In September 2020, the concept of tokenization, the representation of an asset as a token on the blockchain, and explored what tokenization may look like in the near future on Cardano.
It was discovered that with the arrival of native custom token capabilities on Cardano as a component of Goguen, the stage will be set for the proliferation of tokens that power decentralized applications (DApps) and smart contracts on the blockchain.
Tokenization is one of the most powerful use cases for blockchain technology. But while it was looked in-depth at the types of blockchain-based tokens and the benefits of representing assets as tokens, it hasn’t explored yet which industries could be transformed most significantly by tokenized assets on the blockchain.
Real Estate is particularly ripe for disruption by tokenization, it is equally important focus area in the quest for mainstream blockchain adoption.
The real estate industry has long been a favorite of wealthy traditional investors, who see bricks and mortar as a safe hedge against stock market volatility and other types of assets.
But real estate’s attractiveness to high net worth individuals raises the barrier to entry for investors without deep pockets, as properties are most often purchased as a single lot—and prices usually start in the hundreds of thousands of euros.
To help smaller investors pool their resources, property crowdfunding and joint venture investment schemes exist, but they are fraught with their own pain points. For example, selling a partial stake in a jointly owned property would involve finding a buyer for your portion, selling the entire property, or having your equity bought out by the other investors.
As a result, liquidity is often the most common problem with these approaches to real estate investing. Simply put, it is often too difficult to exit your position, or takes too long to realize profits from your property investment.
Instead, investors are turning to an alternative option—tokenization. According to professional services firm EY, non-fungible tokens (NFTs), are particularly well-suited to use in real estate because two properties rarely share the same value and features. NFTs would allow a single property to be represented as a predefined number of tokens.
Let’s say a property worth US$1m has ten original investors, all of whom own 10 tokens each, with one token worth US$10,000. These tokens would be stored as native tokens on a blockchain protocol and could be traded on secondary marketplaces peer-to-peer.
Alice, one of the token holders, decides she would like to release 50% of the equity from her investment, as the property has gone up in value. Instead of finding a buyer for her equity stake, or asking the other investors to buy her share of the property, Alice would simply list five tokens on a secondary marketplace powered by blockchain.
The purchaser, who could be anywhere in the world, would buy the tokens and become the new owner of 5% of the property. The ownership agreement could then be delivered and signed in the form of a smart contract—completely transforming the way we invest in property and opening access to investors with smaller portfolios.
The future of tokenization
Almost any asset can be tokenized, and a huge range of contract agreements can be represented through a smart contract.
But despite the clear benefits of blockchain-powered tokens, innovation will only happen once regulators worldwide recognize tokenization and adapt existing legislation to enable it to flourish. This is one of the core reasons that the Cardano Foundation is dedicated to helping shape legislation globally.
The future of tokenization also lies in its ease of access for the masses. For example, in DeFi, consumer desire for greater APY on savings and investments is strong, and lending protocols’ value proposition is clear—but access and a steep user learning curve is a major barrier to adoption.
Ease of access is decided by the complexity of both the underlying blockchain protocol and the way smart contracts are deployed on it. On the Cardano blockchain, there are multiple initiatives to promote the inclusion of all participants regardless of their technical ability.
Source: Cardano Forum by Elliot Hill