Real Estate Tokenization
What is Tokenization? — It is the process of transforming ownership and rights of assets into digital form.
Real Estate Tokenization: In Real Estate domain, tokenization refers to the process of transforming ownership and rights of real estate assets.
A real estate asset is fragmented into multiple digital tokens. Each token represents a fragment of the underlying property and has its own rights and obligations. Each token can then be sold to investors or buyers. Purchasing the digital token gives them direct ownership of the fragment of real estate property and its associated profits or losses.
For example, a real estate land worth 10 crores can be fragmented into 10 digital tokens worth 1 crore each.
Refer the link below for a real-world tokenization example. https://t27silicoin.com/t27-silicoin-real-estate-security-token-offering
Types of Real Estate tokens
Real Estate tokens can be generated for the following assets.
- Ownership of part of real estate property.
- Full ownership of a real estate property.
- Equity interest in an entity that controls the real estate property.
- Interest in a debt secured by a real estate property.
- Right to share of profits generated by a real estate property.
Technology behind Real Estate Tokenization
Blockchain provides the underlying technology for tokenization. Blockchain is a distributed database, immutable ledger used to maintain a secure and decentralized record of transactions. Blocks contain information related to an asset and are linked to the previous block thereby forming a chain of blocks.
Blockchain network comprises of a peer-peer network of nodes that maintains the exact copy of the blockchain. To add a new block to the chain, a particular node initiates a transaction. The transaction is a message that contains the operation to be performed on the asset. The transaction is sent to all the nodes in the blockchain peer-peer network. The nodes execute a validation algorithm and once the transaction passes the validation, a new block is added to the chain.
The algorithm to accept the block is called the “consensus mechanism”. Different consensus mechanisms are available.
- Proof of Work
- Proof of Stake
How is Blockchain secure?
Blockchain is an immutable ledger. Any modification or deletion of the data stored in the blocks is not possible.
Every block stored in a chain has a unique address. Every block has a link to the block before it.
If a hacker gets access to the block chain network and attempts to modify the data of one of the blocks. The hash value of the block will be changed. If the has value of the block changes, the next node in the link will have a different hash and hence the chain will be broken. Refer the above picture and check what would happen if the block in yellow colour gets a new has value. The red block will now have a different hash and will not be able to reach the previous block. Once this is detected, the block chain network can possibly shut down to prevent tampering.
Second even if a someone tries to add a block by legitimately triggering a transaction, the transaction is sent to all the nodes in the network. Every node validates the data in the transaction before processing it, so even if a node is compromised, other nodes would still run the validation and reject the transaction. This is the benefit of the decentralized model.
Steps to create a real estate block chain network
To setup a block chain network or platform for storing real estate tokens may include the following steps
- Identify the stakeholders of the block chain network and get their approval to join the network. The stakeholders of a real estate tokenization network to buy and sell real estate tokens can include the following members.
- Government Agencies
- Investors (KYC Approved)
- Sellers
- Blockchain network or platform provider
2. Once the network is formed. The next step is defining the transactions that can be performed on the real estate assets in the network.
3. A smart contract is then implemented in code for each of the transactions.
a. Smart contracts contain the rules for validating transactions and once the transaction is valid, the corresponding action is taken.
b. For example, if a seller posts the property on the block chain network, it will run a series of validation to confirm that the property is posted by a genuine seller and only after the validation is successful, the property will be added to the network.
4. Define the users, roles and permissions on the block chain network. For example, Admin users will have more privileges than an Investor user.
5. Develop a UI portal for various users to interact with the block chain network. Users can execute transactions and view the current state of the network.
Choice of block chain network platforms
- Ethereum
- Hyper Ledger
- R3 Corda
- Blockchain as a Service Platforms
- IBM Blockchain
- Azure BaaS — Ethereum
- AWS BaaS — Ethereum, Corda, Hyperledger etc.
More details on the differences between these platforms is available in the link below. https://www.blockchain-council.org/blockchain/hyperledger-vs-corda-vs-ethereum/
For the real estate tokenization where the investor and seller have to be verified before initiating a transaction, it is better to use HyperLedger or Corda platform to create the block chain network. Ethereum platform is permissionless and any node can join the network and perform transactions. HyperLedger and Corda are permissioned blockchain platforms
Sample Use cases
Seller:
- Sign up or Register and submit KYC documents.
- Manual or Electronic KYC verification via Third Party systems.
- Post property with all the details
- Register a wallet to receive funds on sale of tokens
- Tokenize properties
- Approve an Investor for purchase of tokens
- Dashboard to view the tokens and their ownership details.
Investor:
- Sign up or Register and submit KYC documents.
- Manual or Electronic KYC verification via Third Party systems.
- Search for property
- Express interest for purchase of tokens of a property
- Register a wallet for purchase of tokens.
- Purchase tokens.
- Dashboard to view the tokens purchased.
