Real estate is hyperactive everywhere, including the metaverse real estate market that has topped US$500 million. Prices for metaverse “land” are exploding with metaverse real estate agents facilitating multimillion-dollar deals to crypto investors. Accelerating metaverse adoption and the surging real property market suggest that this metaverse property-buying trend isn’t going to slow down.
Generation Z is at the helm of this digital aggregation, but that’s not the only kind of property the ascendant “crypto class” is interested in owning. As rapidly developing decentralized finance (DeFi) services evolve, physical properties will become more accessible to less conventional buyers, especially the young, crypto-wealthy generation deconstructing old guard economics.
The metaverse boom and the future of real estate
Most people associate the metaverse with augmented or virtual reality and cryptocurrency. Few metaverse-aware people realize that some digital private islands have the same price tag as a physical single-family home or that digital land value is rising by 400-500% in certain cases. For example, the Sandbox platform sold 100 virtual private islands for US$15,000 each in 2021. Today, those same private islands are selling for US$300,000.
Despite being potentially unlimited, digital land is similar to how people view New York City or Miami as desirable places to live. For instance, the first city built on Decentraland is made up of 90,000 parcels of land, represented as non-fungible tokens (NFTs).
Just like physical property, owners of digital property can generate income through selling or leasing the property, or building businesses on them that bring in money by offering a valued good or service. Just like in the real world, the value of the digital property depends on its size and location — including proximity to desirable landmarks such as parks, plazas and business centers — as well as how highly trafficked the area is or is anticipated to be.
Forward-thinking investors are purchasing digital land from platforms like Decentraland and the Sandbox as the metaverse becomes more popular, positioning themselves to be at the top of the industry once adoption becomes pervasive.
Metaverse enthusiasts aren’t just fans of disruptive technology. Made up mostly of millennials and Gen Zers, they’re also the future. More than ever, this demographic lives virtually. They work remotely, play games online, and invest in crypto. A recent Harris Poll found that seven out of 10 Gen Zers and millennials are interested in interacting with the metaverse. It’s only a matter of time before the skills they acquire in digital worlds cross over to other areas of their lives.
How DeFi can leverage crypto wealth
Generation Z’s purchasing behavior pivots from the self-centered values that drive millennial consumption. Gen Zers are interested in exploring novel business models, especially when those systems prioritize ethics, access and autonomy. Structures for wealth generation will expire soon, and Gen Zers will likely use DeFi lending protocols to accelerate that.
Real estate is a prime industry to test this theory out. Today’s skyrocketing home prices make plain the generational economic disparities. For instance, traditional banks typically require up to six months of cash reserves, excluding digital assets, and a minimum of three or more years of experience at a single company as legitimate proof of employment. This narrow approach to lending alienates an enormous segment of the population, namely the over 40 million American adults participating in the gig economy, 31% of whom identify gig jobs as their primary employment.
These and other creative workers are more likely to take multiple income-generating pathways, including crypto investment. But today, centralized banks won’t recognize those assets without some kind of bridge. This is where DeFi lending protocols could come in.
Could DeFi lending widen path to homeownership?
DeFi lending protocols could empower people to receive their next mortgage in an unprecedented way — and use their staking rewards to pay it off. DeFi services rely on smart contracts to execute financial actions, removing the need for human intermediaries. That means homebuyers can take out loans more quickly and inexpensively, since overhead costs are much lower. Crypto-native and gig workers, in particular, can benefit from DeFi lending protocols that make mortgages more accessible than anything centralized banks can offer.
Historically, the traditional mortgage lending process has not recognized cryptocurrency holdings as a legitimate source of income, putting crypto-natives at a disadvantage when it comes to homeownership while at the same time hindering local real estate markets from working with otherwise qualified borrowers. Additionally, borrowers acquiring home mortgages via the traditional route, through a bank, are not able to earn interest on their down payments, making it more challenging and taking longer time to pay off the loan.
DeFi mortgages can empower borrowers to leverage their digital assets as collateral in the home buying process without liquidating their positions. Borrowers can also earn interest on their down payment by putting their assets to work through staking or other yield-generating activities, and in turn utilize their passive crypto income to pay down the mortgage. DeFi mortgages also provide an additional level of flexibility — if you’re young and haven’t had time to build your credit score, there should be an option for you by way of on-chain data and crypto holdings. Conversely, a borrower with credit history might opt to integrate certain off-chain information like their credit score if it means a more advantageous rate.
Though DeFi home mortgages are novel, it’s worth noting that they still must operate within the confines of existing home buying processes and legal structures, including any tax obligations and fiat-based down payments required for the sale.
How DeFi can be the future of building wealth
Using DeFi lending protocols to purchase properties lowers the barrier of entry to generational wealth. This is a win for everyone. It empowers people to leverage their digital assets to own real estate, inviting more participation from the mainstream, and legitimizing decentralized economic systems. Astute investors understand that the digital world is as important as the real world to some people. Time will tell how that value evolves, but the economic systems developing in the metaverse today foreshadow a more inclusive, equitable and decentralized future.