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Tokenization: The Future Of Real Estate

Karolina

29 Aug 2023
Tokenization: The Future Of Real Estate

The real estate market is undergoing a significant transformation with the emergence of tokenization, a process in which real estate assets are converted into digital tokens stored on a blockchain, allowing for digital ownership and the transfer of fractional shares. With a market size of around $200 million, real estate tokens account for nearly 40% of the digital securities market, making them an increasingly popular investment option.

Read our article about the Real Estate Market

The Process of Real Estate Tokenization

Incorporating blockchain technology, real estate tokenization is a groundbreaking method that combines the conventional real estate sector with modern advancements. The procedure takes place as follows:

1. Choosing an Asset

Initially, a particular real estate asset must be chosen for tokenization. This may include any type of property, such as residential houses, commercial buildings, or even vacant land.

2. Assessing Value

Professional real estate experts and appraisers undertake a comprehensive analysis of the property to establish its market value, ensuring accuracy in the process.

3. Establishing Legal Structure

Due to the intricate nature of real estate transactions and the novelty of tokenization, a legal framework is implemented. This could encompass the creation of a Special Purpose Vehicle (SPV) possessing the real estate asset, which then issues tokens symbolizing ownership shares in the property.

4. Generating Tokens

With the legal structure in place, blockchain technology is utilized to produce digital tokens. Each token signifies a portion of the property's ownership; for example, if a $1 million property generates one million tokens, each token represents $1 of the property's value.

5. Implementing Smart Contracts

These coded agreements on the blockchain automate and adhere to contract terms. In real estate tokenization, smart contracts may automate procedures like distributing dividends to token holders (if the property produces income) or defining conditions for selling or transferring tokens.

6. Token Sale or Allocation

In an initial offering comparable to a stock market IPO, investors can buy tokens or property shares. In some instances, these tokens can also be exchanged in secondary markets, offering liquidity for investors.

7. Managing Property

Even though properties are tokenized, essential management tasks remain necessary, such as dealing with maintenance, leasing, and other routine real estate functions. Token holders receive revenue distribution based on their shares (e.g., rent), with smart contracts streamlining the process.

8. Trading and Liquidity

Tokenization's main advantage is the possibility of enhanced liquidity. Once the initial token offering is complete, investors can trade tokens on secondary markets, enabling more accessible buying and selling of real estate shares, resulting in a more liquid investment than traditional real estate.

9. Exiting and Redemption

Investors seeking to leave their investment can sell tokens in the secondary market. Moreover, provisions may exist for selling properties, with proceeds being distributed among token holders according to their token count.

10. Security and Transparency

An unalterable and transparent ledger of all property-related transactions is maintained on the blockchain. Coupled with blockchain technology's security features, this ensures that the integrity of tokenized real estate investments remains intact.

Pros and Cons of Tokenized Real Estate

The fusion of technology and traditional property investments is embodied by real estate tokenization, which brings its own unique advantages and hurdles:

Real Estate Tokenization Perks:

  • Liquidity: Tokenization offers enhanced liquidity by allowing investors to trade their tokens on secondary markets, in contrast to the general illiquidity of conventional real estate.
  • Fractional Ownership: By breaking properties into smaller units or tokens, multiple investors can partake in property ownership, increasing accessibility to large-scale investments.
  • Worldwide Participation: Tokenized real estate reduces border constraints, enabling global investors to put money into properties elsewhere as long as they comply with local regulations.
  • Transparency: The blockchain's open ledger guarantees that all transactions are documented, fostering trust among investors.
  • Efficiency: Numerous processes are automated via smart contracts, lessening the necessity for intermediaries and expediting transactions.
  • Cost Reduction: Fewer intermediaries and automation can result in decreased transaction expenses and management fees.
  • Diversification: Without requiring substantial capital expenditures, investors can broaden their portfolios by investing in numerous tokenized properties.

