By Oscar Brito,CEO, Metrospaces
According to CNBC, NFT sales hit $17.6 billion in 2021, a 21,000% increase from 2020. Additionally, the market capitalization of cryptocurrency as an asset class surpassed $2 trillion. In recent years, we have seen a notable shift in perception around the formerly frowned upon distributed ledger technology. NFTs are now the existing craze and everyone from fast-food chain, Taco Bell, to Fashion House, Louis Vuitton, all the way to The National Basketball Association (NBA), is looking to take part. But what is an NFT and why is it valuable to such a wide-ranging group of organizations and individuals?
What is an NFT?
An NFT (non-fungible token) is a one-of-a-kind asset that is tokenized and distributed on the blockchain. An NFT can be sold or traded similarly to cryptocurrency. However, unlike cryptocurrency, these tokens are non-fungible, meaning they cannot be modified.
Ex: one bitcoin is interchangeable with another bitcoin because they have the same value and are essentially the same. An NFT however, is totally unique. Think about it like trading cards – you may trade your card for someone else’s card(s) and still have something of value but it’s not the same unique card you had before.
Because NFTs are essentially smart contracts added to the secure blockchain they can be an extremely valuable tool when it comes to identifying specific and unique items in the physical and digital world. NFTs initially rose to popularity in the digital art space. Prior to NFTs, there was no real collectible value in digital art since it can be so easily copied and there is no real way to establish provenance and ensure ownership. With NFTs, the original art can be numbered and recorded on the blockchain, as well as the immutable transfer of ownership that has brought legitimacy and value to the digital art space.
NFTs for Real Estate
Imagine if you could buy and sell real estate online similarly to how you buy and sell traditional securities. Whether it is selling your entire home through an online marketplace or investing in a real estate project with zero capital requirements, NFTs are changing traditional real estate financing. In the same way that art can be recorded and tracked on the blockchain, property ownership can be divided, tracked and transferred as well. There are two ways to look at NFTs in real estate. One is entire asset NFTs (EA NFT). The other is fractional ownership NFTs (FNFT).
Entire Asset NFTs
Hypothetically, an EA NFT would exist if a property deed were to be turned into the NFT and that is what would be traded and recorded on the blockchain. This is different from other online transactions that are susceptible to fraud, as the blockchain provides an immutable ledger of record that makes it easy to track current and past ownership. Other information, such as property description, condition, floor plans, photos, and more can be included in the smart contract. Theoretically speaking, this is amazing. Traditional real estate transactions involve banks, lawyers, title companies, real estate agents, and notaries – to name only a few middlemen. Couple that with mountains of paperwork, and all of this serves to increase transaction costs and lengthen the duration of a transaction because of the aforementioned inefficiencies. With an EA NFT, the transaction stays between two people: the buyer and the seller.
Unfortunately, this is not yet a reality for the masses. Being a legacy industry, the regulatory framework in traditional real estate has not kept pace with innovation in blockchain technology and the SEC has not provided comprehensive regulatory guidance for this new class of digital asset. This is not to say that it’s not achievable, but pros do not outweigh the cons for now.
You may have heard about Michael Arrington’s Kyiv apartment that sold as an NFT. But If you look closer, you will notice what it was…and what it wasn’t. The NFT that was sold represented the ownership of a corporation and the corporation’s one and only asset was… the apartment. So yes, the corporation and its only asset (the apartment) were sold as an NFT, but that is not a viable and scalable path for mass adoption of NFT property sales.
Fractional Ownership NFTs
Fractional ownership NFTs on the other hand are all the rage. FNFTs open up the normally restrictive world of real estate investing to the masses. Tokenizing a real estate project reduces the prohibitive capital requirements of traditional real estate investing and opens the floor to a wider range of investors, who under normal circumstances wouldn’t be able to access such an investment. Investors can buy and sell these (real estate) tokens like securities on secondaries markets that consequently allow property investment to mimic, in part, the process of receipt and transfer of shares of a publicly-traded company. This can also help bring liquidity to traditionally illiquid real estate investments.
That being said, there is still a regulatory hurdle here, as potential entrants are awaiting a clear framework from the SEC on digital assets, NFTs, tokens, and blockchain-based securities. Guidance in this area would spark heightened levels of interest and participation in innovation and investment in the space. Until then, the space will not be able to fully mature and reach widespread adoption.
There is also crossover into the digital space here as we look at digital property in the metaverse. Unlike the real world, the virtual world has no regulatory hurdles (yet) and since all virtual assets are digital, NFTs (EA or FNFT) are the ideal mode for issuing/buying/selling virtual property.
NFT Rewards Programs
NFTs provide a new way to directly access and reward customers for their loyalty. Because NFTs are smart contracts, they can be programmed to have different perks attached that can expand their financial and non-financial utility. These perks can be programmed to release over time or when certain actions happen -like the transfer of ownership. Perks can range from access to discounts or limited releases, access to exclusive communities or events, and even time-based rewards for holding the NFT for certain periods of time. In the specific case of real estate, rewards could include access to exclusive properties or even a pro-rated yield on the income of the underlying property in the NFT.
Moreover, engage to earn gamification models reward holders for behaviors that are beneficial to the community. Financial and non-financial utility are also bestowed upon to holders via smart contracts that eliminate arbitrary decision making and can help to foster a sense of transparency within the community. In the case of digital and physical rewards, NFTs and smart contracts can help to achieve convergence between physical and digital property – with all the associated utility and perks.
Disrupters like Metropsaces, Ekta and Propy are bringing innovation to the archaic real estate industry that has long been overdue. Smart contracts and NFT based rewards are altering this industry and many others for the better As a PropTech company, we are excited to be a part of this movement and are looking forward to seeing what the future holds.