How Blockchain Can Divide Indivisible Goods for Shared Ownership
Something that often surprises newcomers to cryptocurrencies is that you don’t need to buy a whole Bitcoin. Much like a dollar is divisible into one hundred cents, a Bitcoin is divisible into one hundred million sub-units. These are called Satoshis, in honor of Bitcoin’s enigmatic creator, Satoshi Nakamoto.
Many cryptocurrencies and digital tokens are divisible in a similar way, although there are a few notable exceptions such as NEO. The feature of divisibility allows a digital asset to have many owners.
A previous CoreLedger article explained how tokens backed by real-world assets have the potential to transform the way we do business. Divisible asset-backed tokens bring exciting possibilities in the form of fractional ownership of real-world assets that would otherwise be indivisible. However, indivisible asset-backed tokens also have the potential to enable fractional ownership.
Divisible vs. Indivisible Tokens
Take the example of a five-carat diamond. This diamond could be backed by a single token, divisible into one hundred sub-units. So, one hundred separate parties could own their own piece of the diamond, worth 0.05 of a carat each. In another scenario, the same diamond could also be backed by just ten indivisible tokens, meaning the minimum stake for any single token holder would now be 0.5 of a carat.
Using divisible versus indivisible tokens may have various benefits or drawbacks depending on the underlying asset. For example, if the original owner of the asset wants to reclaim ownership in the future, it may be difficult to buy back sub-units of tokens from a large investor pool. However, for some types of assets, opening up to a larger pool of investors may bring much-needed liquidity.
Fractional ownership of otherwise indivisible assets creates unprecedented opportunities for enterprises and individuals alike. Here are just a few scenarios.
The global art market was worth $63.7 billion in 2017, with much of this generated by professional art dealers. Despite its size, the global art market is notoriously illiquid due to the complexity involved in the trading process. However, art-backed tokens have the potential to inject new liquidity into the global art market.
A piece of fine art could be traded as tokens, offering investors the opportunity to purchase a fraction of a valuable asset that may appreciate in value over time. This potential for fractional ownership of art with tokens was a hot topic of discussion at the Art Basel Miami event in December 2018.
It’s also the focus of the blockchain-based auction project Maecenas. The platform can be used by investors or collectors to acquire art-backed tokens with far lower fees than using brokers or traditional auction houses. Galleries can also sell partial ownership of their existing collection to fund new art acquisitions.
Compared to previous generations, millennials in many countries are facing barriers to homeownership. In the US, real estate ownership among millennials is down eight percentage points compared to Generation X. Rising student debts along with rising real estate prices mean that many are priced out of the market, and fail to benefit from the economic advantages of investing in property at a younger age.
Real estate-backed tokens enable those priced out of the market for their own home to benefit from the potential gains of a buoyant market. If a construction company wants to raise funds to build a new apartment block, they can sell tokens representing shares of the building. Once the block is constructed, the token holders would be eligible for their share of any profits generated from renting out the apartments. If property prices in the area go up, then investors can also sell their share at a profit.
There are already existing blockchain platforms which offer fractional ownership of real estate using tokens. Meridio pioneered its offering with a five-unit rental building in Brooklyn, New York. Another company called PropertyShare, based in India, offers a combination of residential and commercial properties to investors for fractional ownership.
Access to agricultural machinery is a challenge for smallholders. For a farmer who owns perhaps 20 hectares, buying a piece of machinery like a combine harvester can be a crippling capital investment, considering it will sit idle for much of the year. While agriculture in developed countries like the US and Europe is often done on an industrial scale, many developing countries are dependent on smallholders who still supply 70% of the world’s food.
The advent of the internet and sharing economy eased the pain somewhat, as some startups saw an opportunity to offer a kind of Uber for agriculture. However, much like Uber, this depends on someone close to the land itself having the needed equipment.
Fractional ownership could offer a far simpler solution to smallholders. While a group of smallholders today could buy a piece of agricultural machinery based on a “Gentleman’s agreement” or a legal contract, tokenization, on the other hand, offers the potential for provable ownership in a share of agricultural machinery without involving lawyers. The Commonwealth Bank of Australia and Ernst & Young have been trialing such a “smart asset” solution with a group of three farmers in South Africa.
This Is Just the Beginning
The examples presented here are just a few of the possible use cases. The concept of fractional ownership can also be applied to many other types of assets such as cars, racehorses or sports teams — the possibilities are almost limitless. Dividing indivisible goods using tokens will open up new opportunities for wealth creation, as well as bringing liquidity to otherwise illiquid assets. Blockchain offers far broader economic possibilities than Satoshi could have envisaged.
This article is brought to you by CoreLedger.
As a prominent blockchain infrastructure provider, CoreLedger is making blockchain technology simple for businesses to use. With CoreLedger’s offerings, clients can readily tokenize their offerings with fast-to-implement resources that will allow them to modernize their services. Thanks to our in-house developed software solutions and experienced blockchain specialists, CoreLedger is ready to help you make your next move with blockchain technology.