The tokenization of real world assets is something that is getting a lot more attention. While it is still in the early phases, this is going to be an opportunity that is worth tens of trillions of dollars.
A number of years ago I stated that the crypto market cap would enter the quadrillions. My forecast was not based upon tokenized networks like Bitcoin and Ethereum. Although they play a part, i.e. Bitcoin with a market value similar to gold is not outlandish, it is only a small piece of the total.
Real world assets are going to make up the bulk of that. Here is where we see the numbers getting absurd very quickly.
At the head of the list is real estate. This is an opportunity which will generate trillion in a short period of time.
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Tokenization of Real Estate: Trillions
Real estate is one of the largest asset classes in the world. It is estimated to be worth more than $350 trillion globally. Everyone is affected by this industry in some manner.
We are also dealing with one of the most illiquid markets in existence. Real estate transactions have not changed a great deal in the last half century. There are a few areas where computerization entered. However, it is still a paper intensive industry with government right in the middle of it.
Here is where friction arises.
Compare the time necessary to complete a real estate transaction compared to stock. Actually, it is ironic that moving the asset is slow yet debt, in the form of mortgage backed securities, is instant.
This is the crux of the problem. Tokenization solves these issues, completely changing the system.
To frame the market cap, with a $350 trillion value, if 1% of it is tokenized, we are looking at $3.5 trillion. The total of the entire crypto market, according to CoinGecko, is $3.8 trillion.
Inclusion
One of the promises of crypto is inclusion. To a large degree, we see the present financial system as exclusionary.
This is crucial. What percentage of the world could actually buy stocks? If we look at the total number of individuals, we are dealing with a small percentage (most likely single digit).
Tokenization removes this. While regulators are trying to hijack things, we know that decentralized systems are open to anyone. When dealing with something that is permissionless, a completely new set of rules emerge.
With real estate, it is likely there will be a ton of regulation even when tokenized. This is simply the nature of the industry. Precautions are required to ensure someone's home isn't rug pulled. However, this generate enormous opportunity.
The magic of tokenization is how the networks are driving the compatibility. By this, we are referring to the protocol.
For example, if real estate tokens are ERC-20, then we have an asset that can, from a technical standpoint, be traded for any other ERC-20 token. We are not dealing with incompatible assets.
Of course, even when that happens, other networks tend to adopt the asset by creating a derivative. This is how Bitcoin ends up on many different chains.
Another advantage is fractionalization.
Real estate is an expensive business. To buy a property requires a lot of money (or credit). This is out of reach for most of the global population.
Tokenization offers the potential for people to invest what they can. For example, if someone wants to invest $100 per month, this can be done. One can simply conduct regular buying of a token associated with a particular property. It is not different than purchasing $100 of BTC each month.
As we can see, this expands the number of people who can take advantage of the opportunity.
Digital Real Estate
Anyone around cryptocurrency is familiar with the phrase "digital real estate". Digital networks take on this form since there is only a certain amount available. Each token represents, effectively, a portion of the network. Since there is limited storage, bandwidth, and compute, we are dealing with a fixed (at that point in time) asset. Of course, networks expand and grow through node addition along with technical advancements.
With real world assets, we are shifting this concept a bit. In fact, it is being expanded.
At some point, digitla real estate will apply to real estate. That is what tokenization does. We are taking physical assets, such as a property, and creating a digital representation of it.
This is likely to be broken up into many piece, providing an opportunity for fragmented ownership.
With increased transparency, improved liquidity, and friction removal, this will likely move the value of the entire market higher. The simply supply/demand equation is always in play. Instead of finding one buyer for the entire property, we might be looking at 1 million people purchasing a small piece of it.
The entire industry instantly changes due to tokenization. It also makes the numbers absurd. Between commercial and residential real estate, we are looking at tens of trillions that will ultimately be on blockchain. This is likely to happen before the end of the decade.