The speculative bubble of digital real estate is a predictable result based on economic principles

The latest hot new trend is games featuring “digital real estate”. I am worried that these will lead to a speculative bubble in digital land, causing players, developers and investors to lose a lot of money.

If you are developing or investing in such a game or application and hope to take advantage of this wave to reach a multi-billion dollar valuation, then you’d better study the fundamentals carefully before hitting the South Wall.

Digital real estate is actually not a new phenomenon. History has consistently shown that when the economic attributes of “digital land” and physical land are sufficiently similar, we will see digital land speculation, digital housing crisis, and even a full-scale digital economic recession�?�?/font>

This means that once the scalpers take scarce digital assets away from those who really want to play games or do things for the community and control it, then the exciting growth will come to an abrupt end.

Take Axie Infinity as an example.

“A universe inspired by Pokémon, anyone can earn tokens through skilled gameplay and contribution to the ecosystem. Players can fight, collect, raise and build a land kingdom for their pets.”

The current game centers on buying and trading non-scarce virtual creatures called “Axies” in order to make them fight against each other, but future plans will focus on buying and selling scarce digital lands.

Although the game is still in the early stages of development, you can now buy land.

Let us completely put aside the fact that Axie Infinity is based on the blockchain, and focus entirely on the analysis from the perspective of real estate.

The land in Axie gives many in-game benefits, including the right to collect rents, which can be cashed out as real-world money.

Unlike the virtual animals in the game, the supply of land is fixed. In particular, it needs to be emphasized that the future stage of the game will encourage people to build new interactive experiences, but this activity will only be open to people with land.

I can tell you exactly what will happen here (because this is a frequent occurrence)-speculators will buy all the land and hold it.

If holding this rare asset that everyone needs without cost, then it will rise under foreseeable circumstances, speculators will hoard, and those who really want to use the land must pay a high enough price.

This will drag down the economy of the entire game. How bad it is for Axie depends largely on the decisions they make in the coming months.

But I can say with certainty-the more important “digital land” is to the game, the more serious the crisis will be.

We know this for two reasons-firstly, this is exactly what happens in the real world economy, and secondly, we have seen this situation many times in the digital economy before.

Ultima Online, Final Fantasy’s XIV and EVE Online… these virtual worlds with complex internal economies are all typical cases. They all suffer from the shortage of digital land due to speculation.

One of them was able to solve the crisis thanks to a smart economist who drew a page from the book of Henry George, a 19th-century instigator of populism.

The digital house crisis in massively multiplayer online games

As long as there is digital real estate, there will be a digital housing crisis, which stems from the shortage of digital land.

I remember playing Ultima Online in the 1990s, even though I had the money to build a house, I couldn’t find free land to place the house. The housing crisis is still ongoing. These are all similar to the topic of real-world housing crisis.

TimSt proposed to allow the inside of the house to be larger than the outside, thereby improving land use efficiency and building more housing.

Uriah_Heep suggested that TimSt move to a less crowded place, but the answer is that no one wants to move to a rural area in the Ultima world.

All this is too strange, the digital land does not have to become like a physical land.

Digital vs. physical real estate

Real estate, whether it is digital real estate or physical real estate, consists of two parts-land and improvement. For example, the buildings you build, the crops and orchards you plant, and the landfills dumped on the seabed turn wetlands into land.

Improvement is a kind of capital, but land is not. The main difference in the physical world is that you can create more capital, but you cannot create more land. This is a free gift from nature.

All problems stem from this attribute.

The creator of the virtual world can set the rules at will, but the closer the digital land is to the physical land, the more serious the damage caused by speculation.

1. Digital land is not necessarily scarce

There are no laws of physics that prevent you from creating more digital land. Of course, the platform can choose to maintain the scarcity of land (or any other asset). Ultimately, the “scarcity” of digital land depends entirely on trust in the company.

Blockchain does not provide any guarantees-no more land can be created.

Therefore, the scarcity of digital land is always an illusion—a deliberate choice made by platform holders. But although it may be voluntary, as long as the scarcity of numbers is maintained, it will naturally lead to speculation.

2. Digital space does not have to obey physics

In the real world, any real estate agent will tell you three factors that affect the value of a property-“location, location, location”.

We take it for granted that the inside of the house is not larger than the outside. If possible, real estate in Times Square will be much cheaper.

But in the digital realm, portals are very common, and the inside is larger than the outside, which allows the digital world to bypass the limitations of physical land—but only if they choose to do so.

3. Digital land is not a must

In the physical world, everything you do depends on access to the land, whether it’s work, eat, or sleep. Your right to do these things in a particular place depends on the landowner (or yourself if you are lucky), grant Your access rights.

The digital world will not be like this.

In many virtual worlds, digital “homelessness” is possible-and you can still be healthy, efficient, and even rich without a virtual home. If you want to sleep, just quit.

But for whatever reason, many virtual worlds choose to make “digital land” a necessary factor of production.

