What is Tokenized Real Estate?
The real estate market is where investors sell and purchase land. This type of sales and purchase requires a massive investment budget and various legal steps that entail legal and consultation fees.
However, the introduction of blockchain technology into the real estate sector has introduced new features to the industry. The biggest upside of tokenization is the removal of the capital inflow barrier by allowing retail investors to partake in real estate trading.
Real estate is an illiquid asset that has several trading barriers such as a complex registration process and lengthy trading system. However, tokenization has transformed the situation and added innovative solutions such as increasing transparency for investors.
Furthermore, buyers are able to make immutable transactions using the tokenization mechanism from real estate markets.
How Does the Tokenization of Real Estate Work?
Real estate tokenization is the process of fragmenting an asset into various digital tokens that represent underlying property containing all rights and obligations. Smart contracts comprise all specifications of the contract.
If the predefined conditions mentioned in the smart contract algorithm are completed the protocol runs automatically.
In this manner, smart contracts are able to register new land purchases or sales without human participation. In this manner, a new block is generated and added to the blockchain. ERC-721 protocol is used to fractionalize NFTs.
This is a type of Ethereum standard that is associated with smart contracts for tracking transactions where tokens have a role. The ERC-721 standard adds traceability and adds more security for all trades conducted on the platform.
Features of Tokenized Real Estate
Here are some important aspects of Tokenized Real Estate:
Tokenization
Tokenization is part of the product’s title. This process takes a tangible asset and transforms it into a tokenized product using blockchain. It means that it adds more utility to the blockchain technology that benefits both the DeFi and TradFi sectors.
Funding Protocols
Tokenization of real estate can also operate as a crowdfunding event. It means that the asset will be divided into small fractions using smart contracts. In this manner, anyone who purchases or sells a token can claim legal propriety of a unit portion of the tokenized land. Furthermore, all investors are subjected to earn profits and losses in direct proportion of their contributions.
Smart Contracts
Smart contracts are automation protocols on a blockchain. Real estate tokenization makes use of smart contracts to ensure unbiased, transparent, verified, and immutable transactions.
Fragmentation
Fragmentation is an essential part of the tokenization process whereby a massive asset is classified into various units. In this manner, investors who have low capital can participate in the trading of digitized real estate. This process also adds more liquidity.
Decentralization
Tokenization usually takes place on a decentralized network that shortens transaction processing duration. This removes red tape and also makes real estate trading a simple process for investors at all scale.
Transparency
Traditional real estate investors may have limited access to document changes and sales and purchase records. However, tokenization adds real estate trading to digital platforms and ensures that investors can access verified transaction records at any time.
Trophy Assets
Trophy Assets are exceptionally scarce properties that have high demand among investors. Iconic buildings with historical background fall in this section. At the same time, it includes vineyards that include grapes of exceptional quality for producing exclusive wine or riverbank that contain precious stones.
With tokenization, it is possible to transform it into a digital format and raise equity interest among investors.
Collateralized Loans
Tokenized real estate is also used in leveraged trading in the form of collateral. In this manner, investors who have tokenized real estate tokens can use them as collateral to apply for loans.
Conclusion
Tokenized Real Estate offers a multitude of benefits such as transparent and efficient transactions, liquidity solutions, financial inclusion, mitigating counterparty risk, and free-flowing markets. At the same time, investors should consider associated risks such as security concerns and complex licensing processes.
