DeFi Real Estate Tokenization: Revolutionizing Asset Ownership with Concordium
Asset ownership has entered a new transformative era due to the intersection of decentralized finance (DeFi) and real estate. The tokenization of real estate assets through blockchain technology represents a significant industry shift model, usually reserved for those with deep pockets but DeFi now aims to change this.
Tokenizing assets has the potential to democratize the real estate industry by reducing the entry barriers for investors worldwide. In this article, we will dive deeper into how DeFi is revolutionizing real estate through the tokenization of assets. Moreover, we will delve into the role that Concordium will to play in this promising sector.
What is tokenized real estate?
Tokenization can be thought of as the point where the world of crypto and real assets meet and the next BIG frontier in financial innovation. It refers to the process of turning real-world assets into digital tokens that can be easily bought, sold, and traded on a blockchain.
But tokenization cannot be understood without approaching the concepts of money, divisibility, portability and fungibility since these are key traits in the wake of real estate asset tokenization. Let us break them down in relation to crypto in the next section.
Understanding money, divisibility, portability and fungibility in crypto
We all know money as a traditional unit of account and a store of value. In the crypto world, however, these functions are often distributed across various tokens and assets. Real estate tokenization essentially liquidates a traditionally illiquid asset, allowing its value to be more easily exchanged and accounted for.
Divisibility
With tokenization, a single property can be represented by multiple tokens and this is one of its biggest advantages, namely dividing assets into smaller, more accessible units that allow for the democratization of investment opportunities.
Portability
Tokenized assets are digital and this makes them easily transferable across the blockchain, in the case of Concordium, thanks to its new ConcordiumBFT consensus, in a matter of seconds.
This enhances the speed and efficiency of real estate transactions, making them more appealing to a broader set of investors.
Fungibility
In finance, fungibility refers to the interchangeability of assets of the same type. In the realm of tokenized real estate this is slightly nuanced. While each token represents a share of a property, the tokens for another property. However, within a single asset, the tokens are often fungible, ensuring liquidity and ease of trading.
Altogether, the above encompass an important democratizing factor, lowering the barriers to entry increasing inclusivity. Moreover, reducing dependence on real estate registers, getting immutable decentralized proof of ownership with self sovereign portability between jurisdictions tackling bureaucratic hurdles. Ultimately, making a highly illiquid and cumbersome market more liquid and flexible.
Exploring the process behind tokenized real estate assets
NFTs and blockchain technology will revolutionize the real estate sector, but what is the usual process behind a tokenized real estate asset? The tokenization process involves a non-fungible token (NFT). With an NFT, the transaction process is streamlined, allowing the buyer to verify ownership.
The use of blockchain technology and NFTs, ensure that higher levels of security and data integrity can be achieved, reducing the risk for hacks in digital transactions.This protects both buyers and sellers, making it much easier to transfer assets smoothly.
On Concordium, buyers can seamlessly identify themselves due to the identity component built at the protocol level, balancing privacy with accountability through the use of zero-knowledge proofs.
After having converted this real estate into a financial instrument, buyers can take out a loan against the NFT using decentralized financing products (DeFi) or traditional financing (TradFi) on the blockchain, bypassing all the paperwork.
Once these aspects are finalized, an NFT can be minted with descriptive and legal data about the property. In this way, the NFT receives all the documentation, statements and reports necessary for it to have the legal authority to represent proof of ownership.
Following the creation of the NFT, it can be introduced in a secondary NFT market to sell it to potential buyers. These potential buyers can bid for the property and the auction winner can pay for it in FIAT money or cryptocurrency. Once the funds have been released and the NFTs have been transferred to the buyer’s wallet, they will complete the paperwork to finalize the transfer.
Where to implement Real Estate Tokenization: bridging housing gaps for millennials
Buying real estate requires a sizeable down payment, steady income and a good credit score. However, with the dilution of money, higher inflation and interest rates, younger generations like millennials or Gen Z face significant hurdles when entering the housing market.
When adjusted for inflation, the average American today earns less than during the Great Depression. This is a shocking revelation given the technological advancement and economic growth since that time.
In the context of the USA, one dollar today buys less than it did a decade ago and this has a profound impact on the purchasing power of the average citizen, making it increasingly difficult to invest in long-term assets such as real estate.
Blockchain technology makes the fractionalization of property possible through tokenization facilitating buying or selling even small bits of real estate, acting as a counterbalance to monetary dilution. By enabling smaller, more manageable investments, it allows millennials and Gen Z to hedge against inflation and potentially earn returns that outpace it.
Tokenization will be a $16 trillion dollar industry by 2030
According to Boston Consulting Group (BCG) research earlier this year, the tokenization of global illiquid assets could become a $16 trillion industry by 2030 because a large chunk of the world’s wealth today is locked in illiquid assets.
Tokenized real estate has an estimated market size of merely US$128 million according to a report by forekast.insights that relative to the total addressable market indicates a vast untapped growth potential. However, there are significant legal challenges and bureaucratic hurdles to overcome in this segment for it to take off and reach mass adoption.
How can the tokenized real assets market take off?
Tokenized real estate has a promising future by harnessing the power of blockchain technology and democratizing assets. However, there are some essential roadblocks that must be addressed before the market of tokenized real estate assets will reach its full potential. Let us examine some of the crucial ones.
