Irrespective of your views on NFTs, 2021 was a year that brought the topic of digital scarcity and the Metaverse into mainstream dialogue. Alongside the meteoric price rises in digital assets also came a speculative land grab for NFT real estate in many of the early virtual worlds.

The captivating visualisation from Takenstheorem below shows the extent that early buyers of virtual real estate have purchased plots in multiple virtual worlds. It is not hard to imagine that the motivation for some of this activity is entirely speculative.

If you believe in the general direction of travel, then on a casual glance, it makes sense to own a piece of prime virtual real estate in the Metaverse. Logic would dictate as more people flood into these worlds the value of land should rise, so why turn down an opportunity to buy early?

Why does virtual land have value?

However, you can be forgiven for asking the obvious question about why virtual land should actually be scarce in the first place?

In the Metaverse, where there are no physical constraints on land, and any spatial distance can be covered in the time it takes to click a button, why do we value a specific location?

This question highlights some interesting design considerations that virtual world designers make and the knock-on implications of these choices.

The Virtual World Bootstrap Problem

By intentionally designing scarcity of available space it instils value in owning a part of it. The land sales that then arise creates much-needed capital to help build and expand the platform. Alongside this, there is a need to condense activity in order to foster community as quickly as possible, rather than end up with an endless barren expanse.

With this model, the value in a land parcel can be derived from the idea that organic footfall is an advantage. In our current reality, any asset that can attract attention can be monetised via advertising or value capture via services offered.

This assumption is reliant on:

• The virtual world gains popularity and therefore economic activity
• If there are limited, or popular points of entry, then the closer a land parcel is, the more valuable it should be via the increased natural traffic.

Challenges of the current model in Virtual Real Estate

While the current model makes sense on the surface, there are many potential drawbacks that could arise in the future.

"Show me the incentive and i'll show you the outcome"  
Charlie Munger

We have already seen early adopters and speculators grabbing land parcels with the intention of holding them as an investment vehicle.  This debate is further amplified as institutional capital enters the asset class.  

Land squatting has several negative consequences.

Firstly, if the land sits dormant, then it detracts from the wider community experience. If new entrants do not find the development of that ecosystem attractive then they will be incentivised to look for other worlds in the Open Metaverse to inhabit (especially if the entry cost is high). This can at best slow, or at worst, entirely derail growth.  

Secondly, the flood of speculative capital can drive land prices to a point where it becomes prohibitive for value-adding new participants. It should be noted, that this scenario can also arise should the virtual world ultimately gain significant adoption.

While the economic cost problem can in part be addressed via an organised pool of capital, it does not remove the fact that:

• There is a natural limit where the cost becomes unattractive to some participants
• The price will change the type of economic behaviour that takes place in that particular virtual economy

Potential solutions v1.0

In the real world, many major cities have struggled with speculators (often overseas buyers) driving up real estate prices and keeping the acquired properties dormant.

The knock-on impact for local residents has been clearly negative. It adversely affects communities, removes opportunities for local residents and generates a protectionary political environment.

This situation frequently results in attempts to address the problem via property taxation or restrictions placed on buyers.

It is not surprising that the first proposed solutions to these problems in the virtual world resemble our approach in the real world (see Daniel Gross Essay).

Virtual property taxation is an emotive topic. In the infancy stages of the Open Metaverse being born, it feels uncomfortable to many, as the frame of reference for the majority still remains gaming and entertainment, combined with the web 3.0 principles of true ownership.

The second, and in some ways initially more palatable solution, is designing a mechanism to incentivise or mandate the lending out of the dormant real estate to enable productive use for the community.

Neither of these solutions are perfect, and each brings their own consequences.

So what are the other possible models that can be adopted?

V1.5 Solutions

Zoning

Borrowing from the real world urban planning playbook, there is no reason that a world could not designate certain areas for particular use cases.

For example, high-value landing areas could be designated community run, but more remote low footfall areas can be individually owned.

These community-run areas could then be:

• Allocated to permanent public goods, as central meeting places, or desired service offerings that fit the community spirit.
• Rented out for fixed time periods

Unlike the real world, the switching cost of moving digital real estate is minimal.  

These switching mechanisms would ensure that high-value areas remain reflective of the interests of the community and do not sit barren.

