Each group of tokens is issued at a designated price. Once the tokens have been sold, they can be independently traded on the secondary market. While the tokens have an underlying value — the asset value — their price still fluctuates based on market sentiment.

First, let’s assume an example where a property is tokenized and sold at year 1. Both the A tokens and the B tokens are freely traded. The property held for 10 years and sold at maturity. At maturity, the tokens are redeemed, and the two-token waterfall details how each token holder type is paid back, just as how the capital stack is paid back in a specific order.

Aligned incentives

Now, let’s assume an example where the property is sold prior to maturity, at year 5. In the traditional lending framework, the lender is not incentivized to be open to an early sale, as it deprives them of additional interest payments. However, in the two-token framework, the incentives are now aligned as the lender (now the Token A holder), despite receiving a lower interest payment, is able to participate in the upside.

The two-token framework creates a clear standard for real estate tokenization that facilitates the ability to compare and value different deals. Despite its seeming simplicity, it can also be adapted for more complex deal types.

Increased flexibility

It’s important to note that the entire capital stack of a project doesn’t have to be financed through the blockchain, similar to how the entire capital stack doesn’t have to be crowdfunded. Sponsors can take a small portion of either debt or equity and tokenize it, while leaving the rest capitalized through less liquid traditional financing vehicles. Sponsors can then link ownership between the analog and digital worlds.

On the flip side, if a sponsor wants to tokenize an entire project, but doesn’t want its investors to have to interface directly with the blockchain, they can simply tokenize the back-end. Investors still invest as normal and never have to deal with tokens or the blockchain directly.

For more detail, read the whitepaper.

Trading

Private placements are typically “held-to-maturity” by investors, without much secondary trading — this is due to an inefficiency in the way they are held and traded, not due to a lack of interest in being able to trade them. Significant time and paperwork is required to transfer ownership to a new party, and furthermore, assets are often traded below market or net asset value (NAV) price, as the market typically associates the desire to sell with some sort of distress.

The Fluidity capital stack naturally integrates with secondary trading through decentralized technology pioneered by AirSwap, which allows for conversational, peer-to-peer trading. AirSwap’s unique and non-custodial design enables four key secondary trading benefits:

More assets available for trade

In a custodial exchange, which holds custody of the underlying tokens, each and every token requires approval from a regulatory body before it can be custodied and traded on the exchange. Centralized cryptocurrency exchanges are custodial, and many decentralized exchanges are custodial as well. With AirSwap’s non-custodial design, our technology allows for many more assets (the long tail) to be available for trade.

Better trading experience

Many securities trading platforms operate central limit order books (CLOB). However, because these securities represent real world assets, trading activity is happening between investors on a case by case basis. This makes it much better suited to the conversational “over-the-counter” (OTC) trading supported by the decentralized AirSwap network.

More accurate information

Blockchain enables transparency in ownership and in pricing. Today, rarely does an investor have a full view into the capital stack. It’s hard to know who owns all the various debt and equity pieces and what the current market valuation is of each of those pieces. Once the assets are put onto the blockchain, this data becomes visible, as ownership can be tracked through wallets.

Minimal fees and clearing costs

Without the need to issue and sign paperwork for each transaction, transactions can occur more quickly and more often. Compliance can be coded into the blockchain, so there isn’t the need to perform manual checks every time there is a transaction. For example, if there are ownership limits on an asset (e.g., a maximum of 1,000 unique investors is allowed), this can be encoded and the 1,001th investor automatically waitlisted. Moreover, by eliminating intermediaries, trading fees and other costs can be lowered.

At Fluidity, we are excited to enhance traditional commercial real estate investing by combining it with the best of blockchain technology.

Thank you to Michael Oved, Don Mosites, Khurram Dara, Richard Slenker, and Gal Eldar for providing their input.