Tuesday, March 21, 2023 | Sha'ban 28, 1444 H
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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Smart contracts and real estate tokenisation

When the concept of smart contracts originated back in 1994, almost no one knew that blockchain technology would make it so easy to incorporate these contracts into computer code, while also providing transparency and security for all records.


A smart contract could therefore be programmed by a developer although more and more, organisations using blockchain for business are providing templates, Web UIs, and other online tools for making it easier to structure smart contracts. Smart contracts are executed on blockchains such as the Ethereum blockchain, which handles all transactions within a contract; thus, no intermediaries are needed for executing transactions.


Smart contract technology could also transform documentation and the process of transactions, by incorporating the blockchain applications into real estate for example. Smart contracts may also leverage blockchain and other distributed ledger technologies to keep verifiable records of all activities related to executing complex processes, and which cannot be altered due to its decentralised nature.


Blockchain applications enable tools that could potentially automate manual processes, from processes for complying with legal requirements to the distribution of the contents of wills as digital contracts.


Real estate tokenisation refers to the process of fragmenting the asset into digital tokens representing the underlying real property, with all of its rights and obligations. By means of tokenisation a property can be segmented and then represented with a digital token.


Whereas traditional investment into real estate requires locking up capital over an extended period, digital tokens can be transferred safely and effectively over the blockchain network.


Tokens can represent interest in a property, as well as being used to crowdsource capital to invest in a development, thus enabling a wider variety of investors and developers to engage with the real estate market.


Investments made using tokens dramatically lower costs, but they also provide greater freedom, as one - or a collective of investors - can purchase shares of a property and utilise it at any point. Using a blockchain technology and token exchanges could potentially lower significantly the transaction costs associated with real estate.


From a technology perspective, ERC is technical guidelines to developers for creating various types of tokens to meet their needs. Each ERC standard has their own approach for different subjects and use cases, such as tokenising traditional assets, or adding additional features in ERC-20 standards. In addition to ERC-20 and ERC-721, there are also many other ERC token standards that emerged in order to support various different use cases, which are increasing in popularity across the entire Ethereum ecosystem.


In ERC-721, only one smart contract could handle a single type of token, while the ERC-1155 allows one smart contract to support infinite amounts of tokens and functions.


The ERC-1155 token standard is focused on consolidating the best aspects from its predecessors for building token contracts without dependencies on fungibility and with low transaction “gas” costs. ERC-1155 allows for the batch transfer of multiple assets in a single smart contract which results in the transfers of all tokens being done simultaneously, leading to less crowded networks and, therefore, lower gas costs.


In theory, tokenisation of real estate sounds like a great idea, but in practice, we cannot simply ignore the existence of securities laws and other regulations that might prevent the smooth implementation of such an interesting concept.


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