Author: kiman

Real Estate Tokenization Explained

Tokenization is the concept of representing the ownership of securities (company equity, bonds, etc.) as tokens on the blockchain. These tokens are called security tokens, tokenized securities, or increasingly digital assets or digital securities.

Real estate is the single biggest asset class that may be tokenized. Total real estate is worth around $228 trillion today and only 7% of this is available to retail investors. However, more than 80% of people believe real estate to be a good investment. DigiShares aims to help close this gap.

The blockchain itself is a global network that allows individuals and business entities to transact directly with each other in an efficient and inexpensive manner, without using intermediaries as banks and notaries. With tokenization, real estate assets can be represented as tokens on the blockchain that will become as efficient and inexpensive to issue, transfer and trade as other cryptocurrencies.

Tokens on the blockchain can be self-custodied. This means that investors can safekeep their own assets in their own wallet (similar to a bank account on your mobile device or computer). Or they can choose a custodian to safekeep their assets. Custodians are like banks as they provide safe and insured storage of digital assets. However, they are compatible with the blockchain, provide APIs, and are generally quite inexpensive.

Tokens on the blockchain can also be transferred and traded in a peer-to-peer fashion. This means that any investor can directly transfer or trade with any other investor. The transaction itself does not need to be mediated by any middleman (bank, CSD, notary, etc.) but the blockchain itself makes sure that the transaction is settled correctly. The blockchain can even remove any counterparty risk, something that normally requires an expensive intermediary, such as an escrow account with a lawyer. The direct trading removes a lot of friction and makes securities processing on the blockchain highly secure, efficient and inexpensive.

Real estate is highly illiquid but through tokenization, it becomes possible to directly transfer and trade real estate assets to other investors in a very inexpensive and efficient manner. Platforms such as the one provided by DigiShares make this possible and maintains a fully updated share cap table at all times.

Real estate processes are also traditionally very cumbersome and paper-based, involving a lot of manual steps with banks, notaries, etc. With blockchain-based processing of real estate assets, it becomes possible to digitize and automate many of these processes to a much higher degree. With a platform such as the one from DigiShares, these processes can be fully automated:

– Registration of new investors and collection of required information. The actual verification of this can be outsourced to a third-party KYC provider for USD 2-3 per check

– Purchase of shares and investment into the property. The purchase process can be fully automated, allowing the transaction to occur with no manual processing at all. The share cap table is automatically updated after the purchase is completed

– Payment of dividends and interest. By clicking a single button, it becomes possible to pay out to all investors at once, based on a predefined allocation formula

– Trading of digital assets. DigiShares provides a built-in OTC marketplace where investors can trade with each other. No manual processing or participation from the real estate administrator is required.

The very high degree of automation makes it possible to have hundreds of investors in real estate projects unlike today where the number of investors is often limited to below 10. This in turn makes it possible to “fractionalize” and allow investors to participate with $1,000 or $10,000 size investments.

Only a few “accredited” investors may have the normally required $100,000 or EUR 100,000 to invest into a real estate project, but many more investors may have $10,000 or EUR 10,000 to participate. This opens up the market to new types of investors for the real estate developers and it will become easier to finance good projects.

It also allows a much higher percentage of the population to participate in real estate investments and develop a more professional investment strategy to diversify and protect their savings over the years. This is called “democratization” of real estate.

With the DigiShares white-label platform, real estate developers will get a structured platform that enables them to expedite and manage processes related to financing, refinancing, or selling real estate development projects. In addition, they will be able to efficiently and consistently manage a group of owners of a specific project with all that entails – the maintenance of the share cap table, the facilitation of shareholder meetings, the payment of dividends or interest, and the reissuance of lost tokens, etc.

If you are interested in learning more, please contact DigiShares at info@digishares.io

Many have described how we will soon be tokenizing many different types of assets [1], [2], [3] and indeed longer term tokenizing the entire world [4], [5], tokenization being understood as “the act of representing the ownership of an asset or a security as a token on the blockchain”, enabling assets and securities to be transferred and traded more efficiently, securely, transparently, less expensively, and in a more decentralized manner.

Now that we are nearing Christmas, the natural question arises – how can tokenization help Santa deliver his gifts. And who better to explore this topic than Santa’s namesake, the CEO of DigiShares.

