NFTs and Rewards Programs in Real Estate

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.

Image 1

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.

Image 2
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.

Conclusion

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.

CNBC - https://www.cnbc.com/2022/03/10/trading-in-nfts-spiked-21000percent-
to-top-17-billion-in-2021-report.html#:~:text=Investing%20Club-,Trading%20in
%20NFTs%20spiked%2021%2C000%25%20to%20more%20than,billion%20in
%202021%2C%20report%20says&text=Trading%20in%20nonfungible%20tokens
%20hit,a%20report%20from%20Nonfungible.com.

Taco Bell - https://www.businessinsider.com/taco-bell-potatoes-return-

celebrated-with-nft-crypto-collectibles-2021-3
Louis Vuitton - https://www.voguebusiness.com/technology/why-games-became-
luxury-fashions-nft-on-ramp

NBA - https://www.nba.com/news/nba-and-dapper-labs-to-launch-1st-ever-nft-
auction-on-nba-top-shot

Kyiv Apartment - https://www.coindesk.com/business/2021/05/25/techcrunch-

founders-apartment-to-be-sold-as-nft/

Ekta - https://cointelegraph.com/news/fully-functioning-layer-1-mainnet-
announces-fractional-real-estate-nfts-tied-to-real-properties

Propy - https://propy.com/browse/about/