If the community spaces were rented, it could bring valuable income to the platform infrastructure. However, careful design considerations would need to be made to ensure it did not negatively benefit only those with means of financial capital.

Progressive or contingent land release

Another potential design choice is releasing land parcels in stages.

This can either be done on a simple calendar basis or when the initial land allocation has reached sufficient development and density of activity to warrant it. Variations of this staged release can be seen in Webaverse's "Seasons" model and CryptoVoxels expansion.  

The upside of this staged approach, is that it should not disadvantage latecomers as negatively compared to a single initial offering (which clearly benefits early adopters and speculators). Plus, as Jin highlights, this approach offers other benefits of user discovery for the historical development of an ecosystem.

However, problems still can still arise depending on the chosen mechanism that governs the land sale. If conducted through an auction this continues to benefit those with financial capital and not necessarily those with the best interest in the community development.

A possible solution to this is a conditional right to purchase. This could be based on proof of work/proof of value to the community.  Upon fulfilling the required criteria, an individual could then be eligible to purchase a land parcel for a low fixed price.  

This incentive mechanism would:

• Encourage rapid and dense ecosystem development
• Ensure the early adopters are those with aligned interests in helping the community develop
• Provide fair access for those with limited financial means
• Ensure early value creation is captured by those that added value, as they can later choose to sell land in an open marketplace.

Harberger Taxes & Partial Common Ownership

In 1965, the economist Arnold Harberger outlined a system of property rights that elegantly blended free market mechanics with common ownership.

• Landholders are required to publicly declare a self-assessed value
• Holders pay a % tax based on this value
• Anybody can force a transfer of ownership, at any time, if they pay the landholder their publically declared price

Harberger taxes are also known as SALSA (Self-Assessed Licenceses Sold via Auction) and COST (Common Ownership Self-Assessed Tax).

This solution gained wider attention in the 2018 book "Radical Markets" by Posner & Wyel, and was then popularized in the blockchain community by Vitalik Buterin's discussion on the topic.

An interesting example of implementation of this approach is Geo Web, an open-source, infrastructure protocol for anchoring augmented reality content (AR) to physical locations.  

V2.0 Unconstrained Thinking

While the aforementioned solutions are a clear step forward from the initial approaches we see today, they nonetheless remain clouded by our real-world experiences.

However, unlike the real world, the Metaverse is entirely free of physical constraints. It is only over time will we naturally begin to embrace this characteristic in our design choices.

Given the switching cost of moving virtual real estate is minimal it enables some interesting questions:

• Do we need constant fixed locations for all virtual real estate?
• What if some properties were actively rotated on chosen time intervals (quarterly? yearly?), based on community engagement, activity, revenue, or public voting?
• Does every visitor need to experience the same relational order of land organisation? Could their experience be based on their preferences and interests in some way?  
• Could land be free to claim for all, but its position is fluid and can be organised together based on how much value it brings the community?

Reorganising property orders would ensure densely populated areas that offer the highest visitor experience and utility.

However, the obvious downside to this is widespread disorientation, as we naturally base spatial awareness on our relative surroundings.

But what if land parcels were self-organised into districts? Groups of 16 or 25 land parcels grouped together. Visitors would then maintain spatial frames of reference within a district but enable the optimal organisation of districts that bring utility to inhabitants.  

Districts would also be incentivised to ensure those who habitat a land parcel have a genuine desire to populate and enrich the community. They would actively avoid speculators who are only interested in sitting on a dormant land parcel, as this could impact the position and overall exposure for the district if it was based on strength of community development.  

Further to this, districts could decide to develop around a certain architectural theme, enabling a cohesive feeling.

Conclusion

Clearly, this discussion is not in any way exhaustive, and we are likely to see extensive experimentation in the future around these concepts.

As the Open Metaverse matures, we will unquestionably end up with an array of virtual worlds that adopt different models of governance, rules and physics.

These worlds will ultimately end up competing for where value-adding individuals decide to allocate their time and economic resources. Other than a potential land cost outlay, there is little to stop fluid movement between worlds if policy becomes unattractive for inhabitants.

Virtual world creators must therefore think carefully about early design choices, the embedded incentives and second-order effects for the community.