The Market Challenges of Tokenized Real Estate

The Market Challenges of Tokenized Real Estate

Put any industry in the phrase "Oh, it's block chain meets..." and you are sure to get some interest. Recently, that industry has been real estate. Dreams of manning an alternative digital real estate market that can be trustless and allow investment at units of minutia are being shared by many competing entrepreneurs. That a college student could own 0.00001% of the Empire State Building or part of a property in a fast growing zip code, all bought and sold on a real time index.

But even for the startups whose platforms are already built, the expensive conundrum is how to manipulate a confluence of trends for stakeholder behavior that doesn't exist yet? All on a startup's budget, no less?

In this article, we breakdown some major obstacles keeping this dream from becoming reality, sorted from the more pedestrian to Herculean feats of awesomeness required.

Education

Walked in on this great seating situation with very forgiving light. Shot on the X100F
Who wants to learn about crypto alogrithms!? crickets...

Block chain is a buzzword, but is still abstract to mostly everyone that talks about it. When a corporate careerist talk about the promise of block chain and the only example he or she can muster is fraud detection, everyone's BS meter should go through the roof.

Putting block chain in an easy-to-understand metaphor is difficult. And so is marketing its appeal, explaining how it applies to them, and mitigating any feeling of risk. Now, do all at once without their eyes glazing over. And then selling to the next group all over again while trying to maintain momentum. All while maintaining a cool but accessible brand.

And to think it only gets harder from here.

Dealing with the Government

Head First
"Just one more permit, fella..."

You can get past the hurdle of the regulations in the financial market. It's relatively turnkey. Its long and expensive and you would have to re-up, but once you are up and running, you are ready to go.

The real estate portion on the other hand, the process of the law will be ongoing. The time in between when a property's shares are sold to the new home owner or investor and when they can sell back to the market (if they want), means there may be scores of properties out of platform trading commission at once.

The underlying real estate aspect of the trading will dictate the speed of the market. For the slowness of government regulation and its impact on real estate to not cripple your market speed, you would need a critical mass of properties tokenized.

Stress Testing / Debugging

Ottawa road in the evening
How time seems to go by when there's a server issue

The rest of these challenges have to do with the network itself.

Stress testing and debugging is a big challenge for applications that involve relationships between two or more bodies of stakeholders. It requires foresight, imagination, and lightning fast decision-making when everything goes to hell at once.

Try to imagine in perfect levels and proportion, what interactions that have never existed before, will bring down your real estate block chain platform. If you are not perfect in getting these dynamics early enough, you will be hard pressed to figure out what may be going wrong in full flight before it has already crashed and burned.

Was it a struck thread? Did an institutional buyer come on board? Did you choose a shared virtual server because you're a startup and one million cat videos was just too much? Are some transactions stuck? Is there someone sabotaging you? Did a buyer and seller do something in an order not foreseen and there is a bug? Do you have quant traders?

Better figure it out now, your market is capsizing.

And then you'll remember, you could have stayed in Corporate America.

Managing Relative Token Value

Bitcoin vs Altcoins
Do you think the chart in the background is in seconds?

Actual real estate exists in a common physical plane, with market value connecting the houses and buildings nearby to each other.

If the tokens exist on a common digital index, with each competing token that "owns" limited sets of real estate, how will that fare? Will the properties in each token be proximity based, or whatever the business could convince to tokenize their house? Will the value of a unit for one token's house be proportional to the next door neighbor who may be with a competing block chain company? What happens when the more ambitious tokens rig their token value to be higher or lower, like a country setting its own currency?

If there is not a common index, how do you account for innocent local market behavior that may be different from other token platforms? The impact this has on risk levels and token value is a hustle and bustle of epic proportions. You may have a set of coincidentally more risk averse buyers and sellers on average, completely changing your business. And just like that, it could change again depending on the moving average of the crowd.

The reason this matters is that the dynamic has very real impact on the bottom line. If your real estate token company's revenue model is part fee and part holding some of the currency, the local market values, behavior, and structure can make your balance sheet very volatile. When investing in the business one day, you may suddenly be under water, accounting wise. It's pretty dangerous and tough to manage.

Fostering a Market of Buyers and Non-Original Sellers

Bitcoin stats

Past the education element, getting a critical mass of buyers and non-original sellers (or sellers of a property share already purchased from the real life property owners) to actually move the needle on buying and selling of inventory is daunting. The point at which you are still a "0" and the market you created isn't moving, is so high and so close to when you switch to a "1" and get that perpetuating engine of trading.

You can be successful in getting a buyer's market and have so much inventory sitting there non-liquid as people are waiting to sell. The market volatility will be mind-boggling. You will have to figure out your daily trading volume needed and then make it happen on a limited startup runway.

This is a demanding sales target if there ever was one, because you can never stop. You need to sell 10 just to get one that may trade, as a grain of sand in the desert. All to maintain a landscape of buyers and non-original sellers.

In the beginning, there would most likely be a point in which the market dries up, or reaches a state of relative equilibrium. If there is no one to sell at prices willing to be bought, then there is no more action with that platform's token.

So it's not just a straightforward headlong rush of selling either. One minute your product can be considered gold, and the next its garbage. Expert mode.

Managing Inventory and Churn


Where you'll wish you were instead of dealing with disppearing inventory

Bad news- unless you're willing to buy every single underlying property, the real ownership must be reflected in the digital platform. If people that own a building or house sell to the people on the exchange, the house is still empty. And empty houses in real life mean depressed value in the area.

You want that house to be filled. You need someone willing to herd cats on a nameless platform to buy the shares needed to live in that house. The volatile share values would add a whole new dimension to an already stressful home buying experience. No one wants that.

Consider the risk profiles of people getting into cryptocurrency vs. people who stick with real estate.

Tokenized real estate is tasking entrepreneurs with interfacing the most risk averse investors on planet Earth with the absolute least. People who want to feel that they can be rest assured on the safe cash flows of real estate would now be subject to the Wild West. Rapid day traders would want to explode in waiting for a property to become available.

Especially when dealing with the government, the differences between the speeds of the token world and the real estate world, do not really coexist. Real estate is frustratingly slow and cryptocurrency is scary fast.

And what happens if the sellers don't want to keep the property on the index in order to sell in real life? How do you keep it all "in the family"? What is the law in this respect? Does a property shareholder lose the underlying asset of what they are holding, in which the token would turn to zero value?

The interfacing of inventory and the physical market with the demand and the digital market is the single biggest dissonance in the entire tokenized real estate dynamic. If the ones before this are difficult, this is nearly impossible.

Doing the Previous 3 Simultaneously

In order to succeed, the previous three most difficult tasks must be continually accomplished all at once. This part is the hardest because you have to continually to the triple impossible, over and over and over again. Never stopping.
And you thought beating Thanos is hard.

Conclusion

Marc Szeglat shot this picture in 2014 during an eruption of Mount Sinabung on Sumatra.

There are a lot of beautiful dreams being broadcasted about what could happen in the introduction of block chain to real estate. Inspired by the future, many entrepreneurs have staked their financial future on this shining light.

The suspicion is that not all of them have considered just how treacherous is the mountain they are climbing.