Tokenized Real Estate Challenges:

  • Regulatory Ambiguity: Being a novel field, rules surrounding tokenized real estate are still evolving, potentially causing uncertainty for investors.
  • Adoption Pace: Traditional investors may be reluctant to embrace this new model due to unfamiliarity or skepticism about blockchain technology.
  • Security Worries: Even though blockchain is fundamentally secure, concerns relating to smart contract vulnerabilities or platform hacks might discourage potential investors.
  • Market Development: Being a nascent market, tokenized real estate might present limited choices and liquidity for early adopters.
  • Integration with Established Systems: Integrating tokenized assets with conventional real estate systems and practices can be intricate.

Small Investors' Benefits from Tokenized Real Estate

Tokenized real estate is creating fresh opportunities particularly for small investors. Here's how:

  • Accessible Entry Points: Instead of purchasing an entire property, minor investors can acquire tokens that signify a portion of the property, thus lowering entry barriers.
  • Diversified Portfolio: A lower investment threshold makes it more convenient for investors to diversify by acquiring various property tokens or even in distinct geographical regions.
  • Liquidity: Tokenized real estate can be traded on secondary markets, facilitating small investors' efforts in cashing out investments compared to traditional real estate.
  • Transparency: A public ledger records all token transactions, affording investors a transparent overview of the property's transaction background and fostering trust.
  • Decreased Transaction Fees: Blockchain and smart contracts enable a streamlined process, which often results in lower fees, especially advantageous for small investors more sensitive to these expenses.
  • Global Possibilities: Small investors are no longer restricted to local markets and can explore worldwide properties that might have been inaccessible due to significant investment minimums or complicated international transactions.
  • Return Potential: As with any investment, there's the potential for returns. Tokenized real estate provides small investors the opportunity to grow their investments through property appreciation, rental income distribution, or both.

Potential Risks

  • Regulatory Shifts: Investments could be affected by regulatory changes as governments seek to understand the impact of tokenized real estate.
  • Vulnerabilities in Smart Contracts: Imperfectly designed smart contracts might contain weaknesses that can be exploited by ill-intentioned individuals.
  • Value Volatility: The worth of real estate tokens, like other cryptocurrencies, may be subject to fluctuations.
  • Misunderstanding Liquidity: Tokenization provides better liquidity than traditional real estate, but instant liquidity is not guaranteed. Factors such as market maturity, demand, and platform reach will determine the ease with which tokens can be sold.

Conclusion

As real estate and blockchain technology merge, tokenized real estate emerges as a potentially groundbreaking development. Offering transformative benefits such as liquidity, accessibility, and transparency, it also presents novel challenges and risks. Adopting this innovation necessitates a balanced approach, recognizing its limitations while maximizing its potential. As the real estate sector continues to evolve, tokenization may significantly alter our perception and interaction with property investments in the digital era.

Tagi

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Aethir Tokenomics – Case Study

Kajetan Olas

22 Nov 2024
Aethir Tokenomics – Case Study

Authors of the contents are not affiliated to the reviewed project in any way and none of the information presented should be taken as financial advice.

In this article we analyze tokenomics of Aethir - a project providing on-demand cloud compute resources for the AI, Gaming, and virtualized compute sectors.
Aethir aims to aggregate enterprise-grade GPUs from multiple providers into a DePIN (Decentralized Physical Infrastructure Network). Its competitive edge comes from utlizing the GPUs for very specific use-cases, such as low-latency rendering for online games.
Due to decentralized nature of its infrastructure Aethir can meet the demands of online-gaming in any region. This is especially important for some gamer-abundant regions in Asia with underdeveloped cloud infrastructure that causes high latency ("lags").
We will analyze Aethir's tokenomics, give our opinion on what was done well, and provide specific recommendations on how to improve it.

