Tokenization is a revolutionary way of bridging the gap between real-world assets and the digital economy. In a nutshell, tokenization is about taking something tangible - something like a piece of property - and creating for it a tokenized digital counterpart which can live on the blockchain in perpetuity. This innovation enables such assets to be traded, divided, and managed in ways that were previously not possible.
But why tokenize in the first place? And how does that actually work?
Let's dive into two tokenization approaches, namely NFTs, or non-fungible tokens, and fungible tokens, by exploring the pros, cons and some possible applications of each type and how they fit into the ecosystem of our Real-Estate Investment Trust (REIT) in Web3, which we have introduced in our previous blog post.
The NFT Approach: Unique Assets, Unique Tokens
Consider for a moment that you own a high-rise building with 100 unique apartments; each has a different size, layout, and view, and no two are alike. That is where NFTs excel. On the blockchain, an NFT is one-of-a-kind and therefore a digital asset uniquely qualified to represent a one-of-a-kind property.
In that case, each apartment could be represented by a unique NFT. If you own the NFT for Apartment 12B, that token not only proves your ownership but also becomes entangled with all rights and income due from that exact apartment. Critical metadata on such an NFT may include highly relevant information related to location, floor plan, and even legal documents, making ownership transparent and traceable.
That is how NFTs bring a really interesting level of individuality to real estate tokenization. You are not just owning "part of something"; you are owning a certain asset, with all its quirks and value tied directly to your digital token.
Yet, NFTs are not without their challenges. If there isn't a ready buyer, it becomes difficult to sell a high-value NFT, which might represent an entire apartment. They may also be costly - investing in an NFT of a single apartment may be beyond the capacity of many small investors. Of course, whilst NFT marketplaces or P2P transactions will remove intermediaries such as agents who would charge transaction fees, this NFT version of the apartment would not provide extensive benefits when compared with the current off-chain model.
Another alternative is fractionalized NFTs, where an NFT is split into its fungible units and thus owned by numerous investors. Instead of owning the whole apartment, you could buy a fraction, making high-value assets more accessible and liquid.
Fractional Ownership Made Easy: The Fungible Token Approach
But now, let's change this example. What if, instead of tokenizing each individual apartment one by one, we tokenize the building as a whole? In this case, we would not use NFTs but rather fungible tokens. Fungible tokens are interchangeable and divisible, just like shares in a company. They do not represent any particular part of the building but rather represent the proportional ownership of the whole. Technically, fractionalization can also apply to any real-estate NFT, whether it’s one entire building or just a single apartment. A developer might tokenize a whole building as a single NFT, then split that NFT into small, tradable fractions for investors. Meanwhile, an owner of a single apartment could take the exact same approach, issue one NFT for their unit, then fractionalize that NFT so multiple people can co-invest. The difference is mostly about scale and investment goals: a boutique apartment token is more niche, while an entire building or real-estate fund appeals to a wider base of investors.
Say we tokenize the building into a million fungible tokens. Each token would represent a small fraction of the building, and owning 1,000 tokens entitles one to 0.1% of the rental income and provides exposure to potential appreciation in building value. This would become an attractive proposition for a wide array of investors, including the purpose of ease of trading ownership on decentralized exchanges.
Fungible tokens are excellent in terms of accessibility. They lower the barrier to entry by letting people purchase small, uniform “shares” in a property, which are much easier to trade. The advent of Decentralized Exchanges allows one to trade their fungible tokens against pooled liquidity rather than depending on an order book to match sellers with buyers - thus it’s possible to instantly swap tokens at the current market rate. They don’t grant you ownership of a particular apartment; they just represent a share of the entire property. Also, if additional tokens are created beyond the original supply - due to a lack of checks and robust governance controls - then every existing token becomes worth slightly less of the underlying property. This “dilution” can reduce the value of your holdings.
How Buildings 'R' Us uses both approaches
At Buildings 'R' Us, we use both NFTs and fungible tokens, depending on the type of asset and investment structure. For unique properties, such as a single apartment or a boutique building, NFTs are a natural fit. They offer clarity, transparency, and direct ownership, perfect for investors seeking a tangible connection to their asset.
Fungible tokens are more suitable for larger buildings or diversified property funds; they will make fractional ownership accessible to all investment personas and budgets, and the market more liquid, which is an added advantage that real estate investors usually need. This approach will be combined in a way that will permit targeting different investor profiles for a more versatile ecosystem.
