The magnitude of the ease with which an asset can be represented lies in the universality of value. For example, if we take a company stock, it sells at the same value for every trader. The same is the case with something as expensive as real estate and something as simple as a pen.
It is this “representation“ that makes it easy for people to store, transfer, and trade these assets. This process of converting a tangible is it, or a physical share into a digital representation is called dematerialization. Dematerialization is a “secondary“ digital representation of something that is primarily physical.
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When cryptocurrency was introduced in 2009, it was a revolution not only because of the technology also because of how it looked at the world and the assets. Instead of having a digital representation for a physical entity, the cryptocurrency was almost entirely digital. It did not mandate a paper or a coin that represented its value. With cryptocurrency wallets, it became easy to carry out all essential activities like transference storage without mandating a physical representation. It transformed the way people look at asset representation.
Blockchain technology made it possible for people to monitor the supply, the transfer, and the price. Each bitcoin had a unique ID, and the ID was dependent on the bitcoins that were produced immediately before it. This makes sure that there is some control over the number of bitcoins that are produced. At least, this mechanism will ensure that the number of crypto coins produced is contingent upon some work done.
As you may have known, the value of an asset is dependent on its reality. Real estate, for example, is finite. The maximum amount of land a person can process is the total land area of the earth.
Transforming assets through representation
While all these properties of an asset are kept intact, cryptocurrency and the underlying blockchain technology opened up a new avenue for representation. It initiated a line of thought among its primary proponents as to why a physical entity cannot be represented digitally.
This question is probably worth a trillion, and it opens up a new avenue of opportunities for a lot of entities involved in the ecosystem. Unfortunately, it also, for the betterment of the system, renders obsolete a few cost-consuming areas that existed until now. All these become possible by the introduction of the digital, decentralized, immutable, and secure ledger called the blockchain. The blockchain was the backbone of any cryptocurrency, and it brings certain advantages to the table that make it easy to digitally represent, transfer, and manage assets and asset ownership.
For the sake of simplification, let us focus on one specific domain that is quite likely to be positively impacted by the tokenization and digitization phenomenon – real estate.
A bit about the real estate market
Real estate is globally worth about $228 trillion, only to be closely shadowed by the global debt market that falls at $250 trillion. Real estate accounts for the largest asset class in the United States and has been one of the most preferred avenues for investment since times immemorial.
Real estate is a thriving market where people are actively buying and investing and transferring ownership for the purposes of transactions or inheritance. To ensure that the transaction is smooth and flawless, there are a lot of intermediaries involved, ensuring there is no discrepancy in the information transfer. It also involves humongous paperwork to be done in addition to verifying and validating the buyer/investor.
The challenges in real estate
- Real estate, although is universally lucrative, is not as liquid as it is expected to be. The huge value of real estate assets and especially commercial real estate, make it difficult for people to buy and sell their properties and investments.
- Unlike stocks, it might not be possible to easily represent fractional ownership of real estate assets with the existing tech. This would mean that if a person who owns a real estate asset needs only a small amount of money, they cannot afford to sell a part of the real estate property. They either have to sell the entire property… Or not sell it at all! Worst case, they might have to, out of desperation, sell a prized asset at a lower value.
- The paperwork and intermediaries translate into costs that make even the process of ownership expensive, living alone the asset. These third parties, however, take care of some of the most important aspects of real estate like the validation of the asset, proper transfer of ownership, consistency across all places that maintain the record, and validation of the investor.
- Since it is the third party that maintains records, investors do not have an option but to go with the pricing that these people state. There is no room for transparency. Although exorbitant price differences can easily be found out, subtleties are not noticeable.
Bringing in the blockchain
With blockchain technology and digitization/tokenizing in place, it is possible to address all the challenges that real estate faces. The best part is that these solutions can be extrapolated into any territory of assets that face the same challenges as real estate… Or even some challenges!
Since the entire big asset is broken down into smaller representatives called “tokens“ without any change in value, it becomes easy for a person to sell their real estate asset in part to multiple investors. This greatly enhances the magnitude of liquidity. For example, a property worth $1 million could have been affordable only by a few investors. However, when the same asset is broken down into smaller representatives valued at $1000 each, it becomes easy even for retail investors to participate.
Since the data on the blockchain is immutable, it is not possible to erase records of previous ownership. This introduces a considerable degree of transparency into the transactions. The “transparency“ is not just limited to the ownership details but also the price of the asset. Therefore, an investor can be assured that they buy a property that is being sold at the right price.
The entire process of ownership transfer in the blockchain realm is automated by the presence of smart contracts. In combination with immutability and transparency, the smart contract not only automates the process with a considerable degree of accuracy but also ensures that the entire process happens in a transparent fashion. This eliminates the need for paperwork and the need to pay intermediaries.
Another key attribute of the blockchain is the universal consistency of data. Upon consensus, the data stored in one node can be changed, and it is immediately reflected in all the other nodes. Therefore, data changed in one place with respect to ownership, without any effort, can be reflected in every other place that needs to hold the same data.
While the technology has been cracked, real estate tokenization still awaits mainstream adoption because of legal stumbling blocks. Once the legal framework for tokenization of real estate is in place, blockchain will be the way forward for people to transact because of the wide array of advantages it brings.
It is always good to have a Headstart as a visionary. If you would like to be a part of the trillion-dollar real estate tokenization revolution, you can invest in DeFi real estate platform development. You can get in touch with any company that specializes in blockchain apps and DeFi development. They will take care to understand your requirement and present you with perfect DeFi real estate products that will take care of almost all real estate processes.