Santa’s challenges have been convincingly described by David Mikkelson in his seminal extrapolation of the physics of Santa and his reindeer [6]. Mikkelson describes how Santa in the space of 31 hours has to deliver presents to 92 million homes, assuming there is at least one good child in each, approximately 823 visits per second. The total trip is at least 120 million kilometers long and since it must be completed in 31 hours, Santa’s sleigh must move at extreme supersonic speed of at least 1000 kilometers per second.

The sleigh, having to carry 92 million presents, must weigh at least 321,000 tons (assuming small presents). Santa has eight reindeer (Dasher, Dancer, Prancer, Vixen, Comet, Cupid, Donner and Blitzen) which will each drag around 40,000 tons. It is speculated that Santa may have two more reindeer including Rudolph. In case this is true, the 10 reindeer will “only” drag around 3,200 tons each, still a significant amount considering that conventional reindeer can drag a maximum of 140 kilograms in a sleigh over frozen ground.

Mikkelson describes in detail how the movement of 321,000 tons of presents at extreme supersonic speeds through the Earth’s atmosphere will result in gigantic sonic booms and an enormous ball of fire at temperatures of thousands of degrees Celsius. Being in the midst of such an inferno cannot be very pleasant for Santa.

But why don’t we see if we can help Santa with tokenization? After all, the presents are assets, right? If the presents are tokenized, we can help Santa in a multitude of ways. As with any other asset, the transfer of ownership would be optimized and a number of other positive effects would kick in. Santa could simply tokenize the 92 million presents, creating a unique token for each present, that could then easily and comfortably be transferred directly to the wallets of the good children.

The currently most popular blockchain for tokenization is Ethereum. Using the Ethereum blockchain as a medium for Santa’s business would pose some difficulty, however. Ethereum is limited to 15 transactions per second, meaning that only 7,440 tokenized presents could in fact be delivered in 31 hours. Fortunately, a competing blockchain for tokenization, Stellar, can handle upwards of 10,000 tps, and would relatively easily be able to transfer all of the presents within the allotted time.

So clearly it is a no-brainer for Santa – tokenization of the presents can result in a massive reduction in energy consumption and discomfort for himself and the reindeer. But that’s not all. The tokenization also provides increased transparency as it will be evident to everyone who received presents and who didn’t (no more checking twice who’s naughty or nice) – and potentially which presents were received by which children. The tokenization also provides increased security around the whole process as the risk of mix-ups (wrong present to wrong child) is almost eliminated.

Finally, the tokenization makes it possible for Santa to consider decentralizing his distribution network, enabling third parties to participate in the creation and purchasing of presents as well as the actual transfer of presents to the good children. Parents are obvious candidates for taking over parts of Santa’s task in a controlled fashion within Santa’s tokenized distribution network.

One of Santa’s young (but perhaps not always good) “children” is the security token industry, perhaps 3-4 years old at this stage. If the security token industry could write a wish list to Santa, it would probably contain these top three these wishes: regulatory clarity (“peace”) across the world, an increased number of operational security token exchanges, and finally some visibly successful large scale STOs.

If the tokenization of Christmas catches on, it could also be considered to tokenize Christmas trees, after all there are several projects concerned with tokenizing large forests and as everybody knows one of the benefits of tokenization is that you can fractionalize – so why not fractionalize a forest down to a single tree?

Best Christmas wishes from all of us at DigiShares.

DigiShares provides a tokenization platform that handles all processes relating to the tokenization of any asset such as real estate, renewables, expensive art, film production, presents, etc. If Santa is interested in discussing a collaboration with DigiShares, we’ll surely give him a big discount in the spirit of Christmas.

[1] World Economic Forum.
[2] Deloitte: https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/lu-tokenization-of-assets-disrupting-financial-industry.pdf
[3] Forbes.
[4] Tokenizing the World with Blockchain.
[5] Tokenize the World: A Tokenized Securities Documentary.
[6] The Physics of Santa and His Reindeer.

What is blockchain?
What is tokenization?
What are the benefits of tokenization?
Why is it relevant to real estate?

DigiShares provides a white-label tokenization platform for real estate. In this article we will explain blockchain and tokenization and how the use of these technologies can provide real value for the real estate industry.

