Blockchain technology continues to evolve despite all the discussions, prejudices, regulatory obligations, and speculations. An already-existing application of blockchain technologies — tokenization — has recently found itself a real-life use case in real estate.
Tokenization has been around almost as early as blockchain appeared, and it has been looking up to a bright future from day one. Estimations by McKinsey show that the volume of tokenized digital securities will reach $5 trillion by 2030.
Real estate tokenization seems like it will significantly contribute to this growth. The market size for real estate tokenization was $2.7 billion in 2022, and its growth trajectory indicates that it could reach $16 trillion by 2030 according to a report by the Boston Consulting Group.
Let's look into real estate tokenization and identify what's fueling this growth.
Tokenizing Real Estate
Tokenization refers to a digital representation of an asset on a blockchain. Any asset can be tokenized, including investment tools like bonds and equities, physical assets like art and real estate properties, and intangible valuables like identity and data.
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Essentially, a real estate property is tokenized by dividing it into fractions and automating the operational process using smart contracts. The first step is to divide the property's value into smaller bits, depending on the property owner's choice. Then, the property can be purchased bit by bit through these tokens, either by many different investors or by one person.
Sabai Ecoverse, which began in Thailand and is expanding globally, aims to democratize real estate investment for a broader audience who may not have access to large sums of capital.
When I reached out to Vadym Bukhkalov, co-Founder of Sabai Ecoverse, for comment he said, "The digitalization of real estate diminishes market barriers, augments liquidity, enhances transparency, and streamlines processes within the real estate sector. Blockchain technology offers heightened liquidity, fractional ownership, and fortified security owing to the immutable nature of blockchain.”
Advantages Of Real Estate Tokenization
One of the advantages of tokenizing real estate is that it opens up the real estate market to smaller investors, thereby increasing movement and demand for all properties. Let's say I have a property that is worth $100,000. I could create 100 tokens, each valued at $1,000. This would turn selling your property into a process similar to crowdsourcing. I wouldn't have to wait for one prominent investor to purchase my property. Instead, 100 small investors could do the trick.
This method results in increased liquidity and decreased barriers to entry to the real estate market. Because the capital threshold is lower, the property is liquidized much faster while smaller investors enter the field.
Moreover, smart contracts handle the whole process of tokenizing and selling on-chain, leading to transparency, automation, and security. The role of costly intermediaries like agents, banks, and legal representatives are handled by smart contracts. A smart contract can automatically sell a token as soon as the conditions are met, which is much faster, cheaper, and error-free than a human intermediary.
Finally, the added benefit of blockchain technology appears in real estate tokenization as well: Security and transparency. All the sale and ownership processes take place and are recorded on-chain. This data is accessible to anyone and is almost impossible to tamper with. Therefore, all transactions remain trustworthy.
The benefits of real estate tokenization are amplified when the method is applied on a larger scale, where handling property is a part of everyday life.
The CEO of Etherland, Alexis Brand, highlighted such a future while explaining his project to me during an interview, stating, "We envision a future where blockchain-based virtual real estate isn't just about digital plots but streamlining real-world real estate processes. Technology such as Etherland's has the potential to reduce costs, enhance security, and create entirely new opportunities for the industry.
We are approaching real estate tokenization from a different angle than most projects that focus solely on fractionalization. Blockchain-based solutions need to be streamlined to improve the efficiency of the real estate industry. The solutions are designed based on the idea that blockchain-based document management isn’t hindered by the shortfalls that face centralized solutions, such as tampering, data loss, and single-point-of-failure attacks,” Alexis added.
Risks Of Real Estate Tokenization
Founder of Zircon Tech, Andres Zunino, introduced the challenges of this application, stating to Forbes, "However, the tokenization of real estate is not without its challenges. One of the primary concerns is the lack of a consistent regulatory framework that governs the market. Different jurisdictions have varying rules and regulations surrounding digital assets, leading to confusion and uncertainty for investors and issuers. Moreover, the absence of a centralized reporting system for tokenized real estate transactions can hinder transparency and make it difficult for regulators to monitor and enforce compliance."
The most significant setback in real estate tokenization is the lack of knowledge about blockchain technologies in the real estate realm. Property owners hesitate to employ this method due to its complexities, while the area's lawmakers hesitate to set ground rules for such transactions. This regulatory uncertainty further damages the growth of real estate tokenization. The lack of regulatory guidance further creates problems in properly licensing real estate property and tax obligations per token.
Another risk of real estate tokenization appears on the technical front, regarding smart contracts. While they are fairly safe applications, they are a new technology. There are concerns that malicious actors could find loopholes and ways to go around the rules of smart contracts, which can lead to hacks. To prevent this from happening, well-trained technical audits should keep an eye on the chain and run regular diagnostics.
Despite its cons, the real estate tokenization market is on a trajectory to grow. In addition to digitalization and on-chain storage, tokenization offers more benefits to real estate owners. Blockchain technology improves real-world real estate transactions, streamlines documentation, and enhances security, thus merging the virtual real estate world with the world of cryptocurrencies. Blockchain technology is improving rapidly. If the technical problems are solved and the regulatory gaps are filled, real estate tokenization might quickly become a mainstream application for all property owners.
