Making sense of Yuga Lab’s ‘virtual’ land bonanza
Last week, 55,000 parcels of “virtual land” were sold on the Ethereum blockchain for more than $300 million, the largest nonfungible token (NFT) mint ever. It wasn’t without controversy.
In return for shelling out close to $6,000, a purchaser received an Otherdeed NFT, which authenticates that buyer’s ownership of a patch of digital real estate in developer Yuga Labs’ new Otherside game environment.
What can you do with a plot of virtual ground? Well, you can develop your own online games on it or build a digital art gallery, among other things. Moreover, you might expect a lot of online traffic driving your way because the Otherside “world” is an extension of Yuga’s popular Bored Ape Yacht Club (BAYC) NFT project.
The sale began at 9:00 pm EDT on April 30, and the NFTs were sold out in about three hours. During that time, gas fees on the Ethereum blockchain soared — with eager customers sometimes needing thousands of dollars to complete a single transaction. That’s above and beyond the cost of the land parcel. Hundreds of investors not only failed to secure an Otherdeed token, but they also lost their Ether (ETH) gas fees as well. The Ethereum blockchain even went dark for a time.
Some charged Yuga Labs with favoritism in the process, saying, for instance, it had saved all the good “land” for itself or existing owners of Bored Ape Yacht Club NFTs.
Others wondered what all this had to say about gaming and NFTs. If it cost $6,000 for a parcel, and as much as $6,000 in gas fees just to play, was it all becoming a playground for the very wealthy alone?
The sale also raised questions about Ethereum’s scalability — again — and the susceptibility of blockchain-based projects to manipulation and self dealing.
The Metaverse shines brightly
Still, even if the Yuga Labs sale didn’t go entirely smoothly, shouldn’t it still be celebrated as a milestone of sorts in the crypto/blockchain world, especially at a time when the price of Bitcoin (BTC), Ether and other cryptocurrencies have been flat or ebbing?
Consider a report published last week by Kraken Intelligence which reinforced the notion that the Metaverse — a community of online “worlds” with many devoted to role-playing games — is one of the brightest stars in the crypto-based galaxy these days. Over the most recent 12-month period, the metaverse sector notched an annual return of +389%, noted Kraken, compared with Bitcoin’s at -34%, Ether’s at +3%, layer-1 networks at -10% and decentralized finance (DeFi) projects at -71%.
The Metaverse sector includes assets like Decentraland (MANA), The Sandbox (SAND), Axie Infinity (AXS), as well projects like Yuga Lab’s Apecoin (APE). In online “communities” like Sandbox, an Ethereum-based play-to-earn (P2E) game, players can build a virtual world, including the purchase of digital land whose ownership is guaranteed by an ERC-721 standard nonfungible token. The fungible SAND, an ETH-20 standard token, is used not only to buy land, purchase equipment and customize avatar characters but also enable holders to participate in The Sandbox’s governance decisions.
“The Metaverse is still a relatively fresh theme in the crypto industry,” Thomas Perfumo, head of strategy at Kraken, told Cointelegraph to help explain why the Metaverse seemed to be thriving when other sectors were moving sideways. “When Facebook rebranded as Meta in the second half of 2021, we saw a corresponding rise in the price of metaverse-associated fungible assets such as SAND and MANA. Before that, it wasn’t top of mind for most market participants.”
It also represents part of an ongoing evolution of the crypto industry. Perfumo said earlier in a press release that “it expands from financial utility into creative expression and community building.”
Still, $320 million for 55,000 parcels of “virtual land” seems a bit pricey. Mark Stapp, the Fred E. Taylor chaired professor of real estate at Arizona State University’s W. P. Carey School of Business, was asked if “virtual land” has any special qualities or uses that may be commonly overlooked — and could explain the considerable outlays for Otherdeeds and their ilk. He told Cointelegraph:
“I view the ‘virtual land’ as having value for marketing purposes so the platform/world it exists within adjacencies to others. Relative location for capturing visitors and awareness would be desirable attributes.”
In other words, it could enhance your own personal or commercial brand or game, if that is what you’re creating, having Snoop Dogg, for example, as a neighbor in your online eco-system. This happened recently when someone reportedly paid $450,000 for a virtual parcel bordering Dogg’s The Sandbox estate.
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It all seems a new application of the traditional real-estate adage: “location, location, location.” As Sandbox notes on its website:
“LANDs which are closer to major partners or social hubs will likely get higher traffic from gamers, which can potentially mean more income through monetisation.”
Along these lines, some grumbling attended last week’s Otherdeed launch about the quality of “land” that was offered to the public. The really good patches were being kept by insiders like existing BAYC holders, while others were charged. According to Crypto Twitter celebrity CryptoFinally:
i wanted to participate in yuga, but one of the more fked up parts of otherdeed: non BAYCs who want to get involved paid for far shttier land, BAYCS got the only land worthwhile. yuga doesn’t seem to show interest in decentralization outside the existing core group. priced out.
— CryptoFinally (@CryptoFinally) May 2, 2022
Is a bubble forming?