Blockchain, Real Estate, and Tokenization

Tokenization is the concept of representing the ownership of securities (company equity, bonds, etc.) as tokens on the blockchain. These tokens are called security tokens, tokenized securities, or increasingly digital assets.

Real estate is the single biggest asset class that may be tokenized. Total real estate is worth around $228 trillion today and only 7% of this is available to retail investors. However, more than 80% of people believe real estate to be a good investment. DigiShares aims to help close this gap.

Real estate can be tokenized in different ways. Mostly, it is done by tokenizing the equity of the company that owns the real estate project by financing a new development or refinancing an already existing yield-generating property. So, for the purpose of this blog article, we are primarily considering company equity when referring to tokenized securities.

The blockchain itself is a global decentralized ledger (or more easily understood a database or excel sheet). The blockchain incentivizes participants to maintain consensus about the contents of this database and massively disincentives cheating. One way of cheating is to “double spend”, i.e., spending 1 unit of digital currency twice to purchase twice as much as you can afford and hence cheating one of the sellers out of their payment. With blockchain technology, the infamous “double spending” problem was solved for the first time thereby enabling us to manage units of digital currencies (as well as digital assets) in a safe and secure manner.

There are many benefits with tokenization, but generally it makes the processing and management of securities much more efficient and less expensive. Transactions can increasingly occur from peer-to-peer without intermediaries who mainly provide value by maintaining centralized ledgers or databases guaranteeing ownership and value. With the blockchain taking over this task, these intermediaries can be removed from the process enabling investors to transact in an x10 faster and less expensive fashion.

Efficiency Improvements

Benefits of tokenization fall into three categories: efficiency (time & cost) improvements, new capabilities, and other values. All of these benefits are relevant to the real estate industry. Efficiency improvements and new capabilities such as trading and fractionalization are probably the most important to the real estate industry.

In terms of efficiency improvements, the main benefit is the general ability to digitize and automate processes.

Having securities in a digital format makes it possible to work with these securities programmatically. They can exist in users’ own wallets and can exist independently of a bank. Marc Andreesen’s famous quote, “Software is eating the world”, refers to the fact that every time an industry becomes software-enabled it leads to a huge efficiency increase and a huge amount of new innovation. The same happens in the world of securities. Tokenized securities are embellished with so-called “smart contracts” – small computer programs that regulate the properties and actions of the security. These smart contracts can be constructed to regulate governance and compliance. They can, for instance, independently determine whether a security can be transferred to a specific buyer or not, based on the following: KYC/AML of the buyer, whether the maximum number of this type of investor has been exceeded, or the accreditation status of the investor. The automation of these processes results in an x10 efficiency increase, an x10 reduction of cost, and an x10 reduction in human errors.

Peer-to-Peer Trading

In terms of new capabilities, tokenization makes it possible to easily support peer-to-peer trading of tokenized securities. This generally is not possible today with existing technologies and only blockchain technology now makes it possible. Listed securities are traded on exchanges and have significant liquidity, but unlisted securities (real estate, SME company equity, energy projects, VC funds, etc.) are generally not tradeable and suffer from extremely low liquidity. This means that investors are accustomed to being locked into these investments for many years, and if they want to sell beforehand, they often suffer a significant liquidity penalty in the sales price.

Inexpensive and efficient liquidity for unlisted securities is a totally new opportunity for investors. It generally didn’t exist before blockchain and tokenization. Specialized secondary trading exchanges are turning up to provide sophisticated trading of security tokens. Companies such as DigiShares provide simpler OTC-like marketplaces that can generally be run independently by the issuers to provide some degree of liquidity within their projects. We envision that in the future real estate developers may run their own trading exchanges to provide liquidity to their investors.

Fractionalization

The x10 time and cost improvement enables another new capability, – the ability to fractionalize assets. With the normal complicated and paper-based processes for issuance, management, and trading of unlisted securities, it is uneconomical and prohibitive to involve more than 10-20 investors in each project. However, when processes become digitized and automated and are managed by an investor portal such as the one provided by DigiShares, then it suddenly becomes possible and attractive to involve 100 or even 1,000 investors in each project. The portal automatically handles on-boarding of investors and their purchase of tokens (shares).

