4 key components to build fractional ownership on the blockchain
Updated: Jul 29, 2019
This article is part 2 of a 2 part series, you can find part 1 here: https://www.jalantechnologies.com/post/how-to-effectively-raise-funds-and-give-partial-ownership-on-blockchain
In the first article, we talked about how we utilized blockchain technology for representing any property on the system and sell multiple shares of the property (Fractional Ownership) using advanced smart contract ERC-981 on ethereum blockchain.
In this article, we will understand high-level processes and key components involved in building the eco-system around Fractional Ownership on Blockchain.
Based on functionality and key players in the traditional system, we can divide into four main parts:
1. Property Listing and Tokenization: The first main component of the system is the listing and tokenization of the property into the system. Here, the main key players in the system are property developers and owners who want to raise the funds for property development or distribute the fractional ownership of the property to multiple investors. Authenticity of the listed property is tricky if the system allows property developers and owners to list their property.
2. Property Investment: Let's consider few properties are live on the blockchain platform and investors are interested to invest in these properties. So the next process in the system includes identification and verification of legitimate investors i.e. whitelisted investors.
The standard process in real estate includes KYC and AML verification through extensive physical paper work and manual background check. So here main challenges are how this whole process should be managed (Offline or Online) and linked with blockchain platform. My personal hunch on this to follow the traditional process of verification until you build a trustable online system for verification.
Now assume KYC or AML verification is done and investors want to invest into the property. So as system developer, would you allow using only cryptocurrencies for investment or investors also have the option to invest via Fiat currency?
But due to limitations of linking blockchain system with external systems or existing mode of transactions, the use of cryptocurrency for investment would be the best option and the whole process can be automated. As the system owner, if you like to allow fiat currency, you can utilize the central wallet method where the system would buy crypto on the behalf of the investors and complete the process as it should be. Another method of performing this whole process can be traditional bank transfer and maintaining escrow account but this approach comes with its own limitations like manual transfer of property tokens and maintaining whole property ledger off the system.
3. Profit Distribution System: The first and the last goal of any investment is "Receiving the profit as per invested value". In the real estate sector, the most common method of revenues generation is "Property Rental Business" (commercial and residential).
Generally, this whole property rental business (property maintenance, rent collection, and tenant management) is maintained by a company or property manager separately off the blockchain ecosystem.
So here the first main challenge is to bring the generated revenue back into the ecosystem for profit distribution. This can be addressed through multiple approaches and one of them - Collect the generated revenue from rental business into company's bank account or escrow account same as traditional approach and later convert into cryptocurrency and bring back into the ecosystem for profit distribution among the investors as per their respective shares.
The second main challenge is to maintain the whole property ledger (all transactions details) for each property. But luckily, a smart contract offers a perfect solution to overcome this challenge and maintain e-property ledger and automate profit distribution system according to the time and investment value of each investor.
4. Investment Liquidation: Investment liquidation is the last but most important component of this whole ecosystem. Existing real estate investment models are a nightmare for the investors and it has long and time-consuming exiting processes. Whereas blockchain technology provides an alternative and easy way to liquidate your property as per investor choice.
But here, main challenges are how it should be designed without affecting the legal framework of the system. Current existing platforms like Atlant, Blockimmo are purposing inter-property exchange market model and secondary market models where investors can liquidate his investment through multiple ways.
These four key components were found in traditional real estate investment model, time and again, to be present in successful blockchain crowdfunding and investment ecosystem.
To discover more about each of these four key components to build better blockchain eco system for real estate investment, how to establish them, recognize whether you already have them in place or not, and the reasons why each is so vitally important, please comment below or drop me a message on email@example.com to discuss further.