a16z: Where does the value of virtual real estate come from?

Author: Scott Duke Kominers

Compiled by: Paimon

Since the emergence of internet chat rooms, people's lives have gradually moved into digital spaces. However, today, the once ethereal contours of the digital world are becoming increasingly clear and have begun to dominate people's daily activities and lives.

A recent powerful example is the Zoom background, which separates speakers in video calls from their real-world surroundings, empowering individuals to create private digital spaces. From the Serengeti plains to the Studio Ghibli screen, people have quickly begun to use their imagination to create personalized digital environments.

Now, metaverse platforms can provide digital spaces with real "geographical" structures, creating new ways for exploration and interaction. (For example, meetings held on the Gather.town platform connect all Zoom rooms used for presentations through an 8-byte digital landscape, providing attendees with a "face-to-face" space).

What perspective should we adopt to examine the future construction of the metaverse? The framework of the metaverse is simple enough to approach homogeneity: when opportunities arise that the "external choices" of the real world do not provide, people will naturally choose to use digital spaces. This means that the value of these spaces is determined by the activities people want to engage in and the extent to which the digital space contributes to those activities.

Similarly, taking Zoom as an example, at least during non-pandemic times, Zoom is still used for video calls with distant relatives and friends, rather than as a tool for chatting with neighbors. Likewise, metaverse concerts become extremely effective when friends or artists cannot be present in person. When virtual meeting rooms grant people the ability to "teleport" directly to digital locations, it is believed that no one would spend time "commuting" in metaverse spaces. At the same time, when the metaverse can offer experiences like learning to fly with a sword or exploring distant galaxies—experiences rarely possible in the real world—it will still be the preferred choice for people.

These various concepts are still in their early stages, making it difficult to accurately predict where the greatest and most enduring value will emerge. Nevertheless, within the ever-expanding digital space, there remains the possibility of reasoning out the roots of value.

Metaverse Land and Real Estate

For decades, people have been discussing the concept of "virtual real estate." This concept was once used to refer to scarce space on a publisher's website—typically dedicated to advertising, such as the homepage of The New York Times. Today, people have become accustomed to the existence of centralized entities and attention aggregators like Facebook and Google, which own many similar spaces and rent them out.

Virtual real estate has always held value. The difference with Web3 lies in unique forms of digital assets, such as non-fungible tokens (NFTs). These unique forms of existence make ownership (not just rental rights) distinct—specific virtual real estate and metaverse land can be privately or sharedly used. Blockchain is a core technology of Web3, achieving this by providing decentralized, tamper-proof, and publicly accessible records that determine who owns which digital assets.

Given that digital space can theoretically expand infinitely, skeptics may still question the meaningfulness of "owning" digital land or buildings.

However, metaverse platforms have their own scarcity. For example, the space for virtual real estate is limited, and due to this limitation, virtual real estate is primarily used to build facilities like virtual concert halls.

At the same time, due to the existence of rapid movement and even "teleportation," distance will not be a limiting factor for digital buildings. Therefore, when assessing the value of a specific piece of metaverse land or real estate, the most important factor should be how people's activities will influence its usage.

People (or rather, their virtual avatars) may stroll through adjacent virtual commercial streets after a virtual concert ends. Just like in the real world, the stores closest to the virtual concert hall will attract the most "foot traffic."

This means that even in virtual spaces, the "proximity principle" remains important.

In fact, in a sense, the distance between metaverse events and facilities may be even more valuable than in the real world. For example, the audience for a virtual concert comes from around the globe, theoretically bringing more attention to products in the adjacent digital building.

However, at medium to long distances, virtual distance seems to matter less. In the real world, buying a house in the suburbs can provide more space and job opportunities in nearby cities, thus considered valuable. However, when commuting can be solved by "teleportation" in the metaverse, the virtual "home" distance from the "workplace" becomes unimportant.

Broadly speaking, in the metaverse, if the option of "teleportation" exists, unless it is a valuable or entertaining activity during long-distance travel—like taking a virtual cruise and exploring beautiful scenery along the way—people will no longer choose the laborious long-distance journey.

All of this indicates that the value of metaverse land and real estate to users may depend on nearby resources rather than the overall geographical environment of the metaverse space. Prosperous shopping centers, micro-cities, or even entire virtual worlds, like islands in the vast virtual universe, continuously attract people while providing enough "distance" to allow for direct "teleportation."

Whether these different activities are on the same platform may not even be important. Just as people may use Zoom for work meetings and Messenger or Snapchat for socializing, some may work in Meta's Horizon Workrooms and then play with friends in The Sandbox, or curate their private art gallery in Voxels.

