How will tokenization affect the real estate and notary sector ?

Reading this title, you may ask yourself what even is tokenization? And I wouldn’t blame anyone as I discovered this expression few weeks ago. To start explaining what it is, we must start with understanding what is a token and why this is a trending word in the technology sphere.

A token is something that represent something else

Is that clearer? probably not. But humans are using tokens since antiquity, one of the first form token something written on a paper or just some basic coins. This is something symbolic, its goal is to securely prove that its representation belongs to the owner. The thing that is represented by the token don’t have to be physical it can also be abstract, imaginative, or speculative.

If you still don’t get it, let’s check what is and what is not a token:

A t-shirt is not a token (for most of them at least), it is an object that you can use and that have his own value.

A casino coin is a token, it represents the money you invested to get the coins, but some even argues that monetary coins are tokens. So, the definition of what is a token can be a little more complicated.

A mug is not a token, again it represents nothing but itself and contain its own value as the shirt.

A property deed is a token, it’s a paper that justify your ownership of something, but it does not contain the value of the property itself, but it helps to justify that it’s yours.

Now, you might understand better what is a token, you might also wonder that if tokens are that common in our daily life and used by the first civilizations, why are we talking about it in a technology blog?

The tokenization trending debate refers to digital tokens and more specifically, to blockchain use of tokens. Let’s call them crypto tokens

But Bitcoin is not a token nor an Ethereum, those are cryptocurrencies that have their own blockchain. But you can use tokens in the Ethereum or Bitcoin blockchain, and in many of other blockchains. As said earlier, a token represents something, for Bitcoin, tokens are the coins used to trade or make purchases, while Bitcoin is a blockchain, the system that allow coins to be traded, A BITCOIN is a token that represent a value that is tradable. If we compare to the today’s financial system, the bitcoin blockchain is the bank transaction authenticator system while the money is the token that represent a certain value. Crypto tokens are often tradable assets that are based on a blockchain. Crypto tokens are crypto assets that securely represent something which can be identity, ownership, or a specific right for example.

Example of crypto tokens

Fungible tokens are divisible and non-unique, a bitcoin is a fungible token as it is the same as another Bitcoin, and that you can buy fraction of it (or it would be impossible for the common people to buy it.) They all have the same value and are identical.

Non fungible tokens are unique and non-divisible, and their value can only be set by offer and demand. You probably ever heard someone talking about NFT referencing digital art, it’s because those tokens represent unique piece of art and can be owner only by one person. But NFT could also be something different as representing a house propriety dreed.

DeFi (decentralized finance) tokens can be any cryptocurrency that led to exchange, lend, and borrow. It’s like today finance but decentralized, meaning that it is not controlled by central banks or governments and it’s impossible to print new money and regulate the market. This is a fast-growing sector in the blockchain world.

Governance tokens are assets that represent a voting right in a specific blockchain for the person who own it. Those governance tokens are often issued in decentralized autonomous organizations (DAOs) to allow member to take decisions (vote) in a secure way and transparently. DAOs are projects based on the blockchain that is managed in a decentralized way by its members that own a governance token allowing them to participate in the future decisions.

Utility tokens are often used to provide access to services that can be purchased, as for example allow user to watch 10 hours of movie streaming on the platform or to join an online training.

So, what about real estate?

The real estate market group several activities, the first one is the trade of properties, selling and buying property asset. The second one is the renting, where a company or individual make benefits from renting a property. The third one is the debt management linked to the property buying, few people buy a house without asking for a mortgage. The last one is using a property, the right to live in a house or appartement. As you might see, tokenization can have an impact on those 4 different activities linked with real estate

The role of tokens could have in real estate

Trading proprieties could be helped by NFTs and cryptocurrencies. The goal of notaries is to make sure of the buyer and seller identity and that the house is owned by the seller. The notary will then create an official and legal document to prove that the house is sold and who is the new owner. NFTs tokens that represent something unique, they are non-divisible and secure. Meaning that a property can be represented by an NFT and sold to someone. Are they are unique, it is impossible to sell the propriety to two different people and the register is publicly visible imitating the fraud risks. NFT could be a good way to help notaries to make a property sale official and to save it to a public register. Moreover, cryptocurrencies could be used to pay the property, limiting fraud even more.

Propriety renting management, even if more than 74.4% of proprieties are owned by individuals in USA (jchs.harvard.edu), a lot of them are managed by real estate agencies. And some institutional and private organizations have big real estate portfolio. Governance tokens could be delivered in exchange of an amount of money to take decisions in a real estate agency or real estate funds. And to have a part of the benefits, DeFi tokens, delivered in exchange of an investment, can provide equity interest. With the combination of Governance and DeFi tokens, the investor could be able to govern a real estate DAO and take some benefits out of it.

Debt management is important in any real estate project as propriety is usually expensive and must be amortized during decades to create a positive cash flow. Money can be borrowed with DeFi tokens if someone want to create interest from its money and someone want to borrow money to buy a propriety. This exchange can be secured by mortgaging the house promising an NFT in case the loaned don’t pay its interest. And all of this can be done in an automatized and secure way thanks to the blockchain.

The right to live in a property is often determined by a renting bay, that is an contract between the owner and the renter. This bay can be replaced by a utility coin that the tenant must pay each specific period to not lose it.

Limitations:

We cannot replace the work of a notary or a real estate agent using tokens, this technology aim to facilitate the propriety management not to give legal advice or to sell a contract. But, maybe in some time, it could become optional.

Conclusion

Tokenization can happen in a multitude of sector, but real estate could be one the most suitable. Indeed, non-fungible tokens are the perfect way to create secure and transparent deeds and acts while Decentralized finance conduct to a lower barrier of entry without considering credit score. But it can also be dangerous by creating equity tokens on propriety benefits that could result a crisis as the subprime one. Unregulated markets, even those governed decentralized, could lead to big financial problems. Moreover, without notary, it can be difficult to limit the sales without coercion as no human is involved in it. However, tokens could be used to be more productive, limit fraud and be more transparent.