Real estate tokenization & its benefits guide , Property construciton, Residential building
A Simple Guide to Real Estate Tokenization & Its Benefits
22 November 2022
An Overview of Real Estate Tokenization in 2023
The integration of blockchain into various spheres has gained popularity in recent years. There are many reasons for businesses and industries to consider blockchain ledger as a foundation for their success. While healthcare has long been the key sphere where blockchain played a significant role, now real estate takes the first place.
Using blockchain in the real estate space has facilitated digital real estate ownership, providing many benefits for organizations and users. Since real estate has always been a flourishing industry, the use of blockchain only made it possible for owners to gain a stable revenue, increase safety and overcome issues like the lack of trust and transparency.
We created this article to help you learn what real estate tokenization is, how it works, why everyone is talking about this trend, and how much real estate is tokenized. First of all, let’s dive into the fractionalization and resulting tokenization of real estate and how it has altered the domain.
What is Real Estate Tokenization?
Real estate tokenization is the process of fragmenting an asset into digital tokens that represent the underlying property containing all rights and obligations. Real estate tokenization uses smart contracts to define contractual specifics. The algorithm lying in smart contracts activates the events illustrated in the code if a predefined contract condition is met and agreed upon.
Smart contracts are used for transactions in NFT and crypto marketplaces. For example, a smart contract can perform a transfer in the land register with no need for a third party, bank, or a human, since they are automatically executed when agreements are satisfied. Once transactions happen, smart contracts validate the actions and generate another block, which is then added to the blockchain.
NFTs’ fractionalizing process uses ERC-721 tokens. These tokens demonstrate a set standard on the Ethereum blockchain ledger and are associated with smart contracts that are in charge of keeping track of the transactions in which these tokens have a role.
How does Real Estate Tokenization Work?
Before learning how it works, let’s first explore what a real estate token represents. It is simply a digitized share that may also have economic rights as any other share. A real estate token can also represent ownership of the collateralized debt, a portion of the deed, and any other type of asset associated with real estate.
During the tokenization process, sponsors complete the needed steps to allow private or public trading of the real estate tokens or allow investors to exchange their shares. Once the investor’s share is tokenized, it creates another block on a blockchain and can be further sold on third-party markets.
Types of Real Estate Tokenization
Real estate tokenization can be divided into three key types:
- Commercial – Commercial tokenization refers to the process of tokenizing the ownership of commercial properties following legally-compliant protocols.
- Residential – Residential tokenization refers to the process of tokenizing the fractional ownership of residential real estate for asset owners, investors, developers, and organizations.
- Trophy – Trophy tokenization is what its name suggests. It is the process of tokenizing real estate assets that are usually iconic buildings in central locations having potent real estate underpinnings.
4 Benefits of Real Estate Tokenization
Even though the real estate tokenization market is in its development stage and definitely needs more time to fully establish itself, experts have already calculated the benefits the process gives both investors and owners:
Higher Transparency & Efficiency
Since blockchain is decentralized in nature, transactions happening on the blockchain ledger are immutable and transparent. This makes them excellent for the real estate industry, given a string of stakeholders and complex procedures. Automated and self-executed smart contracts reduce the need for banks or humans to conduct transactions, eliminating the risk of any unfair deals.
In addition, no paperwork or waiting time is required on blockchain-based systems. This means transactions are efficient and immediate in contracts with traditional banking systems. You don’t need to worry about the limited time of banks or waiting hours until the transaction happens. Real estate tokenization is about round-the-clock work, efficiency, and transparency.
Real estate selling has always been associated with lots of problems. Besides paper work and human mistakes, traditional real estate has long experienced liquidity problems that cause heartburn to investors. As a result, most investors preferred not to participate in these deals since there was little to no liquidity.
In order to increase the asset value, first of all, the lack of liquidity has to be overcome. This is where real estate tokenization came into the picture with an efficient solution. Since a real estate asset is fractionalized during tokenization, its liquidity becomes higher. Instead of selling the whole asset of real estate, the owners of tokenized properties can quickly sell their tokens, getting better liquidity and a swift change of ownership.
Ideal for Small Investors
Real estate was always considered a perfect investment option for elites. However, real estate tokenization offers a vast range of opportunities for inventors of all sizes and experience levels. In fact, this type of investment is considered to be best for small-scale ones. That is because of the fractionating process, where large assets are turned into small pieces, which makes assets more affordable and less risky for those starting their investment journey.
Less Counterparty Risk
Last but not the least benefit of real estate tokenization is decreased counterparty risk. We all know that long and complex transaction chains are hard to trace, which has always been an issue in the era of pre-tokenized real estate. However, now real estate tokenization uses smart contracts that are an integral part of blockchain-based transactions, making things easier from a regulatory point of view.
In addition, no or minimal human interaction keeps the transaction chain as short as possible, which greatly reduces the risks associated with weak links. Therefore, the counterparty risk is also decreased, if not entirely eliminated.
Real estate tokenization is definitely worth the hype. However, in order to make the process simple and keep you on a safe side, you need an experienced blockchain development company offering real estate tokenization services.
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