Real Estate Innovation: Blockchain & Tokenization
Posted on August 24, 2020
As I mentioned in my recent post about modular construction, removing friction in the real estate industry is the quickest way to profit.
Blockchain technology is another innovation that removes immense amounts of friction from the real estate industry. In this article, I’ll be outlining the most important ways that blockchain will disrupt real estate and how these will benefit humanity as a whole. Good for us, right?
The entire concept of trading real estate on the blockchain hinges on the idea of tokenization. Essentially, tokenization is the process of turning a physical asset into a digital one. In the use case of real estate, this includes digitizing the value of the property itself as well as the legal structure that surrounds the property.
The “token” part of tokenization comes from dividing the asset into different shares (or tokens). These tokens could represent fractional ownership in the property itself or in a company that holds the property. In fact, any number of properties can be tokenized together with a bit of creativity. A fund could invest in many properties then tokenize itself; this token would then represent fractional ownership in that fund. In this vein, creative financial arrangements allow a plethora of tokenization tactics that can fit any scenario.
The tokens are made available on, and subsequently traded on a blockchain. Although blockchains are entirely public (by design), the tokenization process ensures that the actual sensitive property information is kept secret by “hiding” them behind arbitrary values. However, the identity of the asset is still represented here. After all, everyone can see your property as they walk down the street, but they can’t discern the ownership structure.
Real estate sales are complex procedures that often have high monetary values. These high values serve as barriers to entry for individual investors; typically, only institutional investors have the capital to seriously invest in real estate. The tokenization process destroys this barrier by drastically dividing the value of the property. For instance, the first tokenized blockchain real estate transaction to occur in Europe resulted in a single token being worth €6.50, while the entire property was worth €6.5 million. As more and more real estate assets becomes tokenized, even casual investors will be able to include specific real estate assets in their portfolios for increased diversity and personalization.
Tokenization also simplifies the sale process. Instead of going through the complex traditional process of selling a property, the tokenization process allows for a streamlined (and price-effective) sale. After all, you don’t have to pay a broker an exorbitant commission to find a singular buyer for your massive property – just put it on the market as a token offering! The liquidity and flexibility provided by this type of sale benefits both institutional investors and individuals. After all, an institutional investor that would’ve traditionally purchased the property outright can still purchase a large number of tokens (while further diversifying their risk elsewhere), and the individual investor can play in a game they wouldn’t have been able to otherwise.
Couple goals: Blockchain and Real Estate
This democratization of real estate investing is going to do great things for equality across society. Barriers to entry will fall, allowing marginalized investors to play in the same field as the behemoths. Commissions and 3rd-party fees will be eliminated by the secure peer-to-peer system provided by blockchain technology, further allowing people to invest without unnecessary trade-offs.
The idea of tokenization is a trend that will apply to most illiquid physical assets. These assets will have digital representations of themselves that will be split and safely traded on blockchains, ushering in an era of transparency and equality in market entry. Blockchain is the most exciting idea I’ve learned about in the past year (and I’ve learned a lot of cool ideas in the past year). I’m excited to learn more about how it applies to my other favorite topics, and I’m excited for you to learn with me.
The most useful source I found: The Three Phases of Real Estate Tokenization by AlphaPoint
Some nice definitions: Real Estate Tokenization by SolidBlock