The metaverse platform market will not be dominated by a single entity. Moreover, even within a specific platform, there may be many successful clusters of activities—entrepreneurs can develop new facilities or resources as hubs connecting other platforms, attempting to launch their own activities. This is the allure of "composability," a core feature of Web3 that allows people to modify existing frameworks to create new experiences.

Metaverse Land Zoning and Planning

In the digital world, the potential for architectural expression is limitless, meaning that the shortcomings of zoning policies and other forms of structured geographical planning may be eliminated. However, when following the "proximity principle," planning in the metaverse may be even more important than in the real world.

When a virtual space loses its appeal to people, users will immediately shift their focus. Therefore, architects and designers of metaverse platforms must plan spatial layouts based on user preferences and expected usage. To ensure a positive user experience, designers often need to establish high-level rules. Considering the importance of the "proximity principle" discussed above, clustering complementary types of activities together may also help optimize user experience.

At the same time, the ability to create beyond the boundaries of classic design (and even physics) is one of the greatest benefits of digital space. One of the main advantages of some metaverse worlds is that they grant users significant freedom to build anything they desire.

A compromise approach is to focus only on high-level layouts and visual planning of spatial allocation. For example, the luxury villa series of the White Sands metaverse project restricts people from altering the exterior appearance of the villas while granting creators the right to redesign the interiors. In simple terms, this means allowing the reconstruction of internal spaces while maintaining visual uniformity on the exterior of blocks or communities.

The importance of micro-level planning varies by environment. Meticulous zoning may be crucial for creating a high-end digital streetscape, but it may be less important in a game world where players battle monsters or play as ghosts. Similarly, development restrictions in the real world, such as the height of roller coaster tracks, may be entirely unnecessary on metaverse land, as digital space is not bound by traditional physical rules on Earth.

But overall, those digital spaces that are visually pleasing to users will have greater "commercial value."

Digital Assets and Platform Choices

In addition to the most valuable questions regarding the "geographical" significance of digital and metaverse land, there is also the question of which platforms are most valuable for construction. Here, the classic chicken-and-egg dynamic of guiding and establishing markets begins to play a role, meaning it is best to build on platforms that already have a mature user base. Users are also more likely to choose a platform that already has a vibrant ecosystem.

This means that users will favor digital land built on already well-known platforms, just as with NFT Worlds running on the Minecraft engine. Similarly, as Sandbox has done and Otherside has suggested, a metaverse land that integrates many existing digital communities is also highly attractive to users and builders.

These sources of value also depend on the anticipated user activities. Some metaverse platforms are built to support digital versions of everyday tasks; others are fantasy game worlds; and some simply invite people to explore and interact in vast spaces.

If a metaverse platform wishes to encourage users to customize their spaces and incubate projects based on that, it needs to provide tools to achieve this. In contrast, if a digital space is intended for purposes such as business meetings or medical consultations, then focusing on the platform's stability, security, and privacy may be more important.

At the same time, for creators of digital assets such as artists, game studios, and NFT communities, building in a cross-platform operable and portable manner is particularly valuable. One of the greatest benefits of Web3 is that users have the opportunity to bring their owned digital assets anywhere within their sight, accumulating personal identity, status, and other social attributes. As this model becomes familiar to users, they may pursue it with increasing fervor.

Portable, decentralized identities may apply to everything: for example, someone might want to use weapons or charms from their video game world as decorations in their virtual office. Imagine a writer who decorates their real-world office with their favorite virtual items, such as a map of Hyrule and a mysterious "linking book," how could they resist the temptation to keep their virtual workspace consistent as well?

In the metaverse, even buildings can potentially be moved from one place to another. A person who owns a digital building can create a truly personal space by installing their favorite artworks, furniture, or miscellaneous items inside it—then travel with it across various platforms. For instance, Far's SOLIDS serves as a generative architectural framework with versatility, meaning that the digital land of a specific metaverse space could ultimately create value in dozens of other different spaces.

This framework indicates that measuring the value of digital land to users is not that difficult. What remains important is how people use various spaces in the metaverse; the compatibility of digital space with activities and users' overall evaluation of those activities.

The discussion in this article primarily focuses on the concentrated and already implemented use cases of metaverse platforms. However, because the metaverse can fulfill "wishes" that are nearly impossible to achieve in the real world, the hidden opportunities are truly beyond imagination. Of course, determining the value of new things may be more challenging at their inception, but this does not affect the applicability of the aforementioned fundamental principles.