When you say the word NFTs, most people will think of collectibles such as profile picture tokens like Cryptopunks or Bored Apy Yacht Club. And, while these have proven instrumental in popularizing the use of blockchain technology for uses other than cryptocurrency, NFTs can represent a whole lot more.
One of the most exciting and practical use cases for NFTs is to establish ownership of both virtual and physical real estate. With the real estate industry showing interest and the metaverse now firmly becoming part of our vocabulary, it can be useful to have a good understanding of how NFT real estate works.
Below, we’ll explain what NFT real estate is and why it’s revolutionizing both the traditional and virtual markets.
NFT real estate comes in 2 flavors: virtual and physical. Both involve using blockchains such as Ethereum to establish indisputable ownership of land or property.
In the case of virtual real estate, this relates to the plots of land and property in metaverse projects that integrate blockchains into their platforms.
For physical real estate, brick and mortar buildings or real-world land plots are tokenized and linked to NFTs which can then be bought and sold in the same way a collectible would, for example.
Being a digital technology, the term “NFT real estate” predominantly refers to virtual property and land ownership.
These digital worlds, also known as metaverse projects form part of the next phase of the internet, known as Web 3.0 which aims to seamlessly connect the digital world to the physical relying on a decentralized model.
Virtual real estate is simply the ownership and exchange of land and property within these online worlds. Cryptocurrencies are considered the main medium of exchange, with valuations denominated in terms of Ethereum, for example. Blockchain-based computer code called smart contracts are used to guarantee ownership and prevent theft and disputes.
These metaverses allow you to buy land plots, buy and sell property, and even monetize your land like a landlord in the real world with renting, ad-space, and using your space for charged-entry experiences.
Buying and selling virtual real estate is easy. Using Decentraland as an example, you simply visit the project’s LAND marketplace (https://market.decentraland.org/lands) and look for plots available for sale which, in this case, are highlighted in blue.
Just as in the physical world, prices vary. Decentraland, for example, has over 90,000 plots of square plots of land that measure 16×16 meters. Prices of the land vary wildly depending on the location in the metaverse with primo spots on busy stretches and near community plazas fetching considerably more money.
Based on Ethereum, Decentraland uses its own ERC-20 token, MANA to facilitate sales. The price of MANA is variable and tends to correlate to interest in the platform and overall crypto market sentiment.
Taking this prime single plot (https://market.decentraland.org/contracts/0xf87e31492faf9a91b02ee0deaad50d51d56d5d4d/tokens/4423670769972200025023869896612986748938) adjacent to the main square in Decentraland, we can see that it is worth 499,999 MANA, a considerable amount of money.
Just as in the real world, a plot of land far from anything significant is worth considerably less. This non-prime single plot (https://market.decentraland.org/contracts/0xf87e31492faf9a91b02ee0deaad50d51d56d5d4d/tokens/24840612785228507832826346342519079436323) is worth only 30,000 MANA for example.
Physical real estate uses NFTs to represent ownership through the tokenization of real-world assets. Property or land is wrapped in its entirety into a token or split into fractions that allow partial ownership.
Should the concept take off in the industry, there would be many benefits to real estate NFTs:
- Easier to find properties for sale: with blockchains and smart contracts handling everything automatically, agents and buyers would have access to every property for sale, all the time.
- Indisputable proof of ownership: legal ownership is established through smart contracts and the blockchain’s public ledger. These are non-corruptible and undeniable.
- Market transparency: due to their transparent nature, the real estate industry would be a lot more transparent if it relied more on blockchain technology. This would improve security too, with manipulation of markets more visible.
- Improved liquidity: cutting out middlemen and red tape, NFTs would speed up transactions of real estate and increase the liquidity of the market. Ownership can even be transferred from investor to investor without the need for intermediary parties.
Tokenizing physical land or property comes in 2 forms: entire asset or fractional.
An entire asset token is where a whole property or plot of land’s deed is tokenized, allowing it to be exchanged, sold, and bought just like any other NFT.
With the laws surrounding crypto and blockchains still largely undeveloped around the world, transacting entire asset tokens relies on “wrapping” real estate into a legal entity.
To get around the lack of NFT integration of property deeds, this involves creating a Limited Liability Company (LLC) and having the property or land as the sole asset in that company’s possession. The LLC itself is then turned into an NFT and the real estate is sold through this.
In February 2022, a Californian home took this concept and made it a reality by selling the first NFT-backed piece of physical real estate for $653,000. With this sale being largely a proof of concept, there still involves some real-world paperwork and legal consultation.
Fractional tokenization is also a potential avenue for NFT real estate.
Fractional ownership involves multiple parties owning shares of real estate, with NFTs used to represent those shares. If this concept came to fruition, you would own a percentage of a real-world asset. The NFT fractions would represent your share of the property or land, with the value of that share going up proportionately.
This is a lot more established than entire asset tokenization and is being pioneered by projects such as JuiceBox (https://juicebox.money/#/) that use Decentralized Autonomous Organizations (DAOs) to let people crowdfund and big together on real-world assets. The model is already in use for fractionalizing ownership of valuable NFT collectibles, such as the DOGE meme (https://fractional.art/vaults/0xbaac2b4491727d78d2b78815144570b9f2fe8899).
Property, again, would need to be wrapped into an LLC as the legal framework for NFT deed transfer does not currently exist.
This is still extremely early days for both virtual and physical real estate. While the virtual market looks to grow a lot more quickly, the integration of NFTs into the physical real estate world is almost an inevitability.
Despite large changes to legal frameworks and attitudes needed, NFT innovation is proving unstoppable, with demand for both virtual and physical real estate evident. With a lot of the criticism regarding NFTs stemming from a perceived lack of real-world utility, NFT real estate looks to be one of the stand-out examples of the technology improving the current solution in almost every way.