Tokenizing real estate with smart contracts and oracles: The future of real estate investing
The real estate market is currently the largest Asset Market in the world with an estimated worth of $217 trillion dollars!! that’s a lot of money! but the main challenge here is the fact that this market is not really open to everyone due to some of the barriers people face when they try to invest in real estate.
One of the obvious ones is the fact that you need to have a certain level of spending power to invest and profit from the real estate market. While this is just one of the numerous barriers like: legal jurisdiction, location of properties, age... But as the world is gradually moving to the digital age, everything you know about real estate investing is about to change with the help of Blockchain technology.
In this article, we’re going to explore Asset Tokenization, smart contracts, oracles, benefits of real estate tokenization, ...
It’s going to be an amazing read
We’re not going to get into the technical part of tokenization. This article is meant to introduce you to the basics and concept of asset Tokenization
Asset Tokenization
Before we can really understand how the Blockchain is driving the future of real estate, we need to first understand what tokenization is.
Tokenization
Tokenization is the process of turning a physical asset into a digital asset (Token) that can be traded on the Blockchain. This is achieved by creating a token which acts as a digital representation of the physical asset on the Blockchain network, it contains certain information about the assets and enables the token to be traded and transferred just like a digital asset. The Tokenization of these assets is made possible by the use of smart contracts.
A tokenized property located in Indonesia
SMART CONTRACTS
A smart contract is a computer program that can be used to automate the execution of an agreement. The concept of smart contracts was first introduced in the 1990s by Nick Szabo a computer scientist and cryptographer. However, it wasn’t until the invention of blockchain technology in 2008 and the creation of Etherum in 2015 that the idea of smart contracts gained widespread attention.
What role does smart contracts play in real-world assets Tokenization?
In the case of asset Tokenization, smart contracts allow real world assets to be represented by tokens on the Blockchain it also gives room and rules on how these tokens are created, distributed, traded and owned on the Blockchain. Smart contracts also allow real world properties to be broken into fractional tokens that can be traded and transferred. Our main interest here is fractional Tokenization as it gives room for shared ownership where a single property can be co-owned by multiple people.
In order to understand better, Let’s quickly look at this analogy:
Let’s say I inherited a house Worth $1,000,000 from my late grandpa and I am looking to sell this property, Using the traditional method, I’d have to look for agents and middlemen who will also source for rich buyers that are willing to pay $1m for the property. This often takes a lot of time and is not always efficient in most cases due to how illiquid real estate assets can be.
But with the use of smart contracts, I can fractionally tokenize the house by creating 1,000 tokens each worth $1,000 so that anyone who buys any of these tokens becomes one of the rightful owners of the house and gets to enjoy the benefits and royalties that come with owning the house. These tokens can also be traded on a decentralized marketplace.
Can you now see how tokenization makes buying and selling properties easier?
So instead of spending months looking for a single buyer, I can literally sell my house to multiple people and make the same money or even more. Using smart contracts, real estate tokens can be designed to maintain the real world value of the property and also allow them to be easily owned and transferred in a Trustless and most secured way possible
Now, let’s look at the benefits of real estate tokenization
Benefits of real estate tokenization
- Accessibility: With the use of smart contracts anyone can invest in the tokenized real estate market, regardless of their location or financial situation.
- Transparency: all transactions regarding the assets are recorded on the blockchain, making the market more transparent without need for intermediaries.
- Security: assets are protected by the blockchain, making it harder for them to be hacked or stolen.
- Efficiency: the process of buying and selling real estate is simplified and streamlined. In fact you can buy and invest in a property in any county without traveling to the country.
- Liquidity: tokens can be traded quickly and easily, making it easier to sell your investment and also open more investment options for investors.
- Accuracy: since the transactions are recorded on the blockchain, there is less room for human error.
- Immutability: the blockchain is immutable, meaning the transaction records cannot be altered or tampered with.
- Speed: transactions involving tokenized real estate can be completed much faster than with traditional methods.
