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May 10, 2023

Tokenized real estate and the metaverse: a new frontier for investing?

Explore the intersection between blockchain and the metaverse and how it's creating new opportunities and challenges for issuers, investors, and developers of real estate assets.

There’s a new frontier for real estate investing, and it’s taking place where the advent of blockchain technology meets the emergence of the metaverse. These two phenomena are both creating new opportunities and challenges for issuers, investors, and developers of real estate assets.

In this blog post, we’ll explore what tokenized real estate and the metaverse are, how they intersect, and what implications this has for the future of the real estate industry.

What is tokenized real estate?

Tokenized real estate is the process of converting a real estate asset into a digital representation in the form of a token. Tokenized real estate security tokens can be issued, traded, and stored on blockchains such as Polymesh, bringing transparency, security, and efficiency to the process of real estate investing. 

Moreover, tokens are fractional units, enabling real estate assets to be fractionalized or divided into multiple parts that can each be traded or exchanged. While the concept of fractional ownership in real estate assets isn’t necessarily new (think REITs or time-shares), tokenizing real estate assets does make fractional ownership much more feasible. 

Tokenizing real estate provides benefits for issuers and investors alike, including: 

  • Increased liquidity: Tokenizing real estate lowers the barriers to entry and exit for investors since they can trade or exchange fractions of a property instead of the whole asset. This helps to also create a secondary market for real estate tokens that can facilitate price discovery and valuation. 
  • Reduced costs: Using blockchain to facilitate trading streamlines the process and can eliminate intermediaries. As a result, participants can save on the transaction fees, legal fees, administrative fees, and other costs associated with traditional real estate transactions. 
  • Widened investor access: Tokenizing real estate increases the democratization of real estate investing by enabling anyone with an internet connection and a digital wallet to participate in real estate markets, depending on jurisdiction, offering type, and securities laws. Investor bases can diversify, while real estate projects can expand into new geographic reach. 
  • Improved portfolio performance: The global nature of blockchain technology combined with the possibilities for fractionalization can improve portfolio performance by enabling investors to customize their exposure to a variety of new real estate asset types, markets, and risks.

What is the metaverse?

Coined by science fiction author Neal Stephenson in his 1993 novel Snow Crash, “the metaverse” is a term used to describe an immersive, post-internet virtual reality environment.

In science fiction the metaverse is usually portrayed as a single, universal virtual world, however, colloquial usage of the term refers to an environment that encompasses multiple digital virtual worlds.

Notably, the modern concept of the metaverse isn’t a single platform or application, but a network of interconnected spaces that offer different experiences and functionalities. Users can access these worlds and the experiences they offer through various devices, such as virtual reality headsets. 

Most interest in the metaverse is as a new form of social and economic connection. A new wave of interest in the metaverse occurred with the introduction of Web3, an idea for a decentralized iteration of the internet.

Key features of the metaverse

Some of the key features of the metaverse include:

  • Immersion: The metaverse offers an immersive world with a sense of real presence for users by combining various technologies such as virtual reality (VR), augmented reality (AR), mixed reality (MR), haptics, spatial audio, and 3D graphics. 
  • Interactivity: Users can interact with each other and digital objects in various ways, such as through text chat, voice chat, gestures, avatars, games, social media, commerce, education, entertainment, and more. 
  • Identity: The metaverse allows users to create and customize their digital identities and express themselves in different ways, such as through the appearance and behavior of an avatar. Users can also own and control their personal data and digital assets in the metaverse thanks to the concept of decentralized identity. 
  • Innovation: The metaverse fosters innovation and creativity by providing users with tools and platforms to create their own content, applications, and experiences, testing the limits of our physical experiences. A major focus of the metaverse is on social interactivity and the possibilities for collaboration and co-creation with other users.

How can tokenized real estate and the metaverse intersect?

Tokenized real estate and the metaverse are both creating new possibilities for investing and interacting with real estate assets as well as virtual worlds. 

The intersection between tokenized real estate and the metaverse is a natural evolution, as the metaverse relies heavily on the use of blockchain technology to facilitate transfers and ownership. For example, in the metaverse, real estate is underpinned by non-fungible tokens (NFTs) that provide the holder with digital proof of ownership over unique land on a metaverse platform. Real estate in the metaverse is thus already “tokenized”. 

This virtual real estate can be used to create scenes and experiences that serve as a medium for advertising, socializing, marketing, entertainment, and more.

Let’s take a look at 3 ways in which tokenized real estate and the metaverse can intersect.

Virtualization: bringing physical real estate to the metaverse

One problem for digitally-enabled real estate investing, including tokenized real estate, is the physical nature of real estate assets and the inherent dependency on local market knowledge that investing in these assets involves. 

Investors need to make informed choices about where to put their money. While blockchain technology can expand investment opportunities to include new geographic locales or previously inaccessible assets, this isn’t very helpful for investors unless it’s supplemented with ways to gain local market expertise or insight into the actual physical property. 

