Shake-ups in global financial markets often spur a new wave of interest in cryptocurrency and blockchain technology. This was true with the very first cryptocurrency, Bitcoin, being released by Satoshi Nakamoto in the wake of the global financial crisis in 2007-2008. Similarly, this year’s GameStop saga is said to have created the idea of “memecoins” like Dogecoin and its copycats as investors saw the value that can be generated through a shared joke.
This year has seen the rise of non-fungible tokens, from artworks to pieces of digital land and beyond. As China stares down the barrel of its own property market crisis in the form of the flailing property conglomerate Evergrande Group, could this lead to an increase in interest in digital land ownership through NFTs in the world’s most populous country?
China’s property woes
Evergrande is ending the week on studier footing than it started, announcing on Wednesday that it had resolved one coupon payment — a Shenzhen-traded 5.8% bond that matures in 2025 — that was due today. Global markets were rattled earlier in the week at the prospect that the second-largest property developer in China would default, triggering a domino effect similar to the Lehman Brothers collapse that triggered the 2008 financial crisis. While two more bond payments in excess of US$500 million are still due by month’s end, Wednesday’s payment restored some confidence in the market, with most major currencies up 5% to 10% in the 24 hours coming into this morning Asia time.
“Property is not is not going to be key to the next 20 years of the Communist Party in China,” Andrew Sullivan, founder and writer for Asianmarketsense.com, told Forkast.News, explaining while he does not think the Chinese government would let the company fail, it is searching for a market-based solution instead. “They want to switch this away from property and they want to get into advanced manufacturing, semiconductors and things like that … They want to be very clear as to where they want to go next rather than supporting the property sector.”
Real estate has been critical to China’s growth in recent decades, and in a country with no pension system, the housing market has become an even greater source of retirement security in China than it is in other leading economies, Sullivan said. This has meant Evergrande’s troubles have caused real heartache for thousands of people whose life savings have gone into buying yet-to-be-built housing or apartments that may no longer be finished.
This reliance on property as a vehicle for investment also means there is incredible pressure from homeowners to keep property values high. “If you’ve got enough money [in China] you buy your house, that gives you a home, but it also gives you a home for life and that becomes your pension, your nest egg, so to speak,” Sullivan said. “Then you can leave leverage off that to invest in markets, in other products to start generating an income as well. So, there’s a lot of homeowners out there that really do not want to see property prices come down because there’s so much leverage in that sector.”
NFTs on the rise
NFTs have seen an explosion in trading and sales volume this year, with projects like Degenerate Apes, NBA Top Shot and CryptoPunks all seeing extraordinary sales in recent months. But beyond art, there have been some landmark sales of plots of digital land; in June, a virtual plot in the Ethereum-based open-world game Decentraland sold for 1,295,000 of the game’s native MANA tokens worth about $913,000 at the time — roughly matching the median house price for Brooklyn at the time.
In February, a plot of land in the NFT-based blockchain game Axie Infinity sold for 888.2 ETH in February, or US$1.5 million, making it the most valuable NFT ever sold at the time. The anonymous buyer, who uses the Twitter handle Flying Falcon (@Its_Falcon_Time), tweeted following the purchase: “We’re witnessing a historic moment; the rise of digital nations with their own systems of clearly delineated, irrevocable property rights. Axie land has entertainment value, social value, and economic value in the form of future resource flows.”
Yat Siu, a founder and a board member at Animoca Brands, an app development company and lead investor in Axie Infinity, told Forkast.News as interest in alternative asset classes are on the rise, that could soon include digital land sales in light of the unfolding situation in China. “What is happening in China on the property sector is a broad ‘China market dynamic’ concern and in our view is spilling out into a general ‘asset diversification’ approach, including in investing broadly into culture and cultural moments,” he said. “If you look at the global art market or collectibles, that is also rising and with increased interest in markets like China too.”