- Cost-effectiveness: tokenization can reduce costs associated with buying and selling real estate like eradicatng the need for middlemen and agents
- Immutability: the blockchain is immutable, meaning the transaction records cannot be altered or tampered with.
- Flexibility: You can customize the terms of your investment, such as the length of the agreement and the percentage of ownership.
- Anonymity: you can choose to remain anonymous when buying and selling real estate properties.
Tokenization offers a wide range of benefits to real estate industry and also allows people to invest in the market in a way that was never possible before. From buying and selling to development and management of real estate properties, smart contracts offer a streamlined and effective way to handle real estate properties through Tokenization.
Since smart contracts allow real assets to be represented on the Blockchain, which is a network that is completely isolated from the real world a good question will be "How do these tokens communicate with the real world since the assets they represent are not on the Blockchain network"
This is where Oracles come in
ORACLES
Oracles are like bridges between the real world and Blockchain world. They feed real world data to the Blockchain and are a very important part of many Blockchain apps. Without Oracles it would be hard for Blockchain to access real-world information.
Blockchains are very good at processing data that’s already on the Blockchain, but they have lots of flaws when it comes to accessing data that’s stored off-chain. For example a Blockchain that’s is designed for the financial sector will need quality and real time data of what’s happening in the traditional financial markets. Oracles help fill this gap by making it possible for the Blockchain to interact with real-world data. A good example of Blockchain oracle is ChainLink
Roles of Oracles in Real estate tokenization
Just like we’ve explained, the main role of oracles in real estate tokenization is the provision of property data. This data includes property worth, ownership information, addresses, current condition. Oracles can also provide real-time market data and regulatory data of the real estate industry such as exchange rate, market trends, interest rates, tax information, regulations, property law...
This data is important in determining the price and owners of the tokenized assets. It is also important In order ensure all activities involving the Tokenized property comply with applicable laws and regulations.
The future of real estate investing
Just like other aspects of Blockchain, tokenized assets is still in it’s early stages of development and things can only get better as this has the potential to revolutionize the real estate market by breaking the barriers people face and making it more accessible, efficient and transparent.
With the introduction of fractional ownership to the traditional real estate market, this innovation is about to make a lot of people property owners irrespective of their spending power or age.
We already have a lot of companies and projects at the forefronts of tokenized real estate investing. You also need to know that real estate Tokenization is a new thing and a lot of companies are trying to jump on the train so you need to do your research before investing in anyone.
Just so you know real estate tokenization is going to be the next big thing here are some charts on the current performance of the tokenized real estate market:
What to consider before investing in real estate tokens
Like I said, there are lots of projects out there offering investors a chance to break into the real estate market and be a part of the tokenized real estate market but you need to DYOR before putting your money into any real estate tokens.
Just like investing in cryptos and tokens you also need to be careful with real estate tokens. This is why before investing in anyone, you should check out:
- The team: you need to make sure the company has a solid team and not just run by anyone. The team should at least have some experience in the traditional real estate market this would be a sign that they really know what they are doing
- The underlying real estate asset: make sure you have a good knowledge and understanding of the assets that are being tokenized. You should know the location, value, condition… You should also have a good knowledge of the income potential of the asset .
- Liquidity of the token: liquidity refers to how easily an asset can be converted to money. So you need to make sure the token you are investing in has a reasonable liquidity so you won’t end up holding illiquid tokens
- The technology used: since the tokens exist on a Blockchain and each Blockchain has a distinct design and use case, you need to understand the design and mechanism of how the tokens work. You should find out whether buying the token gives you a right to own the asset or you just earn income from it. You should also understand whether the toke represents fractional ownership or not.
If you want to know more about a project you can check out their Social handles and see what others are saying about it. A good project should have a good number of followers and should also be active. You can check out their X accounts, blogs, telegram channels and groups ..
Some amazing real estate projects
Conclusion
This article is just a part of the series of articles I will be writing on Real estate and real world assets Tokenization. We are going to explore real estate trends, Blockchain innovations and more on projects and companies disrupting the real estate market
Check me out on Twitter
Thank you
