Although this could have been one of the first sections of the blog, we are sure that having understood the different cases of tokenization you can already have a pretty good idea of some of the possible unique advantages that the application of this technology provides. Let's see what benefits are derived from tokenization in such a traditional sector with so little innovation in the field of investment for decades.
Providing liquidity to an illiquid asset
Everyone knows that the real estate market is one of the most illiquid. We know of a large number of cases of people with high assets in real estate but with alarming liquidity due to their inability to rent or sell said assets. The reason for this is very simple: in traditional real estate investing, it is all or nothing. An investor acquires the entire property or does not acquire it, there are no intermediate points. This, obviously, greatly hinders access for real estate investors and places a capital barrier for small and medium investors to access this market. Furthermore, the high bureaucracy and inefficiency related to the acquisition of a property accentuates this illiquidity.
Tokenization is the definitive solution to this problem thanks to the fractionation of real estate assets. The investor no longer needs to buy a property to invest in real estate, he can participate with the amount he wishes and benefit from the income or capital gains thereof. The creation of a secondary market for assets associated with tokenized real estate drastically increases the transactionality and efficiency of these investments, allowing operations that previously could take days or weeks to be carried out in a few seconds. We consider this one of the clear advantages of real estate tokenization, as it is an enormous benefit for owners who want to liquidate their assets and for investors who want to access financial products within this market.
Capital barrier reduction
By dividing the value of real estate assets, as we have seen previously, the effect is that the capital barrier for real estate investment disappears. If previously it was necessary to have a capital of fifty, one hundred or five hundred thousand euros to acquire a property, now it is possible to invest from €100 or less, depending on how the value of the asset is divided. This not only benefits small and medium investors but also allows owners to access more liquid markets.
Innovative financial instruments
By tokenizing a right, such as any of those illustrated in the different cases of tokenization, we are creating a new financial instrument that opens up an entire universe of possibilities. One of the most relevant cases is that it enables the immediate collateralization of loans with these new tokenized assets. How does this work? Very easy.
When we request a loan, in many cases we may be required to provide collateral or guarantee. This allows us to access certain benefits, such as greater credit or lower interest, among others. However, we provide a property as collateral so that, if said loan is not returned, the lending entity can recover its investment. If we ask for a loan of €100,000 and put our home as collateral, we better be sure that we can return this money, otherwise we will lose our property. This is a very widespread practice and can be interesting in those cases in which we are certain about our solvency. However, not only is it a process that can take a long time, but there are countless factors that work against us, for example, the criteria, policies or interests of the bank.
In the case of tokenized assets, these can be put as collateral and validated instantly thanks to smart contracts. If we have 20% of the credit rights on a tokenized property, it is as simple as putting them as collateral in a smart contract and requesting a loan, for example, in a stablecoin. We will immediately receive the money and, yes, we must make sure to return it within the established period, otherwise, the contract will not release our tokens. This is efficiency at its finest.
Alternative financing avenues
Another of the big problems that tokenization solves is the financing of real estate projects, both from the perspective of investment, construction, or promotion. Real estate developers make large investments to launch projects, often without the assurance that they will be released later. In the same way, individual investors or companies that wish to finance real estate projects may encounter great difficulties and be faced with the dilemma of whether or not to assume high risk.
Tokenization allows these risks to be diluted by opening the investment to a larger audience that may be interested from many different perspectives. For example, a developer could open financing for an office project and offer investors an attractive return on the exploitation of these assets, while significantly reducing its investment risk in a large project. If the project concludes, investors could see their investment greatly appreciated. In this way, we can see how tokenization opens new avenues of financing that bring great benefits to all participants in the real estate market.
Efficiency and transparency
Given the nature of the blockchain, which functions as a distributed, open and transparent registry, every operation carried out on it is characterized by the same properties. Any transaction of a tokenized asset not only has its effect almost instantly, but also guarantees its immutability and verifiability. Although this property may seem overshadowed by the previous ones, it is as important as these because, for any transfer of value or right to be valid, especially legally, it is essential that there be no doubt about the said transaction. The blockchain enables legal foundations suitable for tokenizing valuable assets, which is a matter of time before this practice becomes de facto, as it allows attesting that an event has occurred without the possibility of having been manipulated or altered by any of the parties. of a transaction or a third party.
Programmability
Last but certainly not least, tokenization enables the programmability of any contract or financial asset. This means that the desired conditions can be imposed with the complete guarantee that the result will be as expected. For example, it can be guaranteed that a tenant's payment goes out every 5th of each month into the owner's wallet. Even with IoT technology (and here we go a little further than the present), if the tenant stops paying the rent, the home's electricity supply could be automatically cut off if the tenant has not regularized the situation after 3 months. Or the electronic lock of the property will be blocked (of course, this condition would be previously established under contract and would be known to everyone). This would be automatically triggered by the smart contract regulating the rental agreement.
This programmability supports an indefinite number of possibilities, such as making automatic rent payments to token owners, using all types of tokenized assets as collateral for financial operations, giving token owners access to various privileges and functionalities,
Conclusion
Tokenization is entering the takeoff runway and this is thanks to a progressive convergence of technological, legal, economic, and social factors, which are enabling the adoption of these new techniques and technologies. In the coming years, we have no doubt that real estate tokenization is going to be one of the biggest trends and changes in the way we know this market, giving millions of people access to investment, improving security and guaranteeing all participants, and giving rise to countless new financial products and project financing methods.
At BlockchainX, we are not only constantly evolving to always work with the latest technologies and stay up to date with the legal developments of these projects, but we go one step further, offering solutions that are at the forefront of technological development and that set foot in new markets. We hope that this blog has been useful to you. If you have any questions or queries, leave us a comment or contact us.