Hey Real Estate, Let's Talk NFTs
What might NFTs mean for the future of real estate?
Hi readers, welcome to Part 2 of my series on virtual real estate. First off I just want to say that on Tuesday a plot of virtual land sold for US$4.3 million in the metaverse The Sandbox. I’m just going to leave that there.
Today I want to take some time to focus on NFTs and unpack not just what they mean for virtual real estate, but also what they could mean for the real-world real estate sector. If you haven’t seen Part 1 of my series, check it out here.
I’m sure you’ve seen absurd article titles like “Beeple sold an NFT for $69 million” and “The CryptoPunk NFT that sold for $532 million. Sort of”. These numbers are absolutely staggering and are reflective of the tsunami of money being moved into the NFT space. Still though, few people seem to really understand what NFTs are, how they work, and what they might mean for the future.
What’s an NFT?
The acronym NFT refers to “non-fungible token”. Let’s break that down into parts.
“Non-fungible” means that an item is unique and original – it’s not interchangeable with a copy.
What’s an example of this? Well, think about the Mona Lisa – the original is believed to be worth more than US$850 million and is housed under extremely tight security at the Louvre. What about copies of the Mona Lisa? You can pick up a poster for $50.
A “token” is something that can be traded and sits on the blockchain.
If you’re not super clear on what the blockchain is, here’s my simple explanation: The blockchain is, in essence, a diary that records the details of transactions (people buying and selling stuff) that is copied many times across a lot of computers. Each record is called a ‘block’ (hence blockchain, i.e. chain of blocks). Because it’s duplicated across a massive network of computer systems, the blockchain is really hard to hack or cheat. This makes it a safe way to transfer money around!
So, to round this out, what’s an NFT? It’s a unique item that can be bought or sold on the blockchain. The NFT is your proof that you own the item.
How does an NFT work?
Let’s say you made a digital artwork and wanted to make it an NFT that you could sell. ‘Minting’ an NFT is how your artwork becomes a part of the blockchain. Minting is done through ‘smart contracts’, which assign ownership of the artwork and handle its transfer from one person to another. Minting is essentially a 3-step process:
1. Code a new block to be added to the blockchain
2. Validate the information (the majority of computers in the blockchain network confirm the transaction is legal)
3. Record the information on the blockchain
Smart contracts are the tech behind NFTs. A smart contract is a digital contract where the agreement between users is set in code, and can be programmed to execute itself when predetermined conditions are met. They exist on blockchain networks and they’re how people can buy and sell your item as an NFT.
What sort of items can be NFTs? What’s this got to do with virtual real estate?
NFTs have become immensely popular in the digital art, music and collectible spaces. Previously it was next to impossible to prove that you owned digital artwork or music, since anyone could download a photo or file. Now, artworks from popular projects like CryptoPunks and Bored Ape Yacht Club regularly sell for more than US$1 million. Proof of ownership has meant that these artworks have been able to retain value similarly to physical artworks like paintings or sculptures. NFT marketplaces like OpenSea handle millions of dollars in transactions per day, which are mostly processed using the cryptocurrency Ethereum.
So what’s the connection to virtual real estate? Well, virtual real estate is largely structured as an NFT! In metaverse projects like The Sandbox and Decentraland, you can purchase land within these platforms in NFT marketplaces like OpenSea (as well as on their respective websites). Parcels of land are listed for sale in these marketplaces and you can watch, or participate in, the bidding on respective properties. What’s really special about this is there is complete transparency – you can watch bidding on any property for sale in real time, and you can view all sold properties, including a property description and the sale price. There’s no secret private auctions or hidden property prices, it’s an efficient market.
Virtual real estate being structured as an NFT makes buying and selling virtual properties instantaneous, with ownership immediately transferred on receipt of funds. This is a world away from current real-world real estate transactions, with lengthy delays for the exchange of contracts, legal reviews and registering a transfer of title.
Ok, but real-world real estate isn’t virtual real estate?
The connection between real-world real estate and NFTs could honestly be an article on its own, but I’ll make an introduction here.
Obviously you can’t physically live in a metaverse house, and I of course recognise that real-world real estate transactions are generally significantly larger than virtual ones (although the gap is closing every day!). All the same, there are some fascinating potential applications for NFTs in the physical real estate world, and it will be really interesting to see how things unfold in the coming years. The one application I’m going to focus on today is home ownership. Other topics like NFT mortgages and asset fractionalisation (one of my favourite topics in this space) I’ll save for another day.
What Covid-19 showed us is that more and more real estate transactions are being done remotely online. Online auctions and virtual tours have become commonplace. On top of this, the paperwork for contract signing and ownership transfer is now largely done digitally, e.g. via DocuSign. What does this mean? Well, it suggests that even in the historically slow-moving world of real estate there’s a clear move to deals being done digitally.
How do NFTs fit into this?
NFTs allow for near instant settlement and a very simplified transaction process. As a member of Gen Z, I can tell you that this is far more attractive a proposition than the current drawn-out process of buying a house or apartment. In June 2021, Propy, a Silicon Valley-based proptech company, facilitated the world’s first NFT apartment sale. The studio apartment (based in Kiev in the Ukraine) was switched from individual ownership to a legal entity, and the ownership of the entity was then transferred via NFT. The NFT description included details about the property and relevant legal information (e.g. photos, floor plan etc.). The person who then owned the NFT would own the property. Over 40 bids were made using Ethereum and the studio ended up selling for ~US$100k. It took just 22 minutes to transfer ownership. This sale was the first of its kind, and I see no reason why many more properties around the world won’t follow in its footsteps. It’s very early days, and I’m excited to see where the future takes us.
We need to make clear that there are many complexities to be unravelled with all of the above, and adoption rates in the real estate industry are historically slow. Nevertheless, it’s interesting to think about what the future might look like, and the role NFTs might have to play beyond buying and selling art online. Who knows, maybe one day all of our houses and apartments will be NFTs.
Stay tuned for upcoming articles where I’ll dig into what Wall Street is busy doing in the virtual real estate space, as well as dive deeper into different projects in the Metaverse and the different elements they bring to the table.
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About the author
Raphael is a young property investment professional at AMP Capital. He has had previous experience in healthcare investment, investment banking and boutique private equity. Outside of work he loves all things investing, a good crypto call, poker, basketball, getting outdoors and keeping fit.
Connect on twitter @raphaelsebban1