The digital world of blockchain holds so much promise for brand building, wealth creation, revenue generation, and efficient and transparent ways to deploy existing and emerging technologies to achieve set objectives. It is a world where individuals, businesses, and governments continue to exploit inherent opportunities for transformation and growth.
That was the case with the Lagos State government in South West Nigeria which recently announced a 16-month plan to tokenise (create a digital representation) its real estate on the blockchain as part of the government’s broader plan to increase its internally generated revenue. Each token created will represent a fraction of the asset, making real estate investment in the state more accessible to a broader audience.
What this means is that the government plans to develop a digital twin of its real estate assets and turn them into non-fungible tokens (NFTs) that can easily and transparently be sold, bought or traded.
In effect, the state government’s real estate assets will be turned into tokens enabling investors to own a piece of the state’s real estate assets much the same way an investor can own a share in a company. This would enable regular investors to purchase high-value real estate assets in places like Banana Island, Ikoyi, Lekki, Victoria Island, and others effortlessly. If the state pulls this off successfully, it will generally transform its real estate by streamlining the acquisition process – often characterised by opaque practices and fraud – enabling digital ownership and thereby boosting liquidity for the assets. While details of the tokenization remain sketchy, it will no doubt unlock the value in the state’s real estate assets enabling seamless and transparent trading and transfer of ownership thereby boosting investor confidence. And, in Lagos, a major commercial hub, this is a big deal considering the uncertain nature of property ownership.
By its nature and relative to other asset classes, the real estate sector is usually illiquid and inefficient. The process of acquiring real estate is often tedious and time-consuming as it involves different professionals at each stage of the sales process. This process is much worse in Lagos State, with the acquisition process often involving both state and non-state actors (omo oniles) that tend to drag the process for months, and in some cases, even years at huge costs to investors. Thus, real estate in Lagos is characterised by high entry costs, limited liquidity, and an overall lack of transparency. Hopefully, tokenisation should help address these challenges. The Lagos State tokenization plan is hinged on blockchain technology which will require the use of NFTs.
What are NFTs?
NFT is defined as a non-fungible token, that is “a non-interchangeable unit of data stored on a blockchain, a form of digital ledger, that can be sold and traded.” Investopedia says “NFTs can be traded and exchanged for money, cryptocurrencies, or other NFTs” depending on the “value the market and owners have placed on them.” NFT includes its provision of a “public certificate of authenticity or proof of ownership.”
Non-fungible tokens are verifiable assets that have unique identifiers and attributes from which they derive their worth. NFTs are individualised digital commodities that can only be exchanged for themselves. That is simply the meaning of “non-fungible”. Unlike Bitcoin or Ethereum, which have equal values, each NFT may represent a different underlying asset and as such may have different values.
NFT is traditionally associated with artworks, videos, tickets, and other related assets. However, its use case extends to other tangible assets like real estate, property development, and fundraising for social impact initiatives, among others. Before the NFT market crash in 2022, NFTs were the big money spinners in the digital world. A report by Nonfungible.com, in partnership with a research firm L’Atelier, showed that “sales of NFTs jumped 21,000 per cent to more than $17.6 billion in 2021, up from $82 million a year earlier.” It was estimated that about $80 million of NFT sales were brokered daily in 2021 before the crash occasioned by oversupply, a difficult global economic outlook due to the aftereffects of the coronavirus pandemic, and rising inflation globally.
Individuals and smart businesses took advantage of the growth opportunity to create new revenue sources. For instance, brewer Anheuser Busch, the parent company of Budweiser, made $4.8 million from its NFT collection in one day. UNICEF utilised NFTs in its Giga initiative to raise funding for the provision of internet access to over a million schools in 49 countries. American digital artist Mike Winkelmann’s (Beeple) artwork was sold for $69.3 million in 2021, and an NFT of the co-founder of Twitter, Jack Dorsey’s first tweet, “just setting up my Twitter”, was sold for €2.5 million. A matured NFT market may be staging a comeback, and governments like Lagos State that see the prospect are quickly exploiting the opportunities to release the value of their prized assets and grow their revenue.
Benefits of NFTs or tokenised real estate
NFTs enable the appropriate valuation of assets. The blockchain technology on which NFTs are reliant is a “decentralized, distributed ledger technology that securely records transactions across multiple computers.” Unlike traditional centralised systems where a single entity controls the database, blockchain operates on a decentralized network of nodes (computers) ensuring transparency, integrity, and immutability of data. The security of the blockchain is ensured through cryptographic techniques, making it resistant to hacking and fraud. The real estate space in Lagos State which is often characterised by fraud will benefit from its planned tokenisation. NFTs also hold the promise to democratise the ownership structure of real estate assets in Lagos State.
NFTs are promising yet risky
However, as promising as NFT is it could compromise security, income, and reputation. Thus, it is imperative that adoption is guided. NFTs are digital assets that come with rewards and risks in equal measure, which calls for a closer understanding of the market, required infrastructure, key stakeholders, and a clear idea of how to build a blockchain architecture, among other considerations.
NFTs are linked to private keys for access. The keys could be compromised: disclosed to unauthorised individuals or hacked by cyber thieves. It is, therefore, important for users to map out a complete security architecture before investing in NFTs. They need to determine how many keys to use, for instance, and how those keys are stored or accessed.
NFTs rely on Ethereum infrastructure
The blockchain technology Ethereum is the main warehouse, where NFTs are encrypted and stored, for many of the traded NFTs. Because most of the NFTs are stored in a single place, Ethereum is a big risk. Questions users must address will include what if Ethereum collapses? What if it becomes obsolete? Having such an understanding allows users to draw up a comprehensive plan of action in the event their worst fears are realized. Users could also explore other platforms to store their NFTs.
Piracy and counterfeiting are huge concerns
Users must worry about legal issues concerning NFTs. Ownership of NFTs could sometimes be difficult to determine in the real world because of the anonymous nature of the digital blockchain world. The creation of non-fungible tokens gives the creator the right to the NFT on the Ethereum blockchain but outside of Ethereum, in the physical world, the NFT could as well be someone else’s.
NFT theft remains a big concern in the NFT market. There is hardly any verification system in place to determine ownership of an asset. The practice of ‘lazy minting’, a system that allows a user to list NFTs for sale without writing them to the blockchain, has continued to encourage intellectual and other property theft. And because it is still a young market, the legal system lacks case laws to properly adjudicate so seeking legal recourse could be very expensive and complex.
Experts see huge promise
However, experts believe such fears are unfounded. According to them, considering the huge promise NFTs hold, many more organisations, both private and public, are likely to adopt the technology thereby making blockchain technology commonplace. Other governments in the country will watch closely to see how Lagos State navigates the tokenisation process and the derivable benefits before they jump into the arena.
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