Just as NFTs — and cryptocurrency and blockchain in general — are seeing greater adoption among younger generations, this is the exact opposite of the housing market, where soaring prices in most regions of the world are leading to most young people being largely excluded from them. This set of factors could be a significant in any potential drive for digital land NFT markets. But this choice is not just an economic one, says Siu, who adds the NFT market is often misrepresented as having a sole focus on profit.
“If you’re like most of us who care about culture, who care about our engagement in life, about feelings and emotions and what it means to us personally, then we’re not buying these NFTs because we want to flip it,” Yat said. “We’re buying the NFTs because of what it means to us, whether it gives a status, whether it gives us love, whether it gives us appreciation, whether it makes us part of a membership in our society, community, whatever you want to call it. That’s why we buy it. And everything we do in life really is more centered around those types of engagements than purely about making money.”
Homeownership has strong cultural significance in many countries and regions, China included. As a housing market becomes increasingly out of reach for younger people, or potentially a risky investment in light of Evergrande’s turmoil, does it make sense for the placement of that cultural value of ownership to shift to digital spaces?
Technology in real estate
One of the reasons real estate is such a popular investment is its ability to generate wealth for families and even generations. This is a key element that is yet to be proven in digital land sales, Ashley Dudarenok, founder of Chinese social media agency Alarice, told Forkast.News. “If digital land wants to become popular, the most important thing is to figure out how to generate money with it,” she said. “At this stage, it’s not like physical property that one can rent out and one can evaluate it and potentially even increase in value as time passes.”
While Dudarenok recognizes there is increased interest among the younger generations, she says until this obstacle can be proven, it’s not going to be replacing any market any time soon. She does foresee one avenue for a future for the technology in high-end real estate, however, where the physical and digital copy of the property are sold together.
Sullivan, too, remains skeptical of purely digital land sales disrupting markets any time soon, though he does see some utility for blockchain technology to be used in the industry. “Blockchain is a very suitable mechanism for land sales,” he said. “Because you’d have all the details, all the deeds or the covenants in one place in an irrefutable open-source system. So for real property, shall we say, then blockchain and smart contracts make sense.”
Are NFTs even that safe?
Being minted on the blockchain, NFTs are immutable certificates of authenticity of digital assets, but that doesn’t mean disputes over ownership and controversy over minting practices don’t arise, however. Animoca Brands was hit by scammers earlier this month, as an ERC-20 token with the name “ANIMOCA” was circulating on Uniswap V2. The company was able to identify the fraud quickly, and alerted its community to not participate in the sale.
“It was just someone trying to sort of just take our brand name and try to make a quick buck,” Siu told Forkast.News, saying thankfully no one has come forward to say they lost any money on the sale. “Everyone just has to be vigilant and take a look at history. Animoca has always listed and announced its projects, so I think as a result, there was a decent amount of skepticism already for some unannounced token.”
Some argue this is one of the fundamental flaws of NFTs: if they are not minted authentically, it doesn’t matter how secure the technology is. “We’ve got to come up with a system to effectively police [this technology], it is going to be an issue going forward,” Sullivan said. “In the early days, it’s not a big issue because people are new to this. It’s a new area. But considering the amount of money being spent [now], then you’re obviously going to get scammers attracted to it.”
But Siu says the industry’s size will be an asset in protecting it from fraud — the higher profile the party doing the minting, the more difficult it will be to get away with it, as there is going to be a greater community watching every transaction. It will also rely on the development of third-party apps and platforms, such as Crypto Slam and Dapp Radar as well as building additional tools into marketplaces to help audit the market.
One of the things of the permissionless and sort of censor-free environment that is blockchain is what makes it beautiful in the sense that anyone can do whatever they want almost, right?” Yat said. “On the other hand, you have to deal with some of these potential abuses.”
At the end of the day, however, for Yat and a growing community of people around the world, that trade-off is worth it. “This goes beyond just NFTs, just the nature of blockchain and the distributed ledger. One of the most powerful things around it is that it is permissionless, but that it is also auditable, and that essentially it can resist censorship,” he said.
