In order to improve liquidity, expedite procedures, and permit digital ownership, real estate properties or their cash flows might be represented as a blockchain token (or tokens). This is known as tokenized real estate.
Read More: Real Estate Tokenization
Generally speaking, depending on the purpose and the nature of the tokenization, using blockchain technology for tokenized real estate necessitates the usage of either fungible or non-fungible tokens (NFTs). When considering a property, or groups of properties, as a whole, NFTs are helpful (i.e., one or more properties, one token). To fractionalize a whole into pieces, fungible tokens can be utilized (i.e., one or more attributes, 100 tokens).
Tokenization is the best option for owners of a single asset or a small portfolio of assets, according to KPMG, since it offers investors the opportunity to engage in fractional ownership and subsequent secondary trading at a significantly lower cost and time.
How Would Tokenized Property Function?
Tokenized real estate often necessitates a solid, trust-minimized connection between the underlying physical asset (property) and the digital asset (token). Chainlink is a Web3 services platform that offers best-in-class connection tools to developers and entrepreneurs that want to bridge the gap between blockchains and real-world assets (like real estate).
To give an understanding of how real estate may be tokenized, this section will detail many options in both the residential and commercial real estate sectors.
Tokenized Real Estate’s Advantages
Tokenizing real estate assets, whether they are single or several properties, entire or fractional, has several advantages.
Tokenization’s ultimate goal is to eliminate the obstacles that now stand in the way of real estate transactions by streamlining procedures, getting rid of pointless middlemen, and bringing down entrance barriers. Liquidity may rise as assets become more affordable and simpler to trade, allowing more buyers and sellers to enter the market and complete deals. The tokenization of real estate assets has the potential to be very important for the real estate sector, according to Ernst & Young (EY). The use of tokenization renders theoretically unnecessary the notary visit, the high transaction expenses, or the property transfer tax.
Improved Price Finding
Tokens for fractionalized real estate can assist the broader market in determining the fair market value of various real estate holdings. A reasonable price for every property is now determined by real estate specialists using a range of data sources, and estimates from various experts can differ. In a similar vein, offers received by sellers after they post their home for sale might vary greatly. However, the price discovery on a portion of the home can offer more information on the fair market value of the entire property if separate properties were fractionalized.
Tokenized real estate, which predates fractionalization, has no effect on the actual cost of real estate. However, it can simplify the permissions and procedures related to real estate transactions. Smart contracts, which operate on the conditions of transfer and automatically carry out authorized transactions, enable low-cost and reliable coordination amongst mortgage lenders, notaries, escrow businesses, and other entities through the use of tokens.
Real estate fraud may take many different forms. It is possible to falsify information about a property to give prospective purchasers incorrect impressions of important measurements like square footage. Purchasers may be tricked into committing fraud by offering phony real estate titles. Smart contracts, blockchain technology, and decentralized oracle networks such as Chainlink can offer enhanced authentication, greater trust-minimization, and verifiable data that lessens information asymmetry, which is frequently the main driver of successful fraud efforts.
The Technical Difficulties of Tokenizing Real Estate
Tokenized real estate is still a ways off from becoming widely used, and there are still a lot of obstacles to be solved before that can happen. Although there have been a few attempts to tokenize real estate so far, none of them have been successful in developing a scalable system that addresses the issues and constraints of the current real estate industry.
Verification and Authentication of Data
A certain level of assurance that the data supplied is accurate, dependable, and legitimate is required for digital real estate transactions, regardless of whether it includes information on property ownership, upgrades, or other mission-critical data.
Real estate decision-making relies heavily on data since it contextualizes the property. What is the typical cost to rent a property? What is the amount of foot traffic on a property? When was it constructed? Which improvements have been made? How well-maintained is the infrastructure? Does the property have a past that might affect its worth?
In the expanding trend of tokenizing real-world assets, Chainlink plays this function. A crucial first step in launching a future tokenized real estate market is onboarding top-tier real estate data providers, like ProspectNow and SmartZip, to deliver premium real estate data to blockchains.
Consider that the NFT that is kept in your digital wallet is your house deed. The password is known to you alone. That also implies that you will lose the house if you misplace or forget the password, which will prevent you from accessing the wallet and the house deed NFT.
One difficulty in balancing the digital and physical links between tokens and the underlying property is determining who, in the event of fraud or error, has the last say over who is the rightful owner of a property. If forfeiting a token equates to losing property ownership, it would be highly illogical. Instead, a centralized organization—like a government—might be able to assist in recovering and approve the issuance of a fresh NFT to take the place of your house deed. What occurs now if you misplace an actual house deed is comparable to this.
Application at a Large Scale
Although tokenized real estate has a lot of promise to increase liquidity and simplify transactions for both buyers and sellers, there are still a lot of unanswered concerns about how tokenization can be implemented nationally or even internationally.
It’s challenging to make significant changes to a $29T market’s backend infrastructure and procedures. Real-estate tokenization will need to be implemented at scale with open standards, a ton of trials and tests, and collaboration from Web3 groups, governments, and companies.