• Will virtual real estate be the next alternative asset class after Evergrande?

  • The property market is becoming increasingly expensive and out of reach for today’s young people. Some buyers may be interested in digital land sales.

    Changes in the global financial markets frequently spark renewed interest in cryptocurrency and blockchain technology. This was true when Satoshi Nakamoto released the first cryptocurrency, Bitcoin, in the aftermath of the global financial crisis in 2007-2008. Similarly, this year’s GameStop saga is said to have inspired the concept of “memecoins” like Dogecoin and its clones, as investors recognized the value that can be generated by a shared joke.

    This year has seen the rise of non-fungible tokens, which range from artworks to digital land and beyond. As China faces its own property market crisis in the form of the floundering property conglomerate Evergrande Group, could this increase interest in digital land ownership via NFTs in the world’s most populous country?

    China’s real estate woes

    Evergrande is ending the week on a more serious note than it began, announcing on Wednesday that it had resolved one coupon payment — a Shenzhen-traded 5.8 percent bond maturing in 2025 that was due today — that was due today. Earlier this week, global markets were rattled by the prospect of China’s second-largest property developer defaulting, triggering a domino effect similar to the Lehman Brothers collapse, which triggered the 2008 financial crisis. While two more bond payments in excess of US$500 million are still due by the end of the month, Wednesday’s payment restored some market confidence, with most major currencies up 5% to 10% in the 24 hours leading up to this morning’s Asia time.

    “Property 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 ULTCOIN365, adding that while he does not believe the Chinese government would allow the company to fail, it is instead looking for a market-based solution. “They want to move away from property and into advanced manufacturing, semiconductors, and things like that… Rather than supporting the property sector, they want to be very clear about where they want to go next.”

    In recent decades, real estate has been critical to China’s growth, and in a country without a pension system, the housing market has become an even greater source of retirement security in China than it is in other leading economies, according to Sullivan. As a result, Evergrande’s problems have caused real heartbreak for thousands of people who have invested their life savings in purchasing yet-to-be-built housing or apartments that may never be completed.

    This reliance on real estate as a vehicle for investment also means that homeowners are under enormous pressure to keep property values high. “If you have enough money [in China], you buy a house, which not only 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 explained. “You can then remove leverage from that and invest in markets and other products to begin generating income as well. As a result, there are many homeowners who do not want to see property prices fall because there is so much leverage in that sector.”

    NFTs are on the rise.

    This year has seen an increase in trading and sales volume for NFTs, with projects such as Degenerate Apes, NBA Top Shot, and CryptoPunks all seeing exceptional sales in recent months. 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 in Brooklyn at the time.

    A plot of land in the NFT-based blockchain game Axie Infinity sold for 888.2 ETH, or US$1.5 million, in February, making it the most valuable NFT ever sold at the time. Following the purchase, the anonymous buyer, who goes by the Twitter handle Flying Falcon (@Its Falcon Time), tweeted: “We’re witnessing a historic moment; the rise of digital nations with their own systems of clearly delineated, irrevocable property rights.” Axie land has recreational, social, and economic value in the form of future resource flows.”

    Yat Siu, founder and board member of Animoca Brands, an app development company and lead investor in Axie Infinity, told ULTCOIN365 that as interest in alternative asset classes grows, digital land sales may soon become a reality, given the situation in China. “What is happening in China on the property sector is a broad ‘China market dynamic’ concern that, in our opinion, is spilling over into a general ‘asset diversification’ approach, including broad investments in culture and cultural moments,” he said. “If you look at the global art market or collectibles, that is also rising, and there is increased interest in markets such as China.”

    Just as NFTs — and cryptocurrency and blockchain in general — are seeing greater adoption among younger generations, the housing market is seeing the opposite effect, with soaring prices in most parts of the world leaving most young people out. This set of factors could be important in any potential push for digital land NFT markets. However, this decision is not solely based on economic considerations, according to Siu, who adds that the NFT market is frequently misrepresented as being solely focused on profit.

    “If you’re like most of us who care about culture, about our engagement in life, about feelings and emotions and what it means to us personally, then we’re not buying these NFTs to flip,” Yat explained. “We are purchasing NFTs because of what it means to us, whether it gives us status, love, appreciation, or makes us part of a membership in our society, community, or whatever you want to call it. That is why we purchase it. And everything we do in life is really centered on those types of engagements rather than purely on making money.”

    Many countries and regions, including China, place a high value on home ownership. Does it make sense for the placement of that cultural value of ownership to shift to digital spaces as the housing market becomes increasingly out of reach for younger people, or potentially a risky investment in light of Evergrande’s turmoil?

    Real estate technology

    One of the reasons real estate is so popular as an investment is its ability to create wealth for families and even generations. Ashley Dudarenok, founder of Chinese social media agency Alarice, told ULTCOIN365 that this is a critical component that has yet to be proven in digital land sales. “The most important thing for digital land to become popular is to figure out how to generate money with it,” she said. “At this stage, it is not like physical property that can be rented out and evaluated, potentially increasing in value over time.”

    While Dudarenok acknowledges that there is increased interest among younger generations, she believes that until this barrier is overcome, it will not be able to replace any market any time soon. She does see one avenue for the technology’s future in high-end real estate, where the physical and digital copies of the property are sold together.

    Sullivan, too, is skeptical that purely digital land sales will disrupt markets anytime soon, though he sees some utility for blockchain technology in the industry. “Blockchain is an excellent mechanism for land sales,” he says. “Because in an irrefutable open-source system, you’d have all the details, all the deeds, or all the covenants in one place. So, let us say, blockchain and smart contracts make sense for real estate.”

    Is it even safe to use NFTs?

    NFTs are immutable certificates of authenticity of digital assets because they are minted on the blockchain, but that doesn’t mean disputes over ownership and controversy over minting practices don’t arise. Scammers targeted Animoca Brands earlier this month, when an ERC-20 token called “ANIMOCA” circulated on Uniswap V2. The company quickly identified the fraud and warned its community not to participate in the sale.

    “It was just someone trying to take our brand name and try to make a quick buck,” Siu told ULTCOIN365, adding that thankfully, no one has come forward to claim they lost money on the sale. “All that is required of everyone is vigilance and a study of history. Animoca has always listed and announced its projects, so I believe there was already some skepticism about some unannounced token.”

    Some argue that this is one of the fundamental flaws of NFTs: if they are not authentically minted, it makes no difference how secure the technology is. “We need to develop a system to effectively police [this technology], because it will be a problem in the future,” Sullivan said. “In the beginning, it isn’t a big deal because everyone is new to this. It’s a new field. However, given the amount of money being spent [now], it is understandable that scammers will be drawn to it.”

    However, Siu believes that the industry’s size will be an asset in preventing fraud — the higher profile the party doing the minting, the more difficult it will be to get away with it, because there will be a larger community watching every transaction. It will also rely on the creation of third-party apps and platforms, such as Crypto Slam and Dapp Radar, as well as the incorporation of additional tools into marketplaces to aid in market auditing.

    One aspect of blockchain’s permissionless and censorship-free environment is what makes it beautiful in the sense that almost anyone can do whatever they want, right?” Yat stated. “However, you must deal with some of these potential abuses.”

    At the end of the day, however, that trade-off is worth it for Yat and a growing community of people all over the world. “This is about the nature of blockchain and the distributed ledger, not just NFTs. One of the most powerful aspects of it is that it is permissionless, but it is also auditable, and it can essentially resist censorship,” he explained.

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