Only a few years ago, owning and trading fractional parts of real estate would have seemed like a far-flung, outlandish idea. However with the advancements and adoption of blockchain technology, the reality of fractional ownership is unfolding in the global, and local, real estate industry. In this post, we’ll dig down into how the tokenization of real estate works and how it solves the problem of liquidity in this sector.
Contents
What does Tokenization Mean?
Tokenization in blockchain refers to the issuance of a blockchain token.
Blockchain tokens are digital representations of real-world assets. A real-world asset can be said to be tokenized when it is represented digitally as cryptocurrency.
Blockchain tokens provide a digital representation of complete or shared ownership for any entity having a specific value.
Many things can be tokenized. For example,
- Tangible assets like real estate, art, precious materials
- Intangible assets such as intellectual property rights
- Regulated financial instruments such as bonds and equities
In real estate, tokenization makes the asset more accessible and liquid.
Rather than purchasing an entire property, investors can buy tokens representing a portion of the property. Illiquidity in this regard is nullified opening up a multi-trillion dollar industry for everyone and not just the select few.
The Benefits of Tokenization
Tokenization has the potential to change the landscape of how we invest and trade assets by making it easier and more accessible for everyone.
Tokenization confers a number of benefits such as
- Liquidity
- Transparency
- Automation
- Accessibility
“Everything will be tokenized and connected by a blockchain one day”
Fred Ehrsam
Where real estate investing is concerned, participation is open to all with an internet connection.
How do you Tokenize Real Estate Assets?
When tokenizing real estate assets, there are a number of key stages. At a high level, the platform to tokenize the real estate is chosen, legal agreements are structured, and token issuance and distribution via smart contract.
One such company forging a pathway in this early stage tokenization of real estate environment is Blocksquare.
Blocksquare is a technology company building the required infrastructure to transfer real estate assets to the internet.
Businesses of every size—from new startups to public companies—use their blockchain infrastructure to offer and manage their real estate investments online.
Learn more with this excellent deep dive on YouTube.
Cryptovium covers Blocksquare, Europe’s leader in the tokenization of real estate
How Can the Real Estate Market Benefit from Tokenization?
Tokenization is changing how we invest in real estate. Taking us from a world where a property is transacted once a decade, to a new reality where hundreds of transactions of that same real estate asset are executed within a minute.
This process is powered by DeFi smart contracts allowing for the tokenization of assets.
This allows anyone with an internet connection to become an investor in real estate. Investors are able to purchase fractional ownership through a website and have their interests transparently recorded on a blockchain.
Individual investors can now participate in large-scale developments which historically have been impossible to access.
Are there any Problems with Tokenizing Real Estate
A problem with tokenizing real estate is met when an attempt is made to either tokenize debt or equity of the capital stack.
Debt is already serviced very well traditionally, while equity tokens have no real on-chain settlement in most jurisdictions around the world.
Therefore in DeFi real estate you need to look at the tokenization of revenue. It is fairly easy to estimate the revenue a particular property can generate.
The most common revenue streams for real estate properties are:
- cash flows from lease contracts, and
- sale of the property to a 3rd party buyer
In terms of commercial real estate, the revenues a property generates also highly impact the valuation of the property as investors look predominantly for a target return.
Additionally in a broader sense, there are risks that investors should be aware of:
- Regulation: real estate tokenization is in its infancy and users must be aware of changing laws in the sector.
- Volatility: the prices of digital assets can be highly volatile, users must conduct a risk analysis
- Fraud: as with any investment, there is always a risk of fraud. Due diligence, as with any investment, is paramount.
Despite the risks, the tokenization of retail estate looks set for significant continued future expansion. Companies such as Blocksquare are well-placed to capitalize on this buoyant growth.
To learn more about Blocksquare, please visit the following:
Blocksquare | Tokenization infrastructure for real estate | Website
