What has appeared from the outside as chaotic volatility in the crypto space is well understood by those within as requisite cycles of birthing. Each brings maturity (ICOs were a disaster, but look at today’s launchpads) and, equally as important, the funding for each era of innovation. Today’s tool sets are greater than ever before – layer 1 blockchains, layer 2 scaling solutions, multi-chain functionality, decentralized exchanges, wallets, storage protocols, developer protocols, lending protocols, and stable coins.
The world is at a tipping point – a gradually, then suddenly moment. With the advent of central bank digital currencies (CBDCs), it will become a requisite that everything can now participate in this crypto-powered digital asset realm. That means that every asset, every person, every entity, every municipality, every income stream, and every experience will become tokenized. As one of the oldest, largest asset classes on the planet, real estate will be no exception.
In this new era, real estate will trade as composable NFTs with non-fungible tokens interacting with their fungible cousins in a seamless ecosystem.
Smart contracts are Ethereum’s true innovation, allowing for instant and verifiable transactions. A smart contract is simply a program that runs on the Ethereum blockchain – a collection of code (its functions) and data (its state) that resides at a specific address on the Ethereum blockchain. Note that they are not controlled by a user, but instead deployed to the network and run as programmed. User accounts can then interact with a smart contract by submitting transactions that execute a function defined on the smart contract. Rules are defined and then automatically enforced via the code. 3
The world is at a tipping point – a gradually, then suddenly moment. With the advent of CBDCs, it will become a requisite that everything can now participate in this crypto-powered digital asset realm. That means that every asset, every person, every entity, every municipality, every income stream, and every experience will become tokenized. As one of the oldest, largest asset classes on the planet, real estate will be no exception.
The key is that these smart contracts are capable of being programmed to interact with each other. In other words, they are composable. Composability is one of the great innovations to-date in crypto – allowing for exciting new use cases, as protocols and applications can now plug into each other like Lego blocks. The money Legos of DeFi are one of the great early advances in composability.
Token standardization is critical to composability. ERC-20 introduced a technical standard for fungible tokens, providing a list of rules that all Ethereum-based tokens must follow. ERC-20 defines six basic functions for the benefit of other tokens within the Ethereum ecosystem, including how data is accessed and the method of transfer.
ERC-721 was the first technical standard for representing non-fungible tokens. This standard builds upon ERC-20, adding mapping of unique identifiers to addresses and a permissioned way to transfer these assets. ERC-721 was first pioneered by CryptoKitties – the breedable collectibles that continue to enthrall their owners.
A semi-fungible token standard emerged soon thereafter, brought forth by the Enjin team. ERC-1155 introduced classes of unique assets – i.e., a video game can have 1,000 swords or suits of armor. The obvious usefulness here is efficiency in not having to transfer multiple ERC-721 tokens, but instead easily being able to call a specific quantity with a single operation. It should be noted that this increased efficiency sacrifices data, as the history of any individual sword or suit of armor can no longer be traced.
Most recently, the composable NFT ERC-998 standard was introduced. ERC-998 provided a template whereby NFTs can own other non-fungible, as well as other fungible assets. Sticking with the CryptoKitties example, a kitty can own a scratching post and a feeding dish (which may contain some amount of fungible “chow” tokens). Selling the cryptokitty means selling all of its belongings, but those belongings may also be bought and sold individually by the owner of the cryptokitty. 4
Tokenizing the actual real estate.
Similarly, real estate should utilize this ERC-998 standard. Any real estate asset can quickly and easily be tokenized as an NFT by coding a few key pieces of data. That NFT can now have additional assets within its ownership control, such as the title, deed, or insurance policy (each of which are an NFT in their own right). In the case of commercial real estate, the associated property and operating entities might also be NFTs – with their associated accounts, income streams and holdings as NFTs and fungible tokens. As one can quickly envision, these composable NFTs are primed and ready to plug and play in the DeFi arena.
Real-time appraisals and analytics.
The true game-changing opportunity lies in the integration of real-time data to properly value and track these non-fungible tokenized real estate assets. Instead of relying on the historic data contained in appraisals and other third-party reports, live data feeds can now be linked to the asset – constantly validating and re-enforcing census, employment, income, expenses, and a host of other critical information. Artificial intelligence can spot trends and market variances, as algorithms highlight real-time valuations based on immutable data.
Thus, composable NFTs provide value to asset owners and investors by providing immutable evidence of ownership and asset performance via crypto tokens that can be seamlessly plugged into the DeFi realm. Critically, NFTs do not fall under the same regulatory oversight as fungible tokens – alleviating the need for costly intermediaries and eliminating the associated time delays.
We now have a blueprint for a market that truly addresses the myriad of real estate transaction issues and eliminates the need for facilitators. This is the real estate market of Web3.