Metaverse emerges as an "other universe" that invites the masses to live, interact, and trade in it. The parts of this universe are virtual reality, the internet, and advanced technologies. Users are no longer in front of the screen, they can enter this world in person. This can be possible in two ways for now; This world we call avatar requires a digital twin and virtual reality glasses. Users may think that they are chatting with their avatars, but can they feel like they are drinking coffee in a real environment? Are the two similar things?
Perhaps it would have never crossed his mind that technology giants would invest billions of dollars in the alternative digital world, referred to as the "metaverse" in Neal Stephenson's 1992 novel "Snow Crash". Although Mark Zuckerberg is mentioned as the pioneer in metaverse investments, the concept of metaverse does not consist of a single platform or “Meta” company. Other companies such as The Sandbox, Decentraland, or Otherside also have their metaverses. Therefore, instead of looking at the subject as a dystopian or fantasy world of an author, it is necessary to approach positively what science fiction will offer us in the future.
NFT, as a word, means Non-Fungible Token, that is, token (money) that cannot be changed. However, NFTs, which are currency, can also be represented as digital asset that has value and can be collected. The difference from digital currencies is that NFTs have a different and unique structure. Digital assets such as artwork, images, and videos are the most well-known examples. NFTs, on the other hand, is essentially electronic document that allows digital products to be registered and sold. In other words, NFT shows ownership of a product and provides its digital registration. While talking about selling and changing hands on a single copy of a digital product with NFT, we see that the sales of these digital products sometimes reach millions of dollars. The land sold for 2.43 million dollars on the Decentraland platform, the virtual yacht sold for 650 thousand dollars on the Sandbox platform, the purchase of Üsküdar Municipality on the Metaverse, the Dutchman who sold his soul, the first tweet of Twiter CEO Jack Dorsey, which was sold for 2.9 million dollars, are surprising examples.
Metaverse Market Share
Buying Land from Metaverse Platform
Several transactions are required to purchase parceled lands on Metaverse platforms. Firstly, it is necessary to have a valid cryptocurrency and digital wallet on the relevant platform. Each currency is listed on cryptocurrency exchanges. For example, while the current coin on the Decentraland platform is MANA, it appears as SAND in The Sandbox. By opening an account in one of these exchanges, the digital wallet of the exchange site is loaded. Afterward, from which metaverse platform the land will be purchased, it is necessary to carry out the prescribed procedures and transfer to a decentralized wallet that integrates with these sites, such as MetaMask. Land purchases can also be made through auctions from platforms such as OpenSea, which are NFT marketplaces.
Trading transactions on digital lands are managed by smart contracts, and recorded on a blockchain, making the transaction indestructible and immutable. Essentially, ownership is also on this NFT, the purchased NFT is stored in the user's digital crypto wallet. Since these transactions are public, they can be viewed by anyone. NFTs are conceptually equivalent to the real-world deed. In April 2022, the Presidency of the Republic of Turkey Digital Transformation Office cited the expression "Qualified Intellectual Deed" as an example of the Turkish equivalent of NFT. Essentially, title deeds are documents that show legal entitlement to a property we've purchased, while NFTs contain metadata that describes the asset they represent.
It is also necessary to mention smart contracts for the purchase of real estate on Metaverse platforms. Smart contracts are programs in which predetermined rules are automated and coded into the blockchain network. Smart contract codes currently available on Decentraland enable users to buy, sell and lease their land with MANA tokens. After the payment is made, the platform automatically transfers control of the NFT to the seller. Transactions with MANA tokens only can be done on the Decantraland platform, each platform has its different cryptocurrency or token for purchases.
The parameters according to which the land values on Metaverse platforms are determined are also an important issue. Virtual real estate owners differ in their land valuations. Like a digital "monopoly", land values have prices that vary according to their location. For example, in the Decentraland platform, the lands are divided into various zones, although the size of each parcel is different. There are districts divided into themes such as Vegas City (Gambling District), Fashion Street (Shopping District), and University (Education District). The value of each land also varies according to the proximity to these regions. For example, one of the biggest purchases was the $2.4 million purchase of a land of 116 parcels near the Fashion Street district in Decentraland. Again, it is seen that the prices in the real estate market are quite high in the areas near the lands owned by celebrities. An NFT collector has purchased a large virtual estate in Snoopverse (The Sandbox area owned by Snoop Dogg) for $450,000 worth of ETH (Ethereum). Apart from the location of the land, the buildings and structures built on the land are also one of the reasons that increase the value of the land. However, a separate payment must be made through MANA for the buildings and additions built on the land.
What is the legal infrastructure in virtual property?
In Metaverse, the land owner can build a house, concert venue, theater, shopping mall, museum, exhibition area, office, or any other structure and building, limited only to the area he/she has purchased. The land owner's purchase is recorded in the blockchain network, which is not under anyone's control. In this way, third parties other than the land owner cannot make changes to the land ownership or delete the processed records. After the purchase, the landlords only acquire ownership of a unique bit string NFT and store this NFT in their crypto wallet. Because NFT is in a crypto wallet, no one can pass on NFT-supported virtual apartments, clothes, or other digital goods without accessing the wallet's password.
First, metaverse investors need to meticulously review each platform's terms of service, and terms and conditions, and learn about potential risks through attorneys. In the service policy of many metaverse platforms, the platform owner gives the company unilateral control. Therefore, when an NFT is purchased, the user does not have full ownership of that digital asset. This purchase means that the user will have access to the digital asset in question for the period determined by the platform.
In the real estate sector, some regulatory steps are needed by the regulatory authorities in the field of smart contracts. Because today, smart contracts created for the sale and lease of land envisage regulations in limited areas such as monetary obligations and term limitations. For areas other than these regulations, no legal protection model is foreseen in most platforms. In one of these gray areas, if the property owners lease their land; An example would be what happens if the lessee establishes a business or takes action that reduces the value of the land. In such a case, it is expected that the provisions that automatically eliminate the activities or actions of the tenant will be provided by smart contracts or additional contracts. In addition, the establishment of contractual relations with property owners who are adjacent to each other to manage the use of property in similar areas will also be on the agenda. Again, the case of lenders offering cryptocurrency loans for virtual real estate also needs to be considered. If the borrower defaults by not being able to pay his debt, some actions should be taken. For example, it is envisaged that smart contracts will be coded so that the metaverse user who receives the loan is unable to make payments in the stipulated terms and that the rights and authorizations arising from the ownership of the NFT can be automatically transferred to the company extending the loan, with the execution of the warning procedures. Experiencing such a situation will raise the issue of foreclosure in the areas parceled out in the metaverse. With the emergence of such legal problems and the increase in the number of users of each platform, some measures will have to be taken.
Investing in real estate in Metaverse brings with it various risks that must be taken into account. One of the biggest concerns is that prices fluctuate due to fluctuations in the cryptocurrency market. This can also greatly affect virtual real estate prices. What we usually see in changes in real estate prices over a decade can happen overnight in the virtual world. Another growing concern is that if the platform fails financially, the metaverse platform may disappear altogether. Members may have voting rights on the termination of the platform, but no regulations are preventing the platform owners from deciding to shut down if there is no money left to keep the platform running. Moving retail, offices and other daily activities to virtual platforms will create similar problems encountered in the physical world, requiring expertise in real estate, finance, employment and intellectual property, among all other types of law.
*This article has been originally published on Harvard Business Review Türkiye on December 12, 2022. Please click here for the original article in Turkish.