HALEY DRAZNIN: There's no doubt that non-fungible tokens are having a moment. Investors are using them to buy NFT art, rights to professional basketball highlights, viral meme celebrity tweets, recording artists are even using them to distribute their music. Now, there's an NFT market for real estate, and it exists purely in the virtual world.
Now, also more commonly known as the metaverse. The popularity and quick adoption of the metaverse has led to the evolution of an entirely new asset class, digital real estate investment. Janine Yorio joins us today from Republic Realm. It's the first ever digital real estate NFT fund. Thanks for coming on Real Vision.
JANINE YORIO: Thanks for having me, Haley.
HALEY DRAZNIN: Let's jump right into it. Republic Realm launched earlier this year. You're the first digital real estate NFT fund. It was just a matter of time really before somebody built a fund around it. How would you really explain digital real estate to the average investor?
JANINE YORIO: If somebody is less familiar with what a metaverse is, I start by saying a metaverse is like a video game. Except unlike most video games, there's no stated objective. You're not trying to kill people or there's really no goal other than just to exist and figure out how you feel most comfortable. The metaverse is a place where you do all of that. Digital real estate is the real estate inside that game.
When you play a video game, whether it's Super Mario Brothers or Madden Football or Fortnite, as your avatar walks around that world, the space inside that game is technically real estate. With digital real estate, that real estate can actually be bought and sold and even developed. You can put buildings on it. You put whatever you want on it.
The concept of digital real estate in a fund structure means that you're buying real estate inside a metaverse game with the goal of holding it, developing it and eventually selling it for a profit.
HALEY DRAZNIN: The growing popularity of cryptocurrencies and NFTs, this emerging tech boom we're seeing, the rise of retail investors all amidst the COVID-19 pandemic have really fueled this recent interest in digital assets. When did it click for you that digital real estate is a legitimate asset class? I know this was something you and your colleague had been talking about for nearly three years.
JANINE YORIO: Yeah. Decentraland has been around for a while and it was the first crypto based metaverse but metaverses generally have existed for quite some time. The Sims and SimCity franchise were really the first and then Second Life which had a big run in the early 2000s were metaverses, but they were not crypto-based.
Then Decentraland came along and used blockchain technology and combined it with this metaverse concept and started gaining some steam. Then all of a sudden, a pandemic hit, and people were forced inside their homes. Socialization became something you did on Zoom. Time spent in video games actually became a matter of mental health. I saw it happening with my children where I used to scream at them for playing video games and then they said, but mom, it's the only way we can talk to our friends. That's where we socialize.
I think it accelerated during the pandemic, because online socialization became really our only form of socialization. You have all these macro trends taking effect, a well understood and already popular model, the metaverse cryptocurrencies having a real moment, NFTs suddenly went from being something very obscure to the point where it's so mainstream that Saturday Night Live does a spoof about it, and you have the improvement of these metaverse games where they're actually engaging and enough so, that real world companies are starting to spend time figuring out how to use them, and more and more people are spending time on them. It really is the perfect storm.
When I saw all of those things happening, it just seemed like what I thought might just be an obscure, not necessarily very popular way to invest, it felt like something that actually was worthy of the consideration of an institutional quality mindset and bringing that to this asset class, because there's so much excitement around it. I think people want to be a part of it. But when you actually try to figure out how to do it yourself, it's complicated.
Then when you overlay asset management strategies like when to buy, how to price things, when to sell, what to do with the land when you own it, it's actually pretty complicated undertaking. Almost like real world real estate investing. That's where we decided the moment was now, there was enough demand and we could actually do something very meaningful from a financial standpoint with this product.
HALEY DRAZNIN: I want to jump into that in a little more detail here. So, your fund owns land in multiple metaverses. Like you said, Decentraland, which is the first metaverse to be built on the blockchain, the Sandbox, Axie Infinity, Cryptovoxels among others, and the unit of land in the metaverse is what's called a parcel. Can you explain what that is and how they're used and how you really determine what to develop on the land that you buy across these different metaverses?
JANINE YORIO: I'm reluctant to keep using the video game analogy, but it's one that we're also familiar with. Let's start there. When you play inside a video game, normally, the characters have a human scale, so there are cars, there are buildings, and when you talk about the size of the video game, you often talk about it in kilometers or square miles. A really big video game has a much bigger area. It might be 100-kilometer square, that's an enormous video game.
A parcel of land inside each metaverse has a specific size that relates to a real-world metrics. For example, in Decentraland, a parcel of land is 16 meters squared, 16 meters on each side, which is about 48 feet on each side. It's about 50 by 50 square feet on each side. It's a pretty big piece of land, you can actually put something pretty meaningful on it and you can develop whatever you want. You could put a house, you could put very popular in Decentraland are casinos, you can put an art gallery, which are also exceedingly popular because people own these NFTs and they want a place to host them and to house them or even to sell them, but you're only limited by your creativity.