Evaluation Summary

Aethir Tokenomics Structure

The total supply of ATH tokens is capped at 42 billion ATH. This fixed cap provides a predictable supply environment, and the complete emissions schedule is listed here. As of November 2024 there are approximately 5.2 Billion ATH in circulation. In a year from now (November 2025), the circulating supply will almost triple, and will amount to approximately 15 Billion ATH. By November 2028, today's circulating supply will be diluted by around 86%.

From an investor standpoint the rational decision would be to stake their tokens and hope for rewards that will balance the inflation. Currently the estimated APR for 3-year staking is 195% and for 4-year staking APR is 261%. The rewards are paid out weekly. Furthermore, stakers can expect to get additional rewards from partnered AI projects.

Staking Incentives

Rewards are calculated based on the staking duration and staked amount. These factors are equally important and they linearly influence weekly rewards. This means that someone who stakes 100 ATH for 2 weeks will have the same weekly rewards as someone who stakes 200 ATH for 1 week. This mechanism greatly emphasizes long-term holding. That's because holding a token makes sense only if you go for long-term staking. E.g. a whale staking $200k with 1 week lockup. will have the same weekly rewards as person staking $1k with 4 year lockup. Furthermore the ATH staking rewards are fixed and divided among stakers. Therefore Increase of user base is likely to come with decrease in rewards.
We believe the main weak-point of Aethirs staking is the lack of equivalency between rewards paid out to the users and value generated for the protocol as a result of staking.

Token Distribution

The token distribution of $ATH is well designed and comes with long vesting time-frames. 18-month cliff and 36-moths subsequent linear vesting is applied to team's allocation. This is higher than industry standard and is a sign of long-term commitment.

  • Checkers and Compute Providers: 50%
  • Ecosystem: 15%
  • Team: 12.5%
  • Investors: 11.5%
  • Airdrop: 6%
  • Advisors: 5%

Aethir's airdrop is divided into 3 phases to ensure that only loyal users get rewarded. This mechanism is very-well thought and we rate it highly. It fosters high community engagement within the first months of the project and sets the ground for potentially giving more-control to the DAO.

Governance and Community-Led Development

Aethir’s governance model promotes community-led decision-making in a very practical way. Instead of rushing with creation of a DAO for PR and marketing purposes Aethir is trying to make it the right way. They support projects building on their infrastructure and regularly share updates with their community in the most professional manner.

We believe Aethir would benefit from implementing reputation boosted voting. An example of such system is described here. The core assumption is to abandon the simplistic: 1 token = 1 vote and go towards: Votes = tokens * reputation_based_multiplication_factor.

In the attached example, reputation_based_multiplication_factor rises exponentially with the number of standard deviations above norm, with regard to user's rating. For compute compute providers at Aethir, user's rating could be replaced by provider's uptime.

Perspectives for the future

While it's important to analyze aspects such as supply-side tokenomics, or governance, we must keep in mind that 95% of project's success depends on demand-side. In this regard the outlook for Aethir may be very bright. The project declares $36M annual reccuring revenue. Revenue like this is very rare in the web3 space. Many projects are not able to generate any revenue after succesfull ICO event, due to lack fo product-market-fit.

If you're looking to create a robust tokenomics model and go through institutional-grade testing please reach out to contact@nextrope.com. Our team is ready to help you with the token engineering process and ensure your project’s resilience in the long term.

Tagi

Quadratic Voting in Web3

Kajetan Olas

04 Dec 2024
Quadratic Voting in Web3

Decentralized systems are reshaping how we interact, conduct transactions, and govern online communities. As Web3 continues to advance, the necessity for effective and fair voting mechanisms becomes apparent. Traditional voting systems, such as the one-token-one-vote model, often fall short in capturing the intensity of individual preferences, which can result in centralization. Quadratic Voting (QV) addresses this challenge by enabling individuals to express not only their choices but also the strength of their preferences.

Table of Contents

In QV, voters are allocated a budget of credits that they can spend to cast votes on various issues. The cost of casting multiple votes on a single issue increases quadratically, meaning that each additional vote costs more than the last. This system allows for a more precise expression of preferences, as individuals can invest more heavily in issues they care deeply about while conserving credits on matters of lesser importance.

