It Works in the Metaverse… 🌄
By Jeran Miller
In our Metaverse Monthly Report-August 2022, we featured this article from Virtual Real Estate (VRE) author Jeran Miller. Jeran is a realtor in the physical world and an aficionado of real estate in virtual worlds. His article tackles the topic of VRE as Proof of Concept for a simpler and fairer form of real estate in the physical world. We hope you enjoy!
The line that separates “a virtual world” from “a simulation” is difficult to draw. After all, each shared virtual world is, intentionally or not, a sort of experiment. It poses the question of what happens when things are set up a certain way, people are brought in, and someone, somewhere, presses play. As exotic as they may seem on our first exposure, everything that exists within them is a kind of import of what we already know. Practically all of our schemata — all of our notions as to what things are and how they should work — originate in our experience of the physical world.
And while only one such physical world exists, our capacity to create new, virtual realities is without limit. Thousands, perhaps millions, of computer-generated worlds are sprouting from our one physical reality. Each one constitutes a sort of petri dish — a tiny, self-contained ecosystem that can give rise to brand new and interesting forms. As we participate more in these virtual environments, we will inevitably develop unique solutions to the problems that exist there. The best of these may also one day travel upstream and become a part of the “real” world as well.
Virtual worlds, then, have the potential to become a sort of “proof of concept space” in which we can test hypotheses and determine what works and what doesn’t. I’m by no means the only one to recognize this possibility, but I see it most clearly in my own profession, which is real estate. Should virtual real estate continue its growth in popularity, I believe the virtual market may one day prove the worthiness of new and innovative models that we can also use in the “real world.” And, not for trivial purposes. These new ways of doing things have the capacity to revolutionize the traditional real estate industry.
Reimagining Title and Deed
One of the more promising transformations may come in the matters of title and deed. These are two legal terms that probably merit explaining before I discuss how they might change. But first, please understand that I practice real estate in Florida, in the United States. Things work somewhat differently in other states and in other countries, but the concepts of ownership and transfer are comprehensible to practically everyone.
So, let’s start with “title.” Title is an abstract notion — something akin to a set of rights regarding a property.¹ These rights include the possession and the use of it, as well as the right to sell or transfer the property to someone else. Colloquially, though, when people refer to someone as “having title,” they usually just mean that he or she owns the home. The second term, “deed,” describes the actual legal document that transfers title from one person to another — sort of like a vehicle that title arrives in when someone buys the property.
Crucially, the deed must be delivered to some sort of local authority who then records it, preserves it, and makes it available to the public. Where I work, this authority is the local County Comptroller. When any closing happens, the deed is submitted to the Comptroller, who maintains it in a way that is both accessible to the public and safe from alteration. More perceptive readers may have already recognized that this mirrors the function of a blockchain, which also serves to store information in a public and permanent manner.
While physical real estate actualizes this process through old-fashioned ink and paper, virtual real estate makes use of NFTs. Were title and deed to physical property represented with NFTs as well, there would be several distinct advantages to the current system. The most important of these is that property transfers between people could be accomplished much more simply, perhaps without the need for a title company, an attorney, or a comptroller at all. More importantly, it could also be done nearly instantaneously, and practically for free.
Contrast this to the delays and title-related closing costs of a real-world sale! One can imagine the ease of closing when all that’s required is a signature from all parties’ wallets. It has the potential to be a far, far simpler process — all without sacrificing the transparency and security of the established system.
Bankless Mortgaging
Much like title and deed, mortgages also represent a fundamental component of modern real estate that we could improve. Experimentation has already started in this regard. Mortgages have been written for metaverse properties for instance.² But there have been very few, and it’s not even clear the company that once provided them still does. The world of defi is also starting to see mortgages being written for real-world homes. I know of at least two cases in which people have successfully used loans from decentralized providers to buy properties.³ ⁴ I imagine we’ll see this more often in the years to come, perhaps for both physical and virtual real estate.
This is likely a positive development. I mean, I don’t think I’m breaking any news by pointing out that the current mortgage system has always been problematic. For instance, race-based lending practices known as “redlining” have caused generational damage worth many billions among African-Americans and other minority groups, and the anonymity of modern decentralized lending could help stop this. When all you have is a wallet address to go off of, it becomes nearly impossible to determine the race, age, gender, sexuality, etc. of a loan applicant. The program simply doesn’t care, and the playing field for financing could be made more even.
Mortgages are further complicated by the complexity and the expense of foreclosure. When someone defaults on a real-life mortgage, there is a painfully long procedure to follow before the title to the home is finally delivered into the hands of the lender. Use of a smart contract would automate this, significantly shortening and simplifying the process. Now, there will likely need to be some oversight in place to make sure homeowners are taken care of, but there will always be defaults when money is lent, and
any serious attempt at replacing the current system must address this inevitability. The use of smart contracts and tokens could greatly simplify a long, complicated, and very expensive process.
Pausing for a moment, I feel compelled to admit that the talk so far has been somewhat idealistic. In the real world, would you use a decentralized mortgage to buy your next house? I wouldn’t.
And I doubt it’s only me. There are very few people who would want to test out something experimental when it comes to obtaining shelter. If, however, I could be certain that such a mortgage would cause me no problems, I would much prefer the decentralized option. I’d simply rather pay my interest to a pool of regular investors than I would to some giant, corporate bank. I doubt I’m alone in that, either, but it will take time to build the confidence needed to actually give it a go.
High Stakes Require High Confidence
The stakes are simply too high to make any sudden and profound changes in the way real estate transactions are handled. It carries enormous systemic risks; not just personal ones. Title, deeds, and mortgages are like blocks that sit near the very base of the housing system. Break one of those blocks, and you could make a giant mess of the whole structure. American real estate represents an immense amount of wealth, after all — $43.4 trillion dollars’ worth.⁵ Any tinkering with that system needs to be calculated, cautious, and thoroughly tested before moving forward.
Perhaps it’s for this reason that, working within the real estate industry, you can’t help but notice that the way things are done changes very slowly. In 2022, for instance, fax is still an important part of the process for many banks, despite its nearly two-decade-long obsolescence. Other examples exist, too, such as the continued insistence on paper and (specifically blue) ink for signatures on deeds. It’s clear that technological change only comes to our industry when the new system has long been proven safe enough.
This is where the Metaverse comes in. Many of us can recall a time in which people were afraid to put their credit cards into a website or exchange important information via email. That fear faded slowly over a span of years as people grew comfortable with the new technology. With regards to the changes I’m writing about here, we’re still a long way from the point where people feel confident that they’ll work. But, how do we ever get to that point when so few people want to risk experimentation with an asset as valuable as their house? The Metaverse represents a wonderful, lower-stakes venue in which we might demonstrate repeatedly that these models work and are worthy of trust.
I believe that, with time, the efficiency of NFTs and defi protocols can win out over legacy systems. We will see the present, one-way flow of technologies between the physical and the virtual become a two-way exchange, and we will further bind our virtual existence to the familiar world of atoms, bodies, bricks, and mortar.
1 — https://en.wikipedia.org/wiki/Title_(property)
2 — https://blog.cryptostars.is/the-birth-of-metaverse-mortgages-b92257ccc864
3 — https://cointelegraph.com/news/uncollateralized-defi-mortgage-taken-out-on-austin-condo-via-teller
4 — https://thedefiant.io/engineer-becomes-his-own-lender-in-first-defi-mortgage
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