You do have zoning requirements, just like you do in the real world. If you have one parcel, you can build a certain height. If you have 10 parcels that are contiguous, you can build a taller structure on it. But people are doing really interesting things. If you have time to visit the metaverse, whether it's Decentraland, or any of the others, you'll start to see how in a universe where you bring human proportions, but you don't have any constraints of physics. Like buildings don't fall down. They don't have to actually be impervious to weather, or earthquakes, or any of these things so that's really exciting from an architectural standpoint, so people are doing really clever things. Lots of curves and very narrow tall buildings and things that probably would never exist in the world because they'd probably fall over.
HALEY DRAZNIN: Are you comfortable sharing how many parcels of lands Republic Realm owns across all metaverse, the last I read was around 30 parcels?
JANINE YORIO: Oh, no, we own a lot more than that. It changes every day. A parcel of land depending on the game or the metaverse you're talking about, it range in price from say $1500 to $8,000. We have a pretty large fund, so we're constantly acquiring. We own hundreds of parcels, and we're always buying more. We'd like to buy large assemblages that are multiple parcels, maybe 10, 20, 30 parcels at a time and so we're always making new acquisitions and always looking to find interesting transaction opportunities for us.
HALEY DRAZNIN: So, this is all what you call a part of your proprietary valuation model, really how you identify prime digital real estate?
JANINE YORIO: Valuing real estate in a metaverse is not totally dissimilar from valuing in the real world. You look at a few things. The most important is market comparable. What are comparable parcels selling for in that metaverse? And that really drives the price because today, most parcels are worth roughly the same amount of money. Now, certain things might make it more valuable, like being really close to a popular casino or being really close to the entry point. Every metaverse starts in the same place when you start to play at the beginning of each session. Being close to that area often makes it much more valuable.
You look at market comparables, you look at things like foot traffic, which is how many people pass by or how many avatars passed by your site on a given day. You look at what are the other adjacent uses, and whether you think being near them would make your parcel or whatever you plan to develop on it more valuable. We have a model that scrapes information from the different metaverses so that we always have a snapshot of what's happening in the market and we can keep track of real-world pricing considerations so that we can make very quick decisions about whether to buy a parcel and what to pay for it.
HALEY DRAZNIN: We're seeing many headlines on the NFT boom that have been around art, music, and collectibles, how do metaverse is really play into that? Are they interconnected?
JANINE YORIO: They're definitely interconnected in that they're correlated. So, the excitement over NFTs is obviously driven up their price across art, music, and even whatever you want to call things, like Cryptokitties, novelty items that are digital, and so surely, that's fueling some of the speculation in virtual real estate. I think the difference is that there's a chance that a lot of the NFT art and music ultimately doesn't have a lot of value.
I say things certain things will hold their value like presumably Beeple art or other really famous art that's being supported in the secondary market by galleries in the real world. Digital real estate, if the metaverse is successful, then that real estate should maintain value. Now, whether it maintains value, the current price is very speculative, but it has a utility in that as avatars or people that are using the metaverse are passing by it, you can do things with that real estate that has value.
On the very simplest level, you could put up a billboard and sell it as an advertising space for a consumer brand. That happens in traditional video games all the time. That's a multi-billion-dollar industry. As long as the metaverses are successful, and users are using them, that real estate has a utility that should give it value. Whether that value is $1,000 of a parcel or a million dollars a parcel will largely depend on a few things, adoption, and then whether this speculative interest is something that becomes more widespread and more widely adopted.
HALEY DRAZNIN: It seems the value of parcels of land in the metaverse are more closely related to the perceived scarcity than they are to the utility, how can you monetize parcels of land and what factors really contribute to the appreciation in the price of land in the metaverse?
JANINE YORIO: Every metaverse has a predefined number of land parcels that the developers of that particular universe lay out in their whitepaper. They'll tell you, we're going to build 90,000 parcels or 100,000 parcels so you know at the outset what the ultimate number is. Now usually, the metaverse developers sell the land in phases. They don't release it all at one time. They sell a few at a time, oftentimes through an auction process. That will obviously increase just like any auction does that feeling of FOMO and that desire for people to pay the highest price in order to win in an auction process.
What fuels the future value and the appreciation of those parcels is more people believing that there is underlying value to that real estate, which is a mix of why people value art which is the more people believe in it, the more valuable it becomes. Then also, things that you can measure like the user statistics around that metaverse, how many people are using it a day? How many people are returning to it a day? How much money are they spending in that metaverse?
It's a mash up between art in the sense that the intrinsic value is not necessarily related to the actual real-world value. A piece of art is not valued on how much the artists spent on painter canvas. It's how much the world believes that piece of art is worth. There's a portion of that in digital real estate, but there's also a large portion that is attributable to metrics like foot traffic and user information.