Understanding Quadratic Voting

Quadratic Voting (QV) is a voting system designed to capture not only the choices of individuals but also the strength of their preferences. In most DAO voting mechanisms, each person typically has one vote per token, which limits the ability to express how strongly they feel about a particular matter. Furthermore, QV limits the power of whales and founding team who typically have large token allocations. These problems are adressed by making the cost of each additional vote increase quadratically.

In QV, each voter is given a budget of credits or tokens that they can spend to cast votes on various issues. The key principle is that the cost to cast n votes on a single issue is proportional to the square of n. This quadratic cost function ensures that while voters can express stronger preferences, doing so requires a disproportionately higher expenditure of their voting credits. This mechanism discourages voters from concentrating all their influence on a single issue unless they feel very strongly about it. In the context of DAOs, it means that large holders will have a hard-time pushing through with a proposal if they'll try to do it on their own.

Practical Example

Consider a voter who has been allocated 25 voting credits to spend on several proposals. The voter has varying degrees of interest in three proposals: Proposal A, Proposal B, and Proposal C.

  • Proposal A: High interest.
  • Proposal B: Moderate interest.
  • Proposal C: Low interest.

The voter might allocate their credits as follows:

Proposal A:

  • Votes cast: 3
  • Cost: 9 delegated tokens

Proposal B:

  • Votes cast: 2
  • Cost: 4 delegated tokens

Proposal C:

  • Votes cast: 1
  • Cost: 1 delegated token

Total delegated tokens: 14
Remaining tokens: 11

With the remaining tokens, the voter can choose to allocate additional votes to the proposals based on their preferences or save for future proposals. If they feel particularly strong about Proposal A, they might decide to cast one more vote:

Additional vote on Proposal A:

  • New total votes: 4
  • New cost: 16 delegated tokens
  • Additional cost: 16−9 = 7 delegated tokens

Updated total delegated tokens: 14+7 = 21

Updated remaining tokens: 25−21 = 425 - 21 = 4

This additional vote on Proposal A costs 7 credits, significantly more than the previous vote, illustrating how the quadratic cost discourages excessive influence on a single issue without strong conviction.

Benefits of Implementing Quadratic Voting

Key Characteristics of the Quadratic Cost Function

  • Marginal Cost Increases Linearly: The marginal cost of each additional vote increases linearly. The cost difference between casting n and n−1 votes is 2n−1.
  • Total Cost Increases Quadratically: The total cost to cast multiple votes rises steeply, discouraging voters from concentrating too many votes on a single issue without significant reason.
  • Promotes Egalitarian Voting: Small voters are encouraged to participate, because relatively they have a much higher impact.

Advantages Over Traditional Voting Systems

Quadratic Voting offers several benefits compared to traditional one-person-one-vote systems:

  • Captures Preference Intensity: By allowing voters to express how strongly they feel about an issue, QV leads to outcomes that better reflect the collective welfare.
  • Reduces Majority Domination: The quadratic cost makes it costly for majority groups to overpower minority interests on every issue.
  • Encourages Honest Voting: Voters are incentivized to allocate votes in proportion to their true preferences, reducing manipulation.

By understanding the foundation of Quadratic Voting, stakeholders in Web3 communities can appreciate how this system supports more representative governance.

Conclusion

Quadratic voting is a novel voting system that may be used within DAOs to foster decentralization. The key idea is to make the cost of voting on a certain issue increase quadratically. The leading player that makes use of this mechanism is Optimism. If you're pondering about the design of your DAO, we highly recommend taking a look at their research on quadratic funding.

If you're looking to create a robust governance model and go through institutional-grade testing please reach out to contact@nextrope.com. Our team is ready to help you with the token engineering process and ensure that your DAO will stand out as a beacon of innovation and resilience in the long term.

Tagi