worth in 2021. Since then, the metaverse has taken off and become widely accepted, reigniting the age-old argument over the worth of virtual property.
We must first comprehend how value is created in order to comprehend why a virtual property can be a wise business investment over the coming ten years.
What Constitutes Value
Value is the result of combining the following:
- Dearth. This shows how many copies of a given item are currently in use. The more scarce something is, whether it's from natural scarcity (like diamonds) or manufactured scarcity (like limited-edition Chanel bags), the more expensive it gets—as long as there is a market for it (i.e., liquidity).
- Fluidity This is the level of interest in the product that fuels conjecture. If no one wants to buy it, a pricey painting is virtually worthless. The popularity of the item has an impact on liquidity (i.e., its reputation).
- Credibility. This shows how well-liked the product or brand is, which increases demand. The brand accounts for a sizable portion of the value, whether it is Ferrari, Picasso, or Hermes.
- Usefulness This exemplifies what this thing is capable of. While reputation and scarcity typically take control in the case of high-priced objects, usefulness is the primary driver of value for commodities. For instance, a Gucci shirt costs far more than a Zara shirt but has the same functionality.
Estate: Physical vs. Digital
The first thing to keep in mind is that there is plenty of land on Earth. We could fit the entire world's population in New Zealand, assuming Manhattan's density. However, each city has a unique level of land scarcity. A location with more residents benefits from a more active economy, which in turn generates more jobs, draws in more residents, and so on, improving market liquidity and fostering network effects.
This explains why the world is divided into regions with high real estate values that are concentrated in bustling metropolises like Manhattan or Central London.
Not much has changed in the metaverse. Think of the metaverse as a digital universe—or, to fit our earlier analogy, a digital planet. platforms like Decentraland or Sandbox MANA + 5.5 MANA + 5.5 each represent a new city with a unique structure, populace, and set of regulations. It is true that new platforms and parcels of property may be formed at any time, just as new websites may appear online.
The land is fundamentally useless without liquidity (i.e., a market for it), reputation, and utility, just like building a new city in the middle of a desert, thus simply adding more land doesn't make it valuable right away. Consequently, the actual amount of land available is not what matters;
The audience is the one who interacts with it. Because these encounters will be scarce, the audience will naturally group around them, forming clusters akin to neighborhoods.
The Fallacy Of Man-Made Scarcity
Every metaverse platform has a finite amount of land from its origin, making it naturally scarce, exactly like in cities. Some contend that creating artificial scarcity by lowering the availability of land in order to raise prices doesn't provide value.
This argument is faulty because the entire luxury goods business relies on creating artificial scarcity through the release of limited editions to raise costs. As long as there is a market for it, artificial scarcity does really create genuine value.
We have an unbalanced market because of the dynamics between content providers (builders) and users in the metaverse (i.e., an endless supply of consumer attention for a finite amount of land and content/experiences). This is distinct from other platforms like Instagram, where there is an infinite amount of content and an infinite amount of consumer attention (billions of pictures and posts).
But is it really? The algorithm used by social media platforms to distribute content creates the same artificial scarcity, favoring popular postings over less well-known ones and thereby limiting the amount of visible content available. Once more, the audience's engagement with the content—rather than its absolute supply—is what counts.
As a result, even on social media, the algorithm artificially limits the availability of quality content that people engage with.
The Utility Layer That Is Missing
What you can accomplish with it and how much value you can derive from it are represented by the utility of a piece of metaverse real estate. Selling NFTs like event tickets, conducting business online, or earning money from advertising are all possible business strategies for the land. The land's utility and worth are represented by the potential revenue it could generate.
Utility is currently the layer that the majority of metaverse platforms are missing. Extrinsic utility is minimal because of the small audience and liquidity, despite the intrinsic utility (the capacity to sell NFTs or run advertisements).
The utility of the metaverse as a whole will increase as its audience expands. Millions of people in the metaverse increases the significance of building a business.
Generally speaking, utility will be what drives long-term value in the metaverse while scarcity and speculation are driving value in the short term.
The Dangers
What are the dangers of purchasing virtual property? So how would land lose value, exactly? The solution is similar to that of real estate: price drops can be brought on by macroeconomic variables.
Similar effects can be produced via utility loss. The city's reputation and liquidity would decline as a result of citizens leaving, creating vacant neighborhoods. The metaverse needs engaging activities and material to keep users interested, just like in a real city.
Liquidity is produced by users, who also increase the potential and usefulness of the land. If the audience doesn't have a reason to stick around, none of this matters. It all starts with building an environment where individuals can derive value from enjoyable experiences that pique their interest in consuming and returning.
Because of this, we require more individuals to create the metaverse and act as the foundation for fascinating virtual cities that will unleash the metaverse's full potential.