Fractional Ownership

What Is Fractional Ownership?

Fractional ownership is shared ownership of a high-value asset, such as real estate, aircraft, boats, or luxury items. In this model, the asset is divided into fractions or shares, allowing users to purchase a fraction of that item instead of buying it entirely.?

Fractional ownership has found increasing adoption, allowing individuals to enjoy the benefits and privileges of owning a valuable asset without paying the full price.

A key benefit to fractional ownership is the boost in liquidity it can provide to otherwise illiquid assets, unlocking wealth to be used in other areas.

It also provides an opportunity for co-ownership, where the costs,?maintenance, and usage of the asset are shared among the owners.

It is worth noting that?blockchain technology?plays a key role in facilitating fractional ownership. Blockchain can be used to?divide assets into smaller units, with these smaller units represented by digital tokens, allowing users to easily own a fraction of an asset.?

Blockchain fractional ownership is also known as?tokenization. Tokenization is the process of transforming ownership and rights of particular assets into a?digital form, where they can be bought, sold, and traded just like securities.

Some advantages of tokenization include?increased liquidity, faster settlement, lower costs, and bolstered?risk management. In short, they lower entry barriers, offering a more comprehensive range of investors access to real-world assets more efficiently and securely.

A History of Fractional Ownership

The concept of fractional ownership started to gain traction in the?aviation industry during the 1980s. Companies like NetJets, which offered individuals and corporations the opportunity to purchase shares in private aircraft, played a crucial role in popularizing fractional ownership.?

Subsequently, fractional ownership found its way into the real estate sector. In the late 1990s and early 2000s, luxury vacation properties and high-end residences became popular assets for fractional ownership arrangements.?

However, at the time, there were several issues with fractional ownership. For one, there were?trust issues?as numerous intermediaries were involved. Lack of?transparency and verifiable ownership were other major problems with fractional ownership.?

The advent of blockchain technology offered a solution to all these issues.?Blockchain?provides a secure and?immutable ledger. Each fractional ownership transaction gets recorded as a block on the blockchain, creating a transparent and verifiable ownership history.?

Furthermore, blockchain is?decentralized, which eliminates the need for intermediaries and addresses trust issues. The technology also reduces costs, makes investments more efficient, and improves?accessibility.?

Tokenization to Unlock Illiquid Assets

In a 2022 report, global consulting firm BCG and digital exchange for private markets ADDX revealed a huge market for tokenized assets (PDF) and the benefits they bring to liquidity to illiquid markets.

“A large chunk of the world’s wealth today is locked in illiquid assets,” the report said.?

The report states that more than 56% of assets held by taxpayers with a net worth of between $600,000 and $1 million are illiquid. This means these assets generally trade at a discount compared to liquid assets and are characterized by a high stock-to-flow ratio (relative scarcity), lower trading volumes, and imperfect price discovery.

“For example, illiquid physical art assets have a stock-to-flow ratio of 28.3 as opposed to 1.11 for liquid Real Estate Investment Trusts (REITs),” the report said, adding that other major examples of illiquid assets include real estate (including home equity), natural resources, land, commodities, public infrastructure, fine art,?computing infrastructure, private equity, and more.?

Several other asset classes that are?only accessible to high-profile investors are also considered illiquid assets. These can include pre-IPO stocks, hedge funds, infrastructure projects, commodities, alternate investment instruments, and private credit.?

Among the main reasons for asset illiquidity include limited affordability, inability to fractionalize inherent utility, lack of information, limited access, restricted to elite cliques, complex user journeys for obtaining access (e.g., KYC and?payment set up?across multiple platforms with no single interface for the customers), and lack of scaled?technological solutions?to unlock liquidity in such assets.?

However, tokenized assets can address most of these issues, bringing liquidity to traditionally illiquid markets and offering a more comprehensive range of investors access to these asset classes by lowering entry barriers.?

Tokenized Assets: The Next Big Trend in Finance

According to a report from Citi GPS, the cumulative size of tokenized assets globally could reach up to $5 trillion in value by 2030. The report, titled “Money, Tokens and Games: Blockchain’s Next Billion Users and Trillions in Value,” mentioned tokenization as the killer use-case of blockchain.?

“Almost anything of value can be tokenized, and tokenization of financial and real-world assets could be the “killer use-case” blockchain needs to drive a breakthrough. We forecast $4 trillion to $5 trillion of tokenized digital securities and $1 trillion of distributed ledger technology (DLT)-based trade finance volumes by 2030.”

Likewise, asset management firm?Bernstein has estimated that the size of the tokenization opportunity will reach $5 trillion over the next five years. Specifically, the firm forecasted a 2% penetration in currency and bank deposits, which could translate into a $2 trillion opportunity in the next five years. It expects another $3 trillion in stablecoins?and CBDCs.

One key trend in this realm has been the tokenization of treasury bills. According to data accumulated by rwa.xyz, in 2023, there is more than $625 million in tokenized US Treasuries across different blockchains, up by more than 450% since the beginning of the year.

Stellar (XLM) and?ethereum (ETH) are leading the market for tokenized treasuries, each with around $300 million in market cap. Ethereum layer 2 solution Polygon (MATIC) and Avalanche are other networks making significant progress in adopting tokenized assets.?

The Bottom Line

Tokenization has emerged as a transformative force within?finance, democratizing investment opportunities and unlocking illiquid assets. Courtesy of the robust security, transparency, and immutability of blockchain technology, investors can easily acquire a fraction of assets that were once beyond their reach.

While blockchain tokenization is still relatively new, it offers vast potential for growth and innovation. Particularly, it offers a compelling option for investors looking to unlock the full potential of their investments.