What about the notion that the astronomical prices being paid for metaverse real estate is indicative of a developing bubble — one that could burst at any moment?
Lex Sokolin, head economist at ConsenSys, told Cointelegraph that he wouldn’t call anything a bubble. Rather, he prefers to talk about instances of “over-valuing future appreciation.” But, in this case, as with crypto generally, a different dynamic may be at play. Sokolin said:
“In traditional markets, you would discount future expectations based on some probability of hitting those expectations, and some cost of capital. In crypto, enterprise value is immediately capitalized through tokens and becomes very volatile as sentiment changes.”
That doesn’t mean that the entrepreneurial ideas here are wrong or misleading, he added, just that there can be “long-term disconnects between how people project the future and how it is actually built.”
Why is Ethereum gas so expensive?
Then, there’s the matter of Ethereum’s gas fees, which by one estimation may have reached as high as $14,000 during the Otherdeed sale. Should one worry about the world’s second-largest blockchain network?
“There’s no debate that gas fees as high as $6,000 per transaction is indicative of the ongoing scaling challenges Ethereum faces,” Perfumo told Cointelegraph. “But, it’s important to note that ordinary transfer transactions and minting NFTs are not fully comparable activities on the Ethereum blockchain,” he said, adding:
“In this specific example, too many people appear to have minted at the same time. As such, smart contract optimization by itself would likely not have changed much.”
Sokolin added that Ethereum provides a scarce computational resource and is a natural destination for high-value transactions “since capacity is limited per block.” And, there were also scaling solutions available that could have avoided the transaction crunch, but Yuga Labs chose not to use them. “That said, having NFTs that are on Ethereum gives them higher perceived status and the largest secondary market, which is likely why Yuga Labs went this route.”
Presight Capital crypto venture adviser Patrick Hansen went even further, asserting that the launch in a sense showcased Ethereum’s current status. “Ethereum has massive challenges ahead, yet again visible in yesterday’s crazy gas fees spike,” he tweeted on May 2. “But the fact that some people are ready to spend mind-boggling +4k$ for #Ethereum transactions also shows how valuable its blockspace is. No other blockchain comes close in that regard.”
Sokolin agreed. “Exactly. If people weren’t willing to pay transaction fees, they wouldn’t pay.” It is one of the peculiarities of crypto economics that the arbitrage activity in such events is so high that even the long-term players “have to pay a very high price to scalpers,” he observed.
Leaving a bad taste
Still, the record launch left a sour aftertaste for some. “I think the Otherdeeds sale was botched, leading to user backlash,” Aaron Brown, a crypto investor, told Bloomberg.
But, maybe a certain amount of manipulation just seems to come with the virtual turf? “I believe that what many companies are calling ‘ownership’ in the metaverse is not the same as ownership in the physical world, and consumers are at risk of being swindled,” wrote legal scholar João Marinotti recently.
Land swindles occur in the physical real estate world, of course, so maybe one shouldn’t over-react here, but there are some differences. “Normally a prudent and informed buyer of real property would conduct due diligence, and the offeror would be subject to regulatory controls including required disclosures,” Stapp told Cointelegraph. In the case of virtual real estate, “I’m unaware of any required disclosures or regulatory oversight,” he said, adding:
“Regulation is intended to prevent fraud, misrepresentation and keep the uninformed out of trouble. The current environment for selling these ‘opportunities’ is ripe for fraud or at least disappointment.”
A betrayal of crypto’s roots?
Finally, what about inclusivity and the crypto world’s cherished democratic ethos. What does it say if it takes $10,000 or more just to participate in a blockchain-based community?
“There’s always been a freedom in the idea that anyone could participate with any amount they wanted,” Mark Beylin, co-founder of Myco, told Cointelegraph. Bitcoin is divisible to eight decimal places, after all, so even if you owned just a tiny fraction of a Bitcoin, you still got the same benefits as someone who owned a lot, such as control of your own funds or freedom to transact, for instance, said Beylin, adding:
“That isn’t true for NFTs, though, since owning a fraction of an NFT doesn’t usually confer any rights to holders, beyond the speculative upside potential.”
There were other sorts of disappointments too. Some would-be investors, for instance, lost all their Ethereum transaction fees and still didn’t come up with any land tokens. These “gas” losses ran into thousands of dollars in some cases. When Yuga Labs announced on May 1 that it was working on refunding gas fees to all Otherdeed minters whose transactions failed, some were skeptical.
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Nevertheless, on May 4, the developer posted this message:
“We have refunded gas fees to everyone who made a transaction that failed due to network conditions caused by the mint. The fees have been sent back to the wallets used for the initial transaction.”
The developer refunded some 500 transactions worth collectively 90.566 ETH, or about $244,000 at the time of the refund. The largest single refund was for 2.679 ETH, worth about $7,877 on May 4 when refunds were sent, according to Etherscan.
Meanwhile, Beylin, who had some bitter things to say about Yuga Labs early last week, struck a more positive and philosophical note by the week’s end. “In the long run, the best projects will figure out a way to open up access for the many instead of just the few,” he told Cointelegraph.