Tokenization Is Just the Beginning
However, tokenization is not all about digital representations of assets but about opening completely new avenues regarding their usage and management. The essence of our REIT ecosystem better unfolds in this direction.
For instance, real estate tokens could be contributed to decentralized exchange liquidity pools. Holders of the tokens could gain fees by providing liquidity, thus offering smoother and more dynamic trading conditions. This makes tokenized assets more versatile and valuable.
The holders can also collateralize their tokens to receive loans. Need cash, but don’t want to sell your stake in a property? Use your tokens as collateral for access to capital. It is this flexibility that enables one to grow their portfolio while still retaining their assets. However, any lending platform will typically require a prudent loan-to-value (LTV) limit, e.g. only allowing you to borrow 50–60% of the property’s current market value. This ensures sudden market changes don’t leave either borrowers or lenders overly exposed. Even tokenized real estate can experience price shifts, and responsible LTV ratios help manage those risks while still giving you access to cash.
And then there's auto-compounding, taking things one step further: rental income and other yields of tokenized properties can be reinvested automatically for maximum returns. With auto-compounding, your investment grows - literally - day and night without any further input.
Beyond rental income, auto-compounders can also reinvest LP (liquidity provider) trading fees or yields from other DeFi strategies. For example, if part of your real-estate tokens are staked in a decentralized exchange pool, you might earn additional trading fees or farming rewards. An auto-compounder can seamlessly reinvest those proceeds too, potentially accelerating growth even further over time.
Real-World Realities: KYC and Connecting Tokens to the Deed
One of the most frequent questions people ask about real estate tokenization is, “Does owning a digital representation of a property actually mean I own the property it represents?” The short answer is yes - but that ownership sits atop a legal structure (like an LLC or trust) which in turn holds the property deed. The tokens you hold represent an actual stake in that entity. This keeps your ownership claim enforceable if, for example, the property ever needs to be sold or refinanced.
Likewise, tokenizing a building doesn’t turn property management into a virtual-only task. Someone still has to manage the day-to-day: collecting rent, paying for maintenance, and renewing leases. That might be a traditional property manager who reports back to token holders, or it could be a DAO making major decisions and hiring local professionals. You’ll see us expand on governance as well as income and expense management in later posts, but rest assured: tokenization doesn’t replace real-world obligations - it just makes them more transparent and efficient.
In many jurisdictions, owning tokenized real estate means verifying your identity (KYC) and abiding by local investment rules. This can affect how many tokens you can hold, or might even restrict purchases from certain locations. While it’s not as frictionless as typical DeFi tokens, it’s the price of ensuring your digital ownership can stand up to legal scrutiny. Fortunately, there are standards like the TREX Standard (ERC‑3643), which we can use to embed these KYC requirements directly into the token itself. This effectively helps us to govern who can buy, sell, or hold tokens, while ensuring that ownership meets local legal standards without leaving the blockchain environment. This approach merges the best of both worlds: decentralized asset management coupled with built-in investor protection.
Wrapping up
Tokenization is not just a buzzword; tokenization enables the democratization of property ownership and makes the investment process seamless and more accessible. The combination of blockchain's clarity with the stability of real estate tokenization opens an opportunity for seasoned investors and new entrants in equal measure.
In our envisioned REIT, this is done by combining the specificity of NFTs, the flexibility of fungible tokens, and the power of DeFi tools like liquidity pools and auto-compounding. Together, these innovations create a smarter, more dynamic way to invest in real estate.
Why tokenize? It's a paradigm shift in the way we think about ownership - providing investors with options, returns, and ultimately tools for growing wealth in unprecedented ways.
In the next blog in this series, we'll dive into expense and revenue management strategies, governance, and price discovery mechanisms (like LBPs and AMMs), uncovering how to answer the question “What’s this building worth to begin with?” For this series, we will gradually introduce the REIT into web3 codebase, as well as experts in the field of real estate investment, real world assets and DeFi. Follow along to discover more.
Additional Reading
- Previous Blog Post: How Would We Build a REIT Today Using Web3 Technologies?
- Tokeny/T-REX Standard (ERC-3643): An Official Standard for Permissioned Tokens
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