The metaverse land tax
Dear Bankless Nation,
I recently saw a fellow argue that “real estate in the metaverse will not be a thing.” Then I saw Drew Harry, the current Vice President of Research and Data at Twitch, reply to that argument like so:
For context: Second Life is a virtual world launched in 2003, and it’s faced land speculation tensions for nearly 20 years. In fact, speculation woes in virtual worlds has a history stretching back three decades now.
Thus virtual real estate exists today and is nothing new. A better argument to make? Under certain conditions virtual land can become too valuable, and this reality is also nothing new.
How can early NFT-based virtual world projects avoid this pitfall and its more potent implications, then? I think implementing a land value tax + a citizen’s dividend is one promising solution. Allow me to explain!
Figuring out the metaverse land rush
I think of the metaverse as the universe of metagalaxies, with a metagalaxy being an interconnected group of individual virtual worlds.
Accordingly, a mature metaverse doesn’t exist yet, though recently we’ve seen surges in that direction from large mainstream corporate behemoths to small indie NFT outfits and everything in between.
On the flip side, those of us pioneering around the metaversal planes today do already have decades’ worth of proto-metaverse history to take inspiration from, and probably more importantly warnings from.
These older projects may not have been blockchain-based like the virtual worlds we around crypto and NFTs are particularly interested in. However, these projects have racked up lessons us newer explorers should take heed of, lest we closely repeat their mistakes.
Understanding virtual land crises
This week I was researching the history of land problems in Second Life when I came across an impressive article, “Land speculators will kill your game’s growth,” by indie game developer and game analyst Lars Doucet.
In the post, Doucet argued that digital land crises in game or virtual environments have historically stemmed from making digital land act too much like physical land. He noted that virtual land doesn’t have to be scarce, obey physics, or even be necessary for in-world experiences.
As such, where virtual land is modeled after real land — i.e. where it’s scarce, necessary and/or beneficial, and gains value per the context of its location — projects with enough popularity eventually run into problems like a “permanent class of landed gentry, rampant land speculation, sky-high prices, and naked rent-seeking.”
Doucet went on to explain that if virtual land isn’t central to a project, it’s possible to grow around these woes or abide by them. Yet things can get much more problematic if land is pivotal to a virtual world. He then outlined a few historical examples of digital land crises, including:
- Ultima Online — UO is a massively multiplayer online (MMO) game launched in 1997 that experienced land crises due to players’ demand for houses.
- Final Fantasy XIV — In-game housing in FFXIV mainly confers recreational and status benefits, but those advantages are enough to foster rampant land speculation in the still popular game.
- EVE Online — When EVE first launched in 2003, the game experienced a real estate crisis as speculators hoarded “factories,” which were economically pivotal. The creators introduced a “use it or lose it” fee that drove out the speculators who didn’t want to maintain the properties, and it saved EVE’s early economy.
A metaverse land tax
EVE’s factory fee described above is what you’d call a land tax. Zooming in, Doucet explained that this land tax’s introduction in EVE deflated the game’s first real estate bubble, lowered goods prices for consumers, increased economic competition, and decreased wealth stratification.
All pretty good stuff right? Well that’s why I agree with Doucet when he asserts that for virtual world project’s that “insist on artificially scarce land that’s also necessary for production, [a] land value tax is the way to go.”
Of course, not all virtual world projects have artificially scarce land that’s key for production. For example, Webaverse is an NFT-friendly virtual world whose land elements aren’t scarce but rather open and highly customizable. A land tax makes no sense for such a project. However, for NFT projects that do have digital land that behaves like real land, a land tax is one viable way to mitigate the woes of digital land bubbles.
Another interesting possibility here? Teams can distribute the proceeds of this tax back to their communities!
The citizen’s dividend
A citizen’s dividend is like universal basic income (UBI) that’s paid via a land tax. As such, virtual world projects could use a digital land tax to capture value for their active users rather than speculators. On this point, Doucet said:
“Another thing to consider is — why does land value go up, in the real world and in the digital? Put another way — who is producing that value? The answer is the community.
[...] The community produces the value, and in misaligned economic systems (including the one that rules the physical world), this value is captured by private landlords and speculators.
[...] Since your player base created the value captured by land prices in the first place, it makes sense that you should capture the land rents that would otherwise go to speculators who do nothing but hinder productive activity. You can then share that community-created value out equally amongst the people that actually created that value — your entire player base.”
A digital land tax isn’t the only way for an NFT-based virtual world project to alleviate land crises, though it’s a compelling option in their toolbox, especially when combined with a citizen’s dividend that rewards active users. As Doucet concluded his own piece:
“In the digital space, you can fix [the land problem] by just making more of what everybody wants (increase supply), decreasing its hard and soft benefits (reduce demand), or applying a ‘use it or lose it’ fee (tax land rents) to cut speculators off at the knee. All of this will have the effect of making your digital economy more productive by lifting the negative weight of speculation and deadweight loss off its neck.”