Circular Economy
In order to effectively address the current planetary crisis, it is imperative to adopt a holistic approach that takes into consideration the profitability of businesses, the preservation of biodiversity, and the reduction of pollution. This demands a paradigm shift in the way we think about economic development and sustainability. Instead of relying on traditional economic models that prioritize short-term profits over long-term environmental and social concerns, we need to embrace innovative and sustainable economic models that promote long-term well-being for both people and the planet. In this article, we will delve into the use of tokenization of assets in the context of a circular economy in the real estate industry. How can this new model, with its granularity, be a positive driver of change for the industry and for the world?
One such model that has gained increasing attention in recent years is the circular economy and it is gaining traction in the real estate industry. The sector is a significant contributor to global energy consumption and greenhouse gas emissions. According to the International Energy Agency, the building sector accounts for 36% of global final energy consumption and nearly 40% of CO2 emissions. Real estate is also one of the main producers of waste with 600 million tons in the US (according to the EPA's 2018 Sustainable Materials Management (SMM) report) and 10 to 15% of which could be recycled or reused.
A circular model is one where instead of making products use them and dispose of them, promotes keeping resources in use for as long as possible, minimizing waste and pollution, and regenerating natural systems. The adoption of circular economy principles in real estate can help reduce its negative impact and can as well create efficiencies in operational management of buildings by allowing to resell, reuse or repurpose and maintain assets. It is important to adopt the mindset of resource management early in the process of construction in order to choose the right materials and make material libraries that later on will be used to recycle or resell these assets during retrofits or demolition.
In an analog world it is extremely difficult to make such models but with the advent of digitization we have the means of keeping track of assets, states and location. Let’s explore how blockchain and particularly tokenization of assets can become instrumental in such an economic model in particular for energy performance, predictive maintenance and retrofits.
Matthieu Merchadou Melki
CEO of Magma and President of the Blockchain and Traceability Commission at the Smart Buildings Alliance for Smart Cities (SBA)
Tokenization
Blockchain and Web3 technology have the potential to play a significant role. Let’s remind ourselves a few fundamentals :
Tokenization is the process of representing a real world asset or right as a digital token on a blockchain. They can take different forms for instance on Ethereum network we can create different kinds such as :
1. ERC-20: This is the most common Ethereum token standard and is used to create fungible tokens. Fungible tokens are interchangeable with each other and have the same value. ERC-20 tokens can represent anything of value, such as assets, utility, or even other cryptocurrencies. They are used in a wide variety of applications, such as ICOs, decentralized exchanges, and crowdfunding.
2. ERC-721: This is a non-fungible token (NFT) standard on the Ethereum blockchain. Unlike ERC-20 tokens, ERC-721 tokens are unique and cannot be exchanged for each other. They are often used to represent digital collectibles, such as artwork, gaming items, or other unique assets like buildings. Each ERC-721 token has a unique identifier, making it distinguishable from other tokens on the network.
3. ERC-1155: This is a hybrid token standard that can be used to create both fungible and non-fungible tokens on the Ethereum blockchain. ERC-1155 tokens are designed to optimize the use of smart contracts for managing game assets. They allow game developers to create multiple types of tokens within a single contract, making it easier to manage and trade game assets. It can be applied to real estate with a global non-fongible token1 that contains multiple other NFT’s representing the assets composing a building. In the Architectural Engineering and Construction (AEC) world it would be objects as in the IFC2 (Industry Foundation classes) standard.
Object refers to a fundamental unit of information modeling. Objects represent specific entities or concepts within a building or construction project. Each object in the IFC standard corresponds to a real-world element or a component of the building or infrastructure: walls, doors, windows, floors, beams, and so on.
Using the IFC standard enables interoperability between different software applications. It allows for the exchange and sharing of building information throughout the project lifecycle, facilitating collaboration and data consistency among various stakeholders involved in the design, construction, operation, and maintenance of a building.
NFTs (non-fungible tokens) can potentially be used to represent ownership and transfer of ownership of these specific objects, real world assets (RWA), which can also be artwork, furnishings, special materials or fixtures. An NFT could be created to represent ownership of a particular piece of artwork or any valuable element that is permanently installed in a building that has historical or cultural significance. For example, an NFT could be created to represent ownership of a particular staircase or façade that has been preserved during the renovation process. This could create a new market for historically significant building elements, allowing them to be bought and sold separately from the building itself. This NFT could be bought and sold on a blockchain-based marketplace, allowing for easy transfer of ownership and potentially increasing the liquidity of the asset.
When creating an NFT, metadata can be included to provide additional information about the real world asset being represented. Metadata can be stored on the blockchain along with the NFT, and can include a wide range of information. Some examples of metadata that could be included in an NFT for an asset are:
1. Title: The name or title of the asset being represented by the NFT.
2. Description: A description of the asset, which could include details about its history, origin, and any notable features like dimensions, serial number, attributes like composition to know if there are any toxic component or if the material has a high recyclability potential
3. Creator: The name of the person or entity that created the asset (digital and real world asset).
4. Date: The date the asset was created.
5. Type: The type of asset being represented.
6. Size: The dimensions or file size of the asset.
7. License: The license terms under which the asset can be used or distributed.
8. Edition: If the NFT represents a limited edition of the asset, the edition number and total number of editions can be included in the metadata.
9. Provenance: Information about the ownership and transfer history of the asset.
10. Object ID: A unique identifier for the asset, generated using a cryptographic hash function.
11. Hash of the contracts related to the object (legal documents, purchase, maintenance, insurance, permits and certificates)
This is not an exhaustive list, and the specific metadata that can be included in an NFT will depend on the use case and the platform being used to create and trade the NFT.
