Tokenization: Unlocking Value in Traditional Assets on the Blockchain

The token economy is now thriving, and many sectors profit from it. One of the economic buzzwords is asset tokenization, which involves tokenizing real-world commodities.

Investing in tangible assets such as business stock, artworks, real estate, and many others is advantageous. However, one of the major issues is a shortage of cash. Real-world asset investing has a lengthy transaction procedure. Tokenization of real-world assets provides several benefits and supports the democratization of investing.   

Buyers perform immutable transactions by exchanging tokenized assets, and the investor obtains cryptocurrency. The market is expected to develop in the future years, almost touching $4,000 billion in digital real estate ownership by 2029.  

Moris Media, India’s leading digital marketing agency, discusses tokenization of real-world assets and how to tokenize a real-world asset in this post. In terms of real-world assets, our experts will look at real-estate asset tokenization and the benefits and obstacles of tokenizing real-world assets.

An Overview of Real-World Asset Tokenization

Tokenization is important for removing intermediaries, increasing market liquidity, and facilitating speedier transactions. Tokenization refers to the process of transforming ownership of a physical object, such as land, gold, or property rights, into a digital token. Tokens serve as a transferable unit of value and reflect real-world assets. On the blockchain network, anything with monetary value in the real world may be tokenized and sold. The tokens we need for trading are issued via security token offerings.  

Companies are tokenizing their firm equities, land, and industrial assets. The transactional downsides are minimal, because tokenization enhances security, encourages crowdsourcing, and provides greater returns. Tokenization also enables real-world assets that were previously unable to participate in the DeFi ecosystem to do so.  

What is the definition of Real Estate Asset Tokenization?

Tokenization of real estate assets separates an asset into digital tokens. A single property is subdivided into many assets, which are then monetized. The smart contracts keep track of the numerous terms and conditions. The contract also mentions the occurrences. As the event progresses, the contract's algorithm is triggered, and the block is put to the blockchain.

Similar to conventional real estate, the price of blockchain technology varies, but there is better security, frictionless payments, and information kept on the blockchain. In addition, unlike the old ecosystem, no one institution or central authority owns the real estate database.

Experts state that real estate tokenization extends beyond fractionalization and aids in security and removing uncertainty about a deal's closure.

You get partial ownership of the land by engaging in tokenized transactions. This also suggests that market involvement is increasing. The opposite may also be done when a tiny portion of the land is tokenized to get money, so utilizing the land as collateral. There are three kinds of real estate tokenization:

Tokenization of the residential area may be done using fractions. Developers, institutions, and real estate investors purchase the fractions.

Commercial tokenization is the use of legal-complaints to tokenize commercial assets.

Trophy tokenization is the tokenization of real estate assets in renowned structures in prosperous places.

How Tokenization of Real Assets Works 

The smart contract functionality is crucial to the task. Smart contracts transform physical assets into digital assets. The contract contains the conditions, which are shared with the blockchain network. And, as we all know, smart contracts execute themselves once the contract terms and conditions are satisfied, at which point the deliverables, i.e. tokens, are distributed.

Tokenized real estate investment makes use of a special-purpose vehicle for real estate investing. A private placement offering is also formed to keep the investment information confidential.

Implementing Real Estate Tokenization in Four Steps

Before diving into real estate tokenization, it's a good idea to grasp the steps involved in "how to tokenize real estate assets."

Deal Formation:

The initial step is to learn more about the jurisdiction, the asset kind, and the shareholder type. The asset owners choose the property to invest in, whereas the issuers choose the sort of shareholder. Both parties also pick the terms and conditions to add. There are certain things to think about, such as the time period for ROI, legal structures, and cash on return.

Legal Framework:

Digitization is being used in legal structure. The document's data is posted to the blockchain network. The data is encrypted on the network and in smart contracts. Security tokens are also given. The following is the primary structure used for real estate tokenization:

Institutional purchasers prefer the Single Asset Special Purpose Vehicle (SPV) form.

Retailers benefit from Real Estate Investment Trusts (REITs). Although costly to run, they are useful in forming a digitized share.

Real Estate Fund - A private equity fund, with tokens representing units.  

Retail investors are involved in initiatives, and tokenization is the greatest way to generate funding for them.

Technology:

Choosing the correct technology for real estate tokenization is critical. The first step is to decide on a blockchain network and a token. To offer the tokens, acquire funds, and boost liquidity, a marketplace is chosen. A custody solution is also needed to keep the tokens and get real-time updates on the KYC. KYC verification is essential for providing investors with digital security.

Marketing and Distribution

The focus in the marketing and distribution of real estate assets is on which payment methods are accepted and information about digital wallet use. To begin, the tokens are allocated to investors during the initial distribution. Following that, there is voting and dividend distribution. Secondary trading closes this process wherein focus is shifted towards trading these tokens in exchange platforms.

The Advantages of Real Estate Tokenization 

Real-world asset tokenization helps both investors and asset owners. There is quick liquidity and tokens that are exchange-compatible for asset owners. It aids in providing investors with quick settlement and cost-effective trading. A few further advantages of tokenizing real-world assets are:

Transparency of transactions are ensured due to blockchain being decentralised in nature. Because there are no closing charges, the transaction cost is lowered.

With real estate fractions getting sold off at a quick pace, this network enjoys better liquidity.

Even smaller investors have access of buying any real estate they prefer due to enhancement of accessibility.

With intermediaries and counterparties not being a part of the process, trading becomes more secure with streamlined activities.

Buyers can easily look for real estate investments that can deliver them better prospects. The marketplace is vast in traditional investment. The effort to reach out to prospective buyers in the digital domain is much more streamlined and easier.  

Disadvantages and Challenges Ahead

Like any technology, tokenization of real-world assets also has its share of limitations and challenges.

Despite the security of the blockchain network, hackers may exploit loopholes in smart contracts and compromise security.

Obtaining a license for real estate tokenization platforms can be a complex and time-consuming process.

Tax regulations related to blockchain and cryptocurrency are currently unclear and not well-defined, lacking a unified tax system.

However, experts are optimistic that these challenges are going to be resolved with the passage of time.

Summarising

To summarise, the tokenization of real estate via blockchain technology will make it accessible to small investors, leading to more affordable prices. However, this will present challenges for traditional players. As demand increases, precise adoption of the technology will be beneficial, and cross-border trade in real estate will likely emerge as another influence. As regulations improve, dealings between parties will be secure and fast. Those who understand and embrace this technology will experience growth.