The portal also automatically keeps the share cap table (shareholder register) updated in relation to trading activities. This in turn makes it possible to reduce the typical minimum ticket size for real estate projects from USD/EUR 100,000 down to perhaps USD/EUR 1,000 or even 100. This is called fractionalization – the ability to fractionalize assets down to very small sizes.

Democratization

Fractionalization in turn leads to democratization. In the US and Asia, most financing rounds for real estate projects are limited to accredited investors for regulatory reasons. In Europe, the regulation is more flexible and most EU member states allow fund-raising up to EUR 5 or 8m from retail investors. In any case, with fractionalization it becomes possible to reduce the ticket size and allow retail investors to participate in the financing round. This is beneficial for the issuer who can now target institutional, accredited, and retail investors. It is also very beneficial for the retail investors who are now able to diversify their portfolios in the same way in which wealthy people have done for many years.

From our talks with many real estate developers, we see that many are truly interested in making a difference and enabling retail investors to participate in their projects. This supports the UN sustainable development goal number 8 – “decent work and economic growth.” It increases the chances for retail investors to build and maintain their savings in an inflationary environment.

Other values introduced by tokenization include global standards and interoperability, secure logging of transactions, and a factor x10 increased design space.

Global Standards and Interoperability

As many may interject, digital securities have been around for many years through banks and exchanges. However, the digital securities have only been available through banks and exchanges and have not been able to exist on their own outside of these institutions in people’s own computers or mobile devices. The banks and exchanges have naturally taken payments for their services as guarantors of people’s portfolios and have acted as intermediaries in any securities process charging both fees and imposing delays.

Others may interject that they have been able to partake in crowdfunding platforms and invest small amounts of money into startup projects in the past decade. More recently, real estate projects have been added to this list. Yes, this is true. But since these platforms do not use blockchain technology, they are “siloed” – their version of digital securities is not standardized and cannot exist outside their platform. Users of these platforms will be tied to these platforms alone and will not benefit from a large and booming ecosystem as we see with tokenization.

Within the tokenization space, there are a few dominating standards for tokenized securities and digital assets including ERC-1400 which is used by DigiShares. These standards ensure that an investor who purchased a tokenized share in Denmark can later sell it anywhere else in the world, and an issuer who financed his project with the DigiShares platform can later have his tokens traded on a licensed security token exchange. This provides value to any participant in the tokenization ecosystem and it provides for a 1+1 > 2 equation in which innovations provided by many collaborating industry participants multiply and accelerate the entire industry.

Secure Logging

Another great benefit of blockchain and tokenization is the secure logging of all transactions. Due to the nature of the blockchain, historic transactions cannot be modified or deleted and they remain visible forever. This makes the blockchain very suitable for tracking transactions related to securities processing and trading, for accounting, auditing, and also for tax considerations. Personal and private data such as name, address, number of shares, etc., are not kept on-chain, but rather referred to from the tokens and stored in password-protected off-chain documents that can only be accessed by authenticated persons such as the owner and the issuer.

Exponentially Increasing Design Space

The most important and long-term benefit of tokenization is the earlier indicated massive new design space opened up by securities becoming digitized, independent, and programmable. This design space increases because we now not only have financial people thinking about securities, but also programmers, software architects, crypto people, and DeFi people. Some examples of the securities that benefit from tokenization include those with voting rights and dividend rights that are dependent upon duration of ownership or other characteristics, designer securities that blend characteristics of equity and bonds, and security tokens with various types of participation rights such as physical access to real estate, etc., etc.

Real Estate Tokenization

So, that finally leads to the following question: Why is all this relevant to real estate developers? We see real estate developers being interested in this technology for many reasons including the importance of being first movers and early adopters of new technology. They also understand the importance of being able to digitize and automate many processes related to financing and management of projects and the importance of becoming able to fractionalize and invite new types of retail investors to participate. They are also interested in being able to access the international market and offer investors liquidity in the form of a trading marketplace.

With the DigiShares white-label platform, real estate developers will get a structured platform that enables them to expedite and manage processes related to financing, refinancing, or selling real estate development projects. In addition, they will be able to efficiently and consistently manage a group of owners of a specific project with all that entails – the maintenance of the share cap table, the facilitation of shareholder meetings, the payment of dividends or interest, and the reissuance of lost tokens, etc.

If you are interested in learning more, please contact DigiShares at info@digishares.io