Tokenization is an innovative new strategy that is set to revolutionize the domain of investing. Tokenization shifts tangible, real-world assets, onto the blockchain through the allocation of a blockchain token. Tokenization introduces a host of benefits to asset investing, the major ones being fractionalization of assets and improved liquidity levels to an asset class previously considered illiquid.
What does real estate tokenization/property tokenization imply?
In simple terms, tokenization is a way to securitize real-world assets. Securitizing implies dividing into shares that can be sold to investors. In much the same way, tokenization is a division of a real estate property into tokens that are indicative of a predefined share in the underlying asset. They are therefore referred to as security tokens.
The immutable blockchain technology secures these tokens, and they can be traded through crypto exchanges or Alternative Trading Systems. (ATS)
Developing a new real estate token
Upon the decision to tokenize, and Ethereum standard, ERC20 token is developed to indicate shares in the property. The cumulative value of these tokens will be equivalent to the cumulative value of the securitized asset. The tokens are divided proportionally, according to the size of the asset. Following this division, the token is sold to investors.
The Security Token Offering (STO) process
The preliminary sale of a security token is usually referred to as a Security Token Offering (STO). It is also referred to as Tokenized Security Offering (TSO) or as Tokenized Asset Offering. (TAO)
STOs are differentiated from ICOs in that tokens sold are indicative of ownership in a real-world asset. STO investors are aware of the underlying asset they’re purchasing and obtain advantages through any future price appreciation in the asset.
Listing tokens on an exchange
Upon token creation and sale to investors, they require listing on an exchange so investors can trade their tokens. As there are not very many listing options out there, entries keep adding on to the list. It is important to note that a single token can be enlisted on several exchanges.
The advantages obtained by investors
Tokenization eliminates intermediaries. This simplifies real estate trade and for developers/owners to obtain capital. Tokens can be traded almost instantly for a very low fee. Investors in tokenized assets enjoy the benefits of the high returns provided by real estate investments, and the liquidity of the stock market.
As real estate tokens are backed by physical assets they are less risky than cryptocurrencies or ICOs, which are prone to volatility. They are highly speculative assets. In addition, stabilization measures can be implemented to ensure the value of the security token so it does not fluctuate beneath the underlying net asset value (NAV) of the property.
Tokenization is providing investors with the flexibility to obtain/invest capital however they choose. Tokenization will also influence other illiquid asset classes, like private equity and venture capital.
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