The metaverse can help solve this problem by enabling users to access virtual representations of real-world properties (and possibly even their neighborhoods or cities) in the metaverse. Users can explore, experience, and interact with these properties through various VR/AR/MR devices or via web browsers. 

For example, RealT is a platform that allows users to participate in fractional real estate investment of tokenized rental properties and tour them with 3D virtual tours. 

Digitization: bringing virtual real estate to the metaverse

One of the beauties of the virtual world is its possibility for creation and innovation beyond the limits of the physical world.

Users can create digital versions of physical properties in the metaverse, from a tiny roadside shack to an entire city. Users can design, build, and customize these properties according to their preferences and needs – a feat nearly impossible in the real world owing to the constraints of money, materials, engineering, regulations, and practicality. 

For real estate owners, the metaverse offers possibilities to unleash new kinds of artistic property creations – such as architectural designs that would be physically impossible to build in the real world – as well as new ways of participating in real estate ownership. A platform or application could allow an everyday user to purchase a parcel of land with crypto tokens and open an amusement park on it, something that would take millions of dollars in the physical world. 

What’s more, the virtual world can reach beyond the possibilities of time and space. Metaverse land owners can build virtually anything on their virtual land, constructing scenes and experiences for users that take place anywhere and any time, from ancient Rome to a galactic outer space “future”. 

Decentraland is an example of a decentralized world enabling users to create and explore virtual lands and creations. At the heart of Decentraland and similar platforms is the blockchain, the immutable ledger that records transactions as users build, trade, and make money from virtual worlds. 

Hybridization: combining tokenized real estate with virtual real estate

Eventually, developments in the metaverse and blockchain could see a proliferation of hybrid asset types combining the concept of asset tokenization with virtual real estate. 

For example, security tokens can prove ownership of physical real estate assets and their corresponding metaverse real estate representations. Users can link their tokenized assets to their virtual assets, buying and trading physical and digital properties simultaneously. 

Likewise, virtual real estate can serve as a real estate asset itself. Metaverse real estate – assets that exist only in the virtual world – can be tokenized on the blockchain for users to invest in as they would physical properties. 

This is actually already happening as Web3 companies seek to develop the metaverse as a kind of embodied internet, where users can own and invest in pieces of virtual land. For example, EveryRealm is one platform propelling the future of tokenized metaverse real estate by enabling its users to invest in tokenized virtual land in various metaverses.

The role of blockchain technology and smart contracts in developing the intersection of the metaverse and real estate

Blockchain technology is a distributed ledger that records transactions and data in a secure and transparent way. Smart contracts are self-executing agreements that run digitally on the blockchain and use programmatic logic to enforce the terms and conditions of a contract (such as a trade or payment agreement) without intermediaries. Together, blockchain and smart contracts enable new possibilities for the metaverse and real estate, such as: 

  • Decentralization: Decentralized blockchains allow users to have full control and ownership of their digital assets and identities in the metaverse, without relying on centralized platforms or intermediaries. As a public proof of ownership, users can also use the blockchain to verify the authenticity of metaverse real estate and its owners.

  • Fractional ownership: Tokenization enables users to divide ownership of physical or digital real estate assets into smaller fractions, lowering the barrier to entry for investing in real estate and increasing the liquidity and accessibility of the real estate market for both real-world assets (RWAs) and metaverse real estate

  • Automation:  Blockchain can facilitate fast and secure transactions of real estate assets in the metaverse without the need for intermediaries or their associated fees. Users can also use programmable smart contracts to execute certain actions or conditions on-chain based on predefined rules or triggers, such as rental payments, ownership transfers, and identity verification.
  • Cross-platform interoperability: With blockchain, users can easily move their digital assets and identities across different platforms and metaverse worlds (or exchange them with other users on those platforms) without losing their value or functionality. What makes this possible is chain interoperability, or the ability for independent blockchains to interact with each other via smart contracts and protocols.

Tokenizing real-world assets in the metaverse with Polymesh

Ultimately, the intersection of real estate and the metaverse is a promising and exciting development that offers new opportunities and challenges for real estate issuers, investors, developers, and users. 

We’ve seen that real estate in the metaverse is inherently tokenized, as it’s powered by NFTs that represent unique digital parcels of “land” in various virtual worlds. Users can use these digital parcels to interact, create, and trade with each other. 

The Polymesh blockchain is a blockchain purpose-built for security tokens that incorporates features essential to regulated assets: governance, identity, compliance, confidentiality, and settlement. Because of its focus on enabling asset tokenization for regulated assets, Polymesh provides a robust environment for digital ownership and trading of both fungible tokens and non-fungible real estate tokens alike.

By using Polymesh, metaverse real estate issuers and investors can benefit from a more secure, efficient and transparent system that can help to prevent fraud, protect privacy, and facilitate easier and cheaper transactions.

Want to learn more about real estate tokenization? Check out the following blogs:

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