NFTs are taking the internet by storm and have been identified as one of the best uses of blockchain technology. However, the value of NFTs, mainly in the form of digital artwork, has begun to plunge following the outbreak of a real-world conflict and a broader cryptocurrency slump.
The profitability of NFTs has started to shift away from digital collectables and towards NFTs as a way to secure real-world assets in the form of security tokens. This concept seems a bit vague and maybe even confusing, so keep reading as we unpack what that really means.
Security tokens are digital representations of traditional tradable securities that are made available through Blockchain. They play an important role in providing transparency (ownership records), increasing liquidity, real-time clearing and settlement, increasing potential speed, lowering costs, providing fractional ownership, which increases retail access to investment. Currently security tokens are supported by a moderately clear framework.
With all the benefits security tokens have, it’s not surprising that the Security Token Market is expected to grow at an 8 trillion dollar rate by 2025.
With a daily trading volume of more than $4 million, the growing interest in tokenized assets indicates a strong and growing market.
Distributed Ledger Technology (DLT), the blockchain is a type of DLT, is now being adopted by the financial services industry (HSBC, 2020). According to the World Economic Forum, DLTs will store and transact more than 10% of global GDP.
This current interest surrounding security tokens has led to a whole new level of innovation. Perhaps the most significant being the purchase of real estate using NFTs.
The cryptocurrency market has also experimented with purchasing real estate, but there are a few key differences between using NFTs compared to cryptocurrency such as Bitcoin to purchase real estate. The first difference, and advantage of using NFTs, is the use of a smart contract.
Smart contracts explained
NFTs are digital assets and can only be owned by one person at a time. However, unlike cryptocurrency where there are billions of the same token existing, NFTs are usually limited to a supply of one unique digital token. The NFTs unique token ID and metadata act as proof of ownership for the individual who buys the NFT (Hedera).
Smart contracts are used to create the NFT (minting process) and to assign ownership of the token. When a new NFT is made, the smart contract will set the creator as the owner automatically. The smart contracts can then transfer the token to new owners when a sale is made (Hedera).
NFTs use smart contracts but Bitcoin and other earlier cryptocurrencies don’t.
Using cryptocurrency to purchase real estate
There are a couple of ways to buy property using cryptocurrency.
- Using crypto as collateral:
You can use your crypto to buy property by using it as a down payment. This prevents the need to cash out your crypto and avoids creating a taxable event in order to buy a property (Coindesk, 2022). The issues with this method are that crypto-backed loans aren’t available in most places, and it’s hard to determine loan-to-value ration as cryptocurrencies are highly volatile.
- Direct crypto transfer from buyer to seller:
Two individuals could decide to create a private agreement to sell a property in exchange for crypto using a direct wallet-to-wallet transfer. The issue with this you probably won’t be able to use a real estate agent (most likely won’t accept their commission in the form of crypto) and the traditional escrow process will still need to go through an accredited bank (Coindesk, 2022).
It’s possible, but using crypto has a few too many flaws to be considered an effective and beneficial way to purchase real estate, especially considering if you’re using Bitcoin there’s no smart contract to streamline and solidify the process.
Using NFTs to purchase real estate
If we use an analogy, using crypto to secure real-world assets is like using a cheque book – there’s risk involved and can be considered a gamble. On the other hand, using NFTs to secure real-world assets is like using a debit card – it’s secure, protected by code, and offers immediate ownership transfer.
One of the biggest challenges with using crypto to purchase property is that it only really addresses the payment part of the process, not the ownership. Smart contracts that result when NFTs are minted open up new possibilities for both real estate deeds AND payment.
An NFT can act as a form of payment or collateral and represent the “normal” sale of a property.
This process is demonstrated by the recent Florida house sale in May (2022): The owner purchased a 2,000-square-foot-house for 210 ETH ($653,000) and received an NFT as proof of ownership (Coindesk, 2022). This transaction was successful and proved the potential behind NFT-backed properties.
Many industry professionals argue that not only is it possible to use NFTs to purchase real estate, it can be more beneficial than the traditional way. They believe that NFTs are “superior records to paper deeds, which can get lost and create ambiguity about a property’s value, size, taxes, sale history and other details” (Coindesk, 2022). These specifics will theoretically remain well-documented on a blockchain thanks to smart contracts, where they will live forever.
NFT-backed property sales aren’t the norm, as the process is still new, but they’re becoming increasingly promising as the market evolves. Why not get ahead while you can?