This happens when you need to visit a specific location for any interesting thing you want to do—whether it’s a social population center, a trading market, a resource-gathering wilderness, or a dungeon for missions.

The question then becomes whether the visit to this digital land is exclusive.

If all valuable locations provide instances for every player who wants to use them or access them, then you will never be in shortage.

But if one player occupies a piece of land meaning another player cannot, it becomes more like a physical land.

Even if the land provides optional “dispensable” in-game benefits, it is enough to trigger a land crisis, so you can only imagine how bad it will become when the core game features are locked in land ownership.

4. The poorest land is the condition of crisis

The shortage of digital land strongly echoes what we see in the real world. Based on my understanding of real-world economics and a close reading of the 30-year long history of digital land speculation, I predict that digital land will be in short supply everywhere:

Scarce

Necessary/or confer benefits;

Obtain value from proximity to population centers and/or “public works”;

In other words, the more land you have, the more serious your land crisis will be.

The most obvious signs of the land crisis are the permanent landlord class, rampant land speculation, sky-high prices and naked rent-seeking, all of which will limit your user growth.

For most MMOs, this is the only good thing-the house is “good to own”, but if you don’t own the house, you can still have a lot of fun in the rest of the game.

Ultima and FFXIV have never resolved their crisis. For EVE, the crisis exists because the control of the land is the core of the entire experience-games like Axie must learn the lessons of history before it is too late.

Network Genesis

Ultima Online (UO, Online Genesis) was first launched in 1997, and it was the first game to define the MMO genre.

Its housing system is rather special-save enough resources for the blueprint of the house you want-from small sheds to magnificent castles-and then find a piece of free land somewhere and place it.

Before long, almost all the available space was used up. If you do not frequent your house often, it will be automatically deleted to make room for others.

But land speculators are not deterred. Holding free land with buildings is a good investment, because the price players are willing to pay for land far exceeds the cost of holding land and buildings.

So why don’t players move directly to a service area with a smaller population? This is a very good question-a lot of players will make the experience less interesting, and at that time you can’t cross-server, so moving means giving up all your friends, experience, skills and equipment.

Densely populated land used to be and is now the most valuable land.

This is similar to the real world-the total value of 7.6 million square kilometers of land in the United States is approximately US$23 trillion, but the value of only 198,000 square kilometers of urban land is US$19 trillion.

Most of the value of urban land lies in the fact that it is where people are.

This is partly due to what economists call the agglomeration effect-living in the center of a prosperous civilization can easily find butchers, bakers, and candlestick manufacturers, which is more valuable than living alone in the center of a forest. Even if your house is the same.

The real situation of the earth also applies to Ultima, and Final Fantasy XIV (FFXIV) is also troubled by the same problem.

The main attraction of FFXIV houses lies in the “soft” benefits of status, aesthetics, role-playing and self-expression. They also have “apartments”, but the demand is very low and they are not the target of speculators. Because you have no basic needs in the game world-if you want to sleep, you just need to log out.

As we have seen, any time you own a “digital land” game, it 1) scarce supply, 2) valuable or necessary, and 3) gain value from close population and economic activities. Prepare for land bubbles and speculative crises.

Now let’s take a look at the game that was famous for solving the crisis in 2003.

EVE Online

The economist Ramin Shokrizade explained the whole thing in his 2013 Gamasutra article “How do I use EVE Online to predict the Great Recession”.

Let me quote the opening paragraph in detail:

“In 2003, I helped them design a new economy in EVE Online. Their biggest problem was that the factory based on the player economy was too cheap to buy and maintain. Since the game was released in the UK one day earlier than the US, when I was allowed to log in to the retail version of the game At that time, all major factories were taken away.

A week after EVE was launched, I submitted a report explaining how this weakness in economic design threatens the game and how to fix it.

My solution is to drastically increase the rents of these factories so that only those who are really active in operating them are willing to hold them.

The idea is to create a “hot potato” effect, unless they want to use it to produce a lot of output. But the result of this speculation is increased wealth stratification, reduced economic competition, increased consumer product prices, and crazy real estate inflation. “

Ramin suggested that the “government” of EVE should simply levy the cost of “use it or lose it” as an inevitable cost of holding factories that have a strong nature of land (scarce, necessary for production, to obtain value from location) ). And this fee must be high enough to get all the profits from speculation.

This is actually a kind of “land tax.” The special thing about land taxes is that they tend to lower land prices by driving speculators out of the market.

Land value tax (also called “site value tax” or “location tax”) should not be confused with property tax-“property” is land and buildings, so the added value of both is taxed together.

The land price tax is only a tax on land, which is a scarce basic resource that no one can make but everyone needs. It is not a single tax based on the area of ​​land you own, but a tax based on the value of the land.

As a result, the land value tax on parking spaces in downtown San Francisco is much higher than on Nevada farms.

