What is Tokenized Real Estate?

What is real estate tokenization?

Real estate tokenization refers to the division of a property into digital tokens which can be purchased by investors.

These digital tokens are stored on a blockchain and represent your ownership in a property. They contain the same legal documentation and ownership information that you'd find in the documents when making a traditional real estate investment.

When you purchase a real estate NFT, you receive the exact same benefits as a traditional real estate investment––plus more.

These same benefits include distributed rental income, appreciation, and various tax advantages.

Tokenized real estate also provides a number of advantages over traditional real estate investing. These advantages include liquidity (tokens can be sold anytime), enhanced security, much lower minimums, a significantly faster investment process, and daily rental income distributions to name a few.

Fractional real estate investing is allowing for a once time-consuming and expensive investment opportunity to be accessible to smaller investors all over the world.

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Advantages of investing in tokenized real estate

Real estate tokenization, otherwise known as a real estate NFT, offers investors plenty of advantages over traditional real estate investing.

Here are a few:

• Liquidity - Unlike traditional real estate investing and other crowdfunding platforms, a property token can be sold anytime via secondary markets with no lock-up periods.
• Security - Property ownership is represented on a digital ledger, which cannot be changed or hacked, instead of being represented on paper documents stored in data silos.
• Lower minimums - Through tokenized fractional ownership, you can gain access to real estate investments for as little as $50.
• Faster investment process - Investing in tokenized real estate takes less than 5 minutes. All legal documentation, ownership deeds, title, etc. is stored on a blockchain.
• Daily rental income - Thanks to the low fees and enhanced speed of blockchain technology, you no longer need to wait 30 days to receive a bank transfer.

How to tokenize real estate

Most people don't know this, but you cannot legally tokenize an actual property.

To tokenize real estate, instead, you would tokenize the LLC that owns the property.

Once the LLC is tokenized, you then fractionalize the LLC into a certain number of digital tokens built on top of the blockchain of your choice. Real estate tokenization is very similar to fractional real estate investing in this sense.

The blockchain we use at Lofty AI is the Algorand blockchain––mostly for it's speed and extremely low transaction fees––but other blockchains like Ethereum and Tezos also work.

Although tokenizing real estate sounds daunting, it's actually a fairly straightforward process.

Because of this, and the advantages it provides, it's becoming a popular belief that tokenized real estate will become the norm within the next few years.

One of the largest advantages of tokenized real estate, are the applications that decentralized finance, or DeFi, provides.

Let's walk through the basics of DeFi below.

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What is DeFi?

DeFi, short for decentralized finance, is a term for blockchain applications that do not rely on a central financial intermediary, such as a bank, to facilitate financial transactions.

Instead of relying on a central financial intermediary like a bank, brokerage or exchange––decentralized applications, or dApps, utilize smart contracts on blockchains such as Ethereum to complete transactions.

Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. They make transactions traceable, transparent, and irreversible.

The creation of smart contracts has allowed for the creation of various dApp use cases including lending & borrowing, insurance, stablecoins, crowdfunding, derivatives, and more.

Click here to watch a quick video that walks through the basics of DeFi.‍

Examples of decentralized applications (dApps)

The most popular types of dApps include:

• Decentralized exchanges (DEXs) - DEXs connect users directly so they can trade cryptocurrencies with one another without trusting an intermediary with their money.
• Stablecoins -Stablecoins are cryptocurrencies that are tied to an asset outside of cryptocurrency, such as the U.S. dollar, which provides price stability.
• Lending platforms -These DeFi platforms use smart contracts to replace intermediaries such as banks that manage both borrowing and lending.
• Yield farming -Also referred to as liquidity mining, yield farming is a way to generate rewards with cryptocurrency holdings by lending your funds to others via smart contracts.
• Liquidity pools -A liquidity pool is a collection of funds locked in a smart contract––they are the backbone of many decentralized exchanges. Users called liquidity providers (LP) add an equal value of two tokens in a pool to create a market. In exchange for providing their funds, they earn trading fees from the trades that happen in their pool, proportional to their share of the total liquidity.

Why is DeFi important?

‍DeFi has the opportunity to take over and replace the rails of modern finance.

It gives people the ability to borrow funds, take out loans, deposit funds into a savings account, trade complex financial products, and more, without asking anyone for permission or opening an account anywhere.

These products are nearly frictionless, in the sense that they require very little infrastructure. The world's 1.7 billion unbanked adults can, theoretically, access all these opportunities without asking anyone for permission.

Also, by largely removing the middlemen (banks and related institutions), DeFi has the potential to make certain products cheaper, which could make a big difference in the long run.

Naturally, the large financial institutions aren't going to sit back and be taken over this easily. Many Wall Street financial institutions are beginning to accept DeFi, and looking for ways to participate. In fact, 75 of the world’s biggest banks are trialling blockchain technology to speed up payments as part of the Interbank Information Network, spearheaded by JP Morgan, ANZ and Royal Bank of Canada.

Closing thoughts

Tokenization and DeFi are truly disrupting the real estate industry and will continue to do so at an accelerated pace over the coming years.

Real estate has always been slow to adopt new technology, most people know that. But, it seems that the advantages of tokenizing real assets are just too strong.

Once the gimmick phase of tokenization and NFTs passes, the masses will begin to recognize the millions of applications that tokenization and DeFi provide.

It's only a matter of time.