These elements embedded in the digital asset allow one to know who owns what, in what state these assets are and who has the right to do what with them. In Web2, it was impossible to transfer valuable items without centralized institutions acting as clearing or verification entities. This new feature of the Web will allow for resell, reuse or recycle of assets in ways that were not imaginable before.
However, it's important to note that the use of NFTs in real estate is still a relatively new concept and there are legal and regulatory considerations that need to be taken into account and those protocols for transmission of digital assets still need to be elaborated.
The take here is that tokenization can be used to create tradable digital assets that represent ownership or access to a particular real world asset, such as real estate or else and that these tokens can be traded and traced effortlessly. This can help to increase liquidity of these assets and accessibility for investors and also reduce transaction costs and intermediation.
Smart Contracts
Once tokens are created they can be traded or maintained using automated or self-executing contracts called smart contracts where the terms of the agreement between buyer and seller are directly written into lines of code contracts and processed in a distributed ledger. This allows to formalize and execute predefined agreements between untrusted participants over the web with embedded compliance and governance.
Tokenization and smart contracts can facilitate the creation of new circular business models that support more sustainable and efficient use of resources.
Here are some examples of smart contracts
- Energy performance contracts: require the monitoring of energy consumption and savings, and blockchain can provide a secure and transparent platform for this monitoring and its outcomes. The use of blockchain technology can also help to reduce transaction costs and improve the efficiency of the contract process. Sensors can record consumption and events that can trigger a change in energy consumption and generate an outcome like a reward or a penalty. For example a smart contract could set the temperature of a room if no presence was detected for a certain amount of time or a reward could be set to be paid to tenants or service providers if they perform certain actions to lower the energy consumption of the building. By using smart contracts, the property owner and the tenant can ensure that the energy performance of the property meets the agreed standards with suppliers and users of the building. If the actual KPI’s fall below the agreed rating, the contract can automatically calculate a penalty amount, or a reward that will be attributed to the human making the necessary actions.
- Repurpose contracts for existing buildings: By using tokenization, real estate developers can create new business models that support sustainable development by repurposing existing buildings or using renewable materials in new construction. This can also encourage the development of new technologies and services that support sustainability, such as smart building systems that monitor asset use. Buildings are literally banks of materials and objects and we need to start thinking about how collectively at the scale of a city or a district we could aggregate this data to repurpose or reuse building materials. For instance tokenizing objects in buildings and maintaining their state up to date will help when a phase of retrofit will occur and these items can be reused or transformed. The information entered in the NFT must allow for a future reuse of the object. By sharing metadata one will be able to evaluate in a city or a district how many of the same item or material they could find and plan accordingly.
- Predictive maintenance contracts are another area where blockchain technology can be beneficial. Predictive maintenance involves using data and analytics to identify potential maintenance issues before they occur, allowing for proactive maintenance. Blockchain can be used to create smart contracts that automatically trigger maintenance tasks when certain conditions are met, such as when a certain threshold is reached for a particular sensor reading. For instance a repair order could be automatically generated through a smart contract if the conditions are set beforehand like the cost of the repair and the time of intervention.
In the simplified example below a recurring incident occurs in a lift in a building and the property manager has set a smart contract to send any available company responding to the preset criteria such as the amount of the repair and the time of execution. The building wallet will be programmed to pay automatically to the service provider.
Recurring incident occurs in a lift in a building
buildingWallet stores the address of the building's wallet, which is the only address allowed to pass a work order.
companyAddress represents the address of the company that is willing to take on the repair job.
maxRepairTime defines the maximum allowed time for the repair in seconds.
maxRepairCost specifies the maximum allowed cost for the repair in USD.
isTaskCompleted is a flag indicating whether the task has been completed.
propertyManager and assetManager store the addresses of the property manager and asset manager, respectively, who will be notified of the task completion.
The WorkOrderPassed event is emitted when a work order is successfully passed from the building wallet to the company, indicating the repair time and cost.
The TaskCompleted event is emitted when the assigned company completes the task, notifying the property manager and asset manager of the repair time and cost.
By using this smart contract, the building's wallet can initiate a work order if the repair satisfies the time and cost conditions. Once the assigned company completes the task, the property manager and asset manager will be notified of the successful execution.
These 3 exemples are agreements between building owners and energy or service companies that guarantee a certain level of energy savings or asset performance. The companies are responsible for implementing measures in the building or guaranteeing the performance of an asset. They have an obligation of performance and need to provide a stiff reporting This approach helps to reduce energy consumption and costs while also improving the overall performance of the building.
Overall, circular economic models and tokenization can work together to create new opportunities for innovation and sustainable development in the real estate industry. By leveraging the benefits of both, real estate developers can create new business models that support more efficient and sustainable use of resources, while also creating new revenue streams and supporting local communities.
To achieve this, however, we need to unlearn old ways of thinking and relearn new economic and sustainable models all while redefining the notion of value in real estate. This involves breaking free from the linear model of "take-make-dispose" and shifting towards a more circular and regenerative model of economic development. It also requires collaboration and innovation across sectors and stakeholders to develop new business models, technologies, and policies that support a more sustainable and circular economy.
In summary, the circular economic model is a promising solution to the current planetary crisis. By adopting this model, businesses can not only reduce their environmental impact but also improve their bottom line and contribute to the overall well-being of society.
1 Ref Magma DTT that can contain a multitude of “child NFT” created by the stakeholders of the building.
2 https://www.buildingsmart.org/standards/bsi-standards/industry-foundation-classes/