HALEY DRAZNIN: When we look at cryptocurrencies, there's over 10,000 different cryptocurrencies and Bitcoin's market cap dominance, for example, has fallen from 90% in its early days to around 50% where it is today. What's to say that new metaverses won't come about that will take away the market share from these fast movers that you're investing in today?
JANINE YORIO: First of all, there are a lot of responses to that. I f you believe in a future that looks something like ready player one, where people are spending massive amounts of time online, and you believe that humans are tribal and sort by their interests, there is an opportunity for many different metaverses to coexist. There could be one that's all about sports, and one that's all about art and one that's about young people and one that's for old people, there are a million different ways that people sort themselves. There's an opportunity for many winners.
The second is that the whole point of crypto and NFTs are that things are transferable between the universes. What you own in one, you might be able to move into another. So, it's not necessarily that one will cannibalize the other. There's almost like a free movement across this ecosystem. The metaverses are all part of one ecosystem. Oftentimes, they're all built on the same Ethereum blockchain and so theoretically, the vision is that things can move freely between them, and that they form an economy together almost like countries that are part of a world, as opposed to worlds in a situation where there can only be one world that dominates.
If you think about it more like that, like it's a globe, and there can be lots of different countries and they can coexist and share and have economies that interact with each other, then I think you'd get a better sense for how multiple metaverses can win. There's obviously no guarantee which of the metaverses that exist today is going to be the winner or the one that succeeds over the long term. But I think this idea of being able to move things around between them is why people are comfortable spending so much money on things inside them.
Unlike games like Fortnite or Minecraft where you can buy things on eBay that you can use in those games, you can't use them in other games. You can't take a Fortnite skin and wear it in Minecraft. Theoretically, you can take your Adidas shoes from Decentraland and wear them in Sandbox. Now, I don't think a lot of that technology exists today but that is the vision for the future.
HALEY DRAZNIN: Can you explain the dynamics of the primary and secondary markets and how parcels of land trade hands in those metaverses?
JANINE YORIO: Sure. When a game developer first begins their metaverse, they often have a land sale. Sometimes even a land pre-sale, so people will buy the ability to buy land in the future once the land is minted and exists. The developer will offer a fixed amount of their overall land, maybe say 5% to 10% of it in a sale. They might conduct it like an auction. They might also sell it through a marketplace like OpenSea. It depends. There are different ways they can do it. Some of the metaverses have their own marketplace built inside them where people can buy and sell things.
The secondary market is where it gets interesting, because then it starts to resemble the real world where land is sold in lots of different ways. Like you and I might text each other after this show and you might say, hey, I have 10 parcels in Sandbox, do you want to buy them? Just like you might if you owned a timeshare in Myrtle Beach.
We also might transact through a third-party marketplace like OpenSea. We also might transact through in a metaverse marketplace. There are lots of different places where people are transacting a land, Telegram and Discord often have channels for each of the metaverses and people are buying and selling things between each other in off-market transactions all the time. There are lots of different ways that once the land is sold from the game developer, it then reenters the market through these different secondary mechanisms.
HALEY DRAZNIN: How does your fund determine fair value for parcels of land? It's not like anyone can go and create more parcels of land. I understand there's a certain cap given it's on the blockchain and the whitepapers that these metaverses release when they launch.
JANINE YORIO: We look at things like what other market comparables are in that metaverse, so what other people are willing to pay, we look for price support. What we think is the maximum price we'd be willing to pay relative to where we've seen say, the previous 10% of transactions having occurred. Especially in anything crypto-based, there's so much volatility, there's oftentimes exuberance where prices can go up literally 10% in a day. We have to be very careful of not getting overexcited and overpaying just because it feels like that's where the market is moving. We want to make sure we try to take as much of a historical perspective as is possible in an industry that has six months of operating history.
Also, one thing to bear in mind when you're thinking about price. These parcels do not trade in US dollars. There's a currency risk that you're taking as well. You have to convert usually Ethereum, you had to convert US dollars to Ethereum, then you convert Ethereum to whatever the metaverse's currency is, in Decentraland, it's called MANA, in Sandbox, it's called SAND, you convert to those tokens. Those tokens also fluctuate in value. So, you have all of these underlying currency trades that you can't really hedge against that will also move the price.
If the price goes up in MANA, but then MANA went up 10% also, then that could effectively be a 15% to 20% increase in the equivalent US dollar value for that land. You have to be thinking about all these different factors at the same time, and how they interrelate to each other. There's also gas fees, which are something that depending on what time of day you transact, you might have to pay additional gas fees and you have to then build that into your investment basis and make sure you're comfortable with that price.
HALEY DRAZNIN: Can you walk us through a little bit more about how returns are generated. What's the