When a sufficiently high land price tax takes effect, what are the natural incentives for landowners? Well, they better sell the land or have built something useful on it. This will force speculators to push the land to the market, and there will be no bids from speculators at this time, which further depresses the price of land.

As the value declines, the amount of land appreciation tax will also decline. But if speculators try to raise land prices again, taxes will increase proportionally and the bubble will automatically shrink.

But won’t speculators just pass on the land tax and increase prices further? Empirical evidence has always shown that it will not. Unlike sales tax and income tax, land value-added tax has no deadweight loss. Experimental evidence continues to confirm this.

Remedy

Using digital land value-added tax to solve the digital housing crisis is easy to grasp, but the details depend to a large extent on the specific implementation of each game and social conditions.

But we must always remember that digital land is not physical land, so we can often solve this problem in other ways.

Never forget that you can create more land, you have a digital world without physical limitations, just print the land like a dollar bill. This is to solve the problem from the supply side.

But if your game is designed in such a way that location determines the value of the land, this solution may not work. Even if you can print unlimited land, you cannot directly control the core area (depending on the size and density of the player base).

Your other option is to reduce the importance of land and solve the problem from the demand side, but the player may have added some features.

In the final analysis, if you insist on producing artificially scarce land, then the land value-added tax is the way to go.

Now let us return to games like Axie, which require special care, because digital real estate is a more core activity, so the possible damage caused by the digital land crisis is much greater.

I really hope that everyone can learn the necessary lessons so that no one loses a lot of money and burns the trust of an entire generation of players.

Land grab pre-sale dilemma

If you use the “digital land grab” model to pre-sell your game, you must be prepared for the inevitable crisis-whether to directly harvest loyal early users, or to put all new users into landless serfdom, and then Stop development.

We have seen clear signs of this tension in Axie.

In order to prove that it is reasonable to pre-sell the land with real money, the land must have “hard” in-game utility, otherwise it is just a digital gadget and users will feel cheated. If this precious piece of land remains strictly fixed in quantity, the digital land crisis is not only inevitable, but also imminent.

If your game takes off and succeeds, then at some point, all the land worth owning will be owned, and new players will not be able to own anything worth owning at a price lower than the monopoly price.

Selling land in phases can prevent this from happening suddenly, but it only delays the inevitable. Depending on the importance of the land, new players may not even be able to play the game at all-these people will pay ever-increasing rents for privileges.

This kind of marketing plan may be a good way to drive active pre-orders, but it is certainly not a coherent growth strategy for companies looking at multi-billion-dollar valuations. Why invest in a project that is destined to stagnate?

I predict that many developers who have experienced initial success but are negatively dragged down by user growth will try different degrees of “land dilution.”

They will carefully avoid changing the amount of land in order to keep their promise to keep the land scarce, but they will cleverly change the necessity or importance of land for playing games, trying to not annoy the nobles and appease those who just want to be able to buy and play damn Game farmers.

But the real problem with digital land grabbing is that they are more than one kind. At least Axie Infinity is actually a game, and Earth 2 seems to be pure speculation.

It is a simple virtual representation of the entire planet, divided into small pieces, players can buy, hold, and sell, and that’s the whole thing.

According to the trailer, the first stage is “selling land”, no one knows what the second stage is, but the third stage is obviously “profit”!

Land speculation punishes builders

If digital land is a scarce resource and a necessary factor of production, and the value of the land increases as it approaches population centers or “public works,” then you may need to impose a digital land value tax to ensure that only those who intend Only those who use the land to do valuable things can get the land.

I’m sorry to say that a setting like Axie will inspire people to do the exact opposite-grab valuable land and hold it forever.

Don’t charge too much rent to creative and productive users who really want to build cool products. This will inhibit creative output.

If you want your players to make the most of your digital space, then tax the land, but not the improved facilities and buildings.

Another thing to consider is why the value of land will rise in the real and digital worlds? In other words-who is creating this value? The answer is community.

In the real world, living in a safe and friendly neighborhood, with a grocery store on the corner, schools and libraries within walking distance, and beautiful public roads and sewers will make your neighboring land more ideal and valuable.

Given that the premise of many land grabbing games is the “Play to Earn” mode, players first create the value captured by the land price, so it makes sense that the platform should capture the land rent that would otherwise flow to speculators-they will only hinder production activities .

Then, the value created by the community is equally shared among the people who actually create the value, that is, the entire group of players.

Of course, real money payments open up a world of additional compliance, dangers and risks, so I recommend anyone entering this field to be extra careful and conduct a lot of due diligence.

Land shortages are not inevitable, they are the predictable result of well-known economic principles.

In the digital realm, you can do this by making more of what everyone wants (increasing supply), reducing its hard and soft benefits (reducing demand), or charging “use it or lose it” (tax land rent). Solving this problem discourages speculators.

The real world rents are too high, let us not repeat the same mistakes in the digital world.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/the-speculative-bubble-of-digital-real-estate-is-a-predictable-result-based-on-economic-principles/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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