Tokenize an Asset?

Tokenize an Asset?

The real estate industry is ready for tokenization by Linework Corporation

One of the sectors in which tokenization will soon change the rules of the game is certainly the real estate industry. Using blockchain technology, and the tokenization process, it is possible to transfer the value of real assets such as houses, apartments and properties to the respective tokens which are insured on a blockchain.

This innovation will undoubtedly revolutionize the real estate market and inevitably change the traditional way of doing things. Blockchain technology has great potential, as it helps build trust and foster frictionless or third party transactions. Tokenization will solve, among other things, liquidity problems in commercial real estate by creating a liquid secondary market that is accessible 24/7. In addition to this, many other applications can be included and the pioneers of the sector are ready to lead the way in the development of promising projects.

In this article, we will take a closer look at how real estate tokenization works, its advantages and use cases. Tokenization will be a big trend in 2022, as the ability to fragment a property allows investors to build a risk-optimized portfolio. The future is digital, and blockchain is driving this development into one of the oldest and most rigid industries.

The concept of tokenization is gaining particular attention again and gaining momentum. Ideas and projects are being developed everywhere, one of the sectors in which tokenization is most widely adopted is the real estate industry.

The underlying technology that makes this possible is the blockchain. In simplified terms, a blockchain is a distributed and decentralized database stored on a large number of servers. A single update on a server involves the simultaneous updating of data on all servers. Transactions on blockchain-based platforms can never be altered or canceled. Tokens can be linked to these transactions, primarily as digital representations of assets such as assets, money, or securities.

Tokenization solves many known industry problems

Especially during the COVID-19 pandemic, one of the real estate industry’s problems was the reliance on physical meetings to conclude contracts. Procedural difficulties and inefficiencies have and are still jeopardizing the success of this market.

Furthermore, a large number of intermediaries (lawyers, brokers, financial institutions, etc.) continue to cause avoidable and costly friction to some extent. Establishing the necessary trust between these intermediaries and ensuring compliance requires a great deal of red tape. These cumbersome circumstances lead to increased costs and time consuming. However, if properties are tokenized, lengthy and inefficient processes through intermediaries become obsolete, as blockchain is based on the “peer-to-peer” principle. Conversely, blockchain technology creates trust between two contractual partners and ensures a secure process through its technology. In addition, it increases transparency and automation and allows the international transfer of tokens (in this case real estate shares) in a few seconds.

The real estate sector itself is not agile and the buying and selling processes are very complex. Furthermore, unpredictable events such as construction errors and natural disasters can negatively impact liquidity. While blockchain cannot counteract physical risks, it allows for the design of efficient and cost-effective process solutions. This significantly increases liquidity and mitigates the negative impact. Therefore, a huge liquidity boost is generated by the possibility of fragmenting real estate investments through tokenization, that is, the offer of smaller shares actually at the desired price and the related “partial tokenization”.

This allows you to effectively use the property’s intangible assets through the sale of certain shares, which will surely transform the sales process from static to dynamic. And this will offer owners much more flexibility. Tokenization gives both institutional and retail investors the opportunity to diversify their portfolios. Let’s see an example of how tokenization could be applied: Normally, you pay the rent or buy a property. With tokenization, a combination of these two options is possible. You could own 60% of the property and tokenize 40%. This 40% can be offered on a secondary market and can function like a mortgage. For this, you will not need a financial service provider or a bank. Therefore, the required capital can be obtained at any time through assets that are already owned and are not yet fungible.

In general, it can be said that smart contracts make the entire investment process faster and safer. These processes can be done in a matter of seconds, 24/7, and without the need for an intermediary.

Potential of Tokenized Real Estate

Equipped with registration functions, real estate tokens can map the corresponding ownership and liquidity relationships in the digital world. This allows an efficient and above all daily management of the liquidity of the properties. It is possible to convert the entire spectrum of properties into digital assets via blockchain (i.e. without an act or an analog registration of ownership).

Another option is payments to owners, which are mapped in this way. Real estate feeds are an ideal tool for asset managers to create liquidity efficiently and cost effectively. In addition, a door is now opening for institutional investors to access previously tied capital. The new model reduces direct and indirect marginal costs thanks to the exchange of partial ownership and the greater liquidity of the asset itself. In addition, the land transfer tax, which was previously significantly limited by high liquidity premiums, is avoided. This allows you to liquidate properties efficiently without deducting costs.

Now with tokenized real estate it is possible to actively trade on the secondary market without liquidity discounts. This offers simple and inexpensive possibilities to invest in real estate at any time. Location costs, or the friction caused by unnecessary intermediaries, will play no role. In addition, the platforms that collect these tokens also offer the possibility of having a refined user interface for asset managers and their institutional investors. This gives investors and financial institutions access to both traditional and completely new asset classes (for example, equity tokens).

Compliance and technical safety are also guaranteed. An important custody activity includes the conservation of private keys, which are necessary for the secure transmission, storage and, above all, the safe custody of tokens. The decentralized blockchain concept allows owners and investors to meet without the involvement of an intermediary.

Future perspective

The simple concept of tokenization, converting the rights of an asset into a digital token, will have a significant effect on the real estate sector. By enabling trading of digital assets, including tokenized shares of real estate, on secondary markets, blockchain technology will fundamentally change the way this sector is funded and treated.

It is time for the real estate industry to prepare for Web 3.0 and begin to truly participate in the digital transformation. Aspects of tokenization, such as ownership fragmentation, will be of great value to institutional and retail investors. With tokenization, true portfolio diversification can be achieved. In this way, investors can better mitigate their risks by not having to buy 100% of an asset but can instead participate partially. For retail investors, this development will provide far more opportunities to invest, even with small amounts of capital. While we still have a long way to go before this $ 200 trillion market is part of the emerging token economy, the accompanying benefits make it difficult to overlook this future development: The minimum required investment size will shrink dramatically.

Furthermore, tokenization will lower high barriers to entry and help change a sector plagued by high barriers to entry and illiquidity. Tokenization will open up this illiquid market and help democratize this sector, while allowing the entry of new large amounts of capital. Finally, another important aspect is that the underlying blockchain technology will allow tokenized assets to be traded every day, 24/7, while also increasing liquidity. If you want to know more about tokenization in real estate and other sectors, then you should definitely download our report!

As you can see tokenization will completely change the way real estate operates, and in this change it will allow anyone to be able to invest in tokenized assets by acquiring their corresponding tokens. Join Linework now, and be part of this revolution!