Arguably the strongest use case for blockchain technology as we approach 2024 is the tokenization of real world assets. Simply put, the reason this combination works so well is because the experimental nature of blockchain is offset by the reliability and familiarity of what already exists (and at a large scale). While assets can be classified as many things, our startup handles commercial real estate, and we can attest to the unprecedented experience that blockchain and Web3 are offering for this illiquid and antiquated industry.
First, commercial real estate is an asset class that everyone interacts with (apartment complexes, office buildings, or restaurants) but few actually get the opportunity to utilize it as an investment strategy. There have not been any outstanding solutions to this until recently. The investment process into a commercial property is stale and complex, often making it a headache for real estate developers to find investors, collect their information and capital, and struggle through a stack of paperwork. As a result, the entry barriers are artificially so high so as to only entice the richest to hand over massive checks. Fewer investors, fewer problems.
This was the case until recently, in which it was recognized that blockchain technology, which acts as a decentralized, automated, and immutable ledger, can accurately record not only the designation of ownership but a downstream transfer too. This means that you could create a token that is legally recognized as a share of a commercial property and transfer it between investors, without hassle. Theoretically, you could do that 2000 times on the same property without introducing additional work or stress. Thus, the fractionalized model was born, and property owners unlocked access to investors with smaller checks, as opposed to two or three HNWI (high net worth individuals).
On a platform like e-States, real estate developers seeking funding, who perhaps would like to engage their community or have run out of local, wealthy individuals to call upon, can leverage blockchain technology to raise capital from a new, broad investor class. Using integrated software, screening investors and nurturing them through a deal is easy, even at scale. Solidifying their place on a high-quality asset is transparent and simple. The blockchain is treated as a form of cap table, in which an investor (each with their own wallet address) is in possession of the number of tokens that they purchased.
What’s even more exciting, though, is the opportunity for liquidity. Not only do real estate developers often struggle to onboard a few investors, but those folks are held in place until the property is sold, which is usually five to seven years after the initial fundraising effort. There is no premature exit — which makes the industry painfully illiquid. What if investors were able to sell their ownership stake prior to the completion of the deal, on some form of secondary market? Does this introduce a new headache for the property owner?
The tokenization ecosystem makes that possible. Whether it’s a primary or secondary market purchase, token transfers are fast and efficient, returning capital to the initial investor and assigning ownership to the new investor. A proper market-maker does this without drawing capital from the property owner, effectively creating an equilibrium where every buyer has a seller. Reduced holding periods are an effective way to encourage investors to put money into a deal. Not only are their investments smaller, which mitigates risk and allows them to further diversify, but being able to recoup that capital when needed makes the commitment considerably less intimidating.
The tokenization of commercial real estate certainly comes with a lot of benefits and is a massive step forward in the modernization of the industry. However, I liken the process to the engine of a car. It’s a powerful tool, but the invention has to be placed on wheels and complemented with accessories before it can become popular. That’s the mindset our startup has adopted, recognizing the need for a friendly user interface, additional portfolio tools, and incorporating artificial intelligence.
As the everyday person starts to unknowingly use and enjoy blockchain, it’s only a matter of time before Web3 becomes not only commonplace but the expectation in finance. Tech is cool, but solving a problem appeals to both pathos and ethos. Blockchain can win mainstream adoption with real-world asset (RWA) tokenization.
Author Bio
Matthew Schneider is the CEO at e-States and a thought leader within Gen Z. He has previously worked as an entrepreneur in various roles, from authoring and publishing a novel as a teenager to leading small-cap and derivative trades in the stock market. Matthew is a self-taught shark in the PropTech vertical, possessing expertise in project management, leadership, startups, asset securitization, and tokenization. Additionally, from entrepreneur and CEO experience, he touts skills in communications, marketing, finance, and business law. He’s deemed a leader in his network for his commitment to hard work, accountability, and setting admirable goals and expectations.