The complexity of SPVs
In the world of real estate asset tokenization, innovation meets tradition facilitated by Special Purpose Vehicles (SPVs). Such legal entities are designed for singular purposes and have historically been an important governance tool in the management of real estate investments.
SPVs in the context of real estate tokenization can be structured in a way that separates them from the financial standing and creditworthiness of the property developer. In other words, the performance and value of tokens tied to real estate assets within an SPV are not directly dependent on whether the developer has a good or bad credit rating.
But structuring SPVs for the purpose of real estate asset tokenization is complex and demands expert knowledge.
Legal disputes can impact holder rights
Legal complexities can materialize in the form of disputes over property titles, fractional ownership structures that can jeopardize token holder rights, poor structures that could invalidate title insurance policies, etc.
Before tokenized real estate gains broader traction, there are international jurisdictional obstacles that must be mitigated. Local regulatory regimes must be harmonized and ratified internationally as the markets will otherwise remain fractionalized and siloed inside localized policy zones.
Moreover, while on the one hand this type of market presents many untapped opportunities, combining tokenized real world assets with decentralized finance (DeFi) simultaneously amplifies the challenges.
How does DeFi and real estate tokenization work?
Increased tokenization of real world assets, including real estate, offers a new source of yield in DeFi, unlocking opportunities for higher returns and portfolio diversification injecting a much needed liquidity into the DeFi vertical.
During this crushing bear market, decentralized finance (DeFi) yields have dried up considerably, edging closer to traditional financial markets. According to data provided by DeFi Llama, the total value locked (TVL) of DeFi has decreased from 51,497 billion USD in september 2022 to 38,147 billion USD at the time of this writing.
Once real estate assets are tokenized, they will flow into the DeFi world where platforms can use these tokens as collateral for loans and trade them, bolstering the liquidity and appeal of DeFi for investors. Bringing real world assets (RWAs) into the DeFi space, makes them more accessible and tradable but more importantly, it also cultivates growth by giving businesses improved access to capital.
But DeFi is an ecosystem that could benefit from more regulatory clarity and improved transparency. According to a Beosin Global Web3 Security Report 2022 , DeFi projects lost a total of $950 million in security exploits during 2022. This comes hot on the heels of the $1.89 billion lost in cross-chain bridge exploits in 2021.
Naturally, it is no surprise that DeFi and overall Web3, has not only caught the eyes of bad actors but regulators as well. It is paramount that protocols building DeFi and Web3 solutions choose a secure and fast blockchain with ID at the foundational level that is supportive of any upcoming regulatory changes.
Concordium: a game changer for tokenized real estate
Concordium is a groundbreaking layer 1 blockchain platform that allows the tokenization of real-world assets including real estate.You can seamlessly convert any RWA or ownership right into digital tokens on the Concordium blockchain by leveraging battle tested technologies and low code frameworks. blockchain.
As the DeFi ecosystem expands, the imperative for secure, versatile, and adaptable identity verification intensifies.The identity layer puts much needed trust into this industry with Concordium as the most regulation-ready blockchain, addressing the current crucial challenges of real estate tokenization and DeFi simultaneously.
Concordium’s Web3 ID, is a zero-knowledge-based identity infrastructure that leverages the Concordium base-layer ID, extending its potential to allow tailor-made solutions that harness attributes and credentials securely and in a decentralized manner within the DeFi context and with enough versatility to also accommodate any needs related to the tokenization of real estate.Concordium provides the most secure and efficient platform for transforming real-world assets into digital tokens, opening up new realms of possibilities for ownership and trade.
Exploring the Future: Real Estate Tokenization with Concordium
We are rapidly transitioning to a society where people want to have physical ownership of their assets. Whether it is the title to a car, deed to a house, gold, silver, baseball cards, combine harvester, grain silo, satellite, or your 1000th of a cruise ship, each has the potential to be tokenized.
The blockchain revolution is making this possible. For investors, the key question is, what protocol will these companies use to digitize assets on? Right now, there are dozens of layer-1 smart contract platforms competing to be the leader in the digital asset revolution.
However, none offers the unparalleled unique combination of blockchain technology and zero knowledge proofs that Concordium provides. The ID embedded at the protocol level makes Concordium the most regulation-ready blockchain platform in the Web3 space and it is therefore the ideal blockchain for digitizing assets, especially real estate assets which present regulatory complexities.
When combining real estate assets with DeFi, Concordium’s Web3 ID stands out with its strong zero-knowledge-based credential infrastructure leveraging the Concordium base-layer ID. This extends its potential to allow tailor-made solutions that harness attributes securely and in a decentralized manner within the DeFi context.
Moreover, it is a fast and solid science-based blockchain with protocols developed by prominent academics from some of the world’s leading universities in cryptographics. This guarantees that the technology and protocols underpinning the Concordium blockchain are not just theoretically sound, but have been scrutinized and validated by experts in the field, ensuring a robust and secure foundation.
Ultimately, Concordium’s speed, scalability, tokenization capabilities, adaptability, verifiable self-sovereign data ownership and secure transaction at low cost make it an ideal choice for businesses looking to tokenize their real-world assets. This includes many verticals in the digital assets field and naturally the segment of real estate tokenization.
