Real estate backed stable coin, revisited
We, at Konkrete have spent a lot of time thinking through how best to achieve real estate tokenization. There are several complications in terms of how best to structure this. Tokenizing real tangible assets is hard, with several questions that come up such as how do you manage the on and off ramps?
And especially if it is any transaction that legally requires recording in a centralized registry it becomes a Dead on arrival proposition for tokenization. So how do you tokenize real estate where title records are maintained centrally by state agencies?
Even if you say you structure in a fund and then units of the fund change hands but the title does not then it still does not get around the fact that such units are securities. And securities need to be recorded in centralized registries and unlike crypto tokens security tokens cannot be non custodial.
The term security token is a paradox. Securities are custodial in nature and crypto tokens are bearer. It's like saying you are flying an underground aircraft.
Till the date we do not have a single global government run exclusively on blockchain, we can bid non custodial security tokens goodbye.
Having your records centralized and using blockchain alongside it makes no sense. The blockchain becomes completely superfluous. While a number of corporates have jumped on the blockchain bandwagon and developed permissioned chains, this is really a nonsensical term.
If you maintain your records in a centralized manner then you do not really need blockchain. Blockchains are slow, expensive to operate and have terrible user experience. It makes no sense to use a blockchain solution unless you have a use case that cannot be addressed with a simple shared google sheet.
Blockchain should only be considered as a solution if the intent is achieving consensus in a decentralized manner.
If your consensus is on the basis of a centralized record maintained by the state (or one party) it simply does not work with blockchain.
Securities laws in addition add a lot of complexity around being able to promote in a certain jurisdiction, type of investor, the ability to make a market, control mechanisms and so on. In addition the volumes required for a real estate transaction can be quite significant.
Which is why we are taking a bit of a detour and going down the invoice factoring path with Factorium. You can read all about it here
In essence, the only assets that can be tokenized have to be blockchain native. Transactions between 2 parties, or contracts between 2 parties can be recorded on the blockchain to make them blockchain native but having them recorded in a centralized registry as their authentic source is a poison pill in terms of using blockchain.
So you can record payments on the blockchain, and you can have smart contracts for unsecured loans on the blockchain. But if you are doing secured lending and your collateral is off chain and especially if your claim to that collateral has to be recorded in a centralized registry then blockchain as a choice is out.
Peer to peer transactions that are not required to be recorded on a centralized register are the only ones that can be meaningfully represented on the blockchain. While some may argue that you can have the centralized record as the settlement layer and use the chain for transactions, that really makes the whole thing unnecessary. Why not update the centralized record directly? Or have another centralized cache which supports the secondary market and then updates the main records in a batched manner? Having a decentralized system working on top of a centralized system adds no value but it definetely makes things worse due to the costs associated with blockchain.
While it does give you bragging rights about how your corporate implemented blockchain, anyone who knows anything about blockchain is likely to see through it.
Real estate tokens or security tokens as they are being conceptualized by most of the leading players in the space are simply not going to work for the above mentioned reasons.
In order to actually use tokenization using blockchain for real estate, you need a transaction that
- Has something to do with real estate.
- Generates value
- contract is recorded in a peer to peer manner only and does not have a centralized record
- these contracts do have legal standing
Couple of things come to mind.
Property management rights are one. We have previously discussed it here.
Property management represents a contract between the property manager and the landlord. The landlord pays a fee for the service, which usually comes from the rents derived by the property.
This is a contract only recorded (no centralized registry) between the manager and the landlord and is a good fit for representing on the blockchain.
These rights can then serve as a collateral for a stable coin.
Another and probably better solution is the rental rights.
Renters and landlords again have a peer to peer contract which is valid in the eyes of law despite not being recorded centrally. The rents generated by residential property in Australia range around the 4% mark. The absolute rent amounts go up benchmarked by the CPI annually. But if you think about the rent generating potential of a property by discounting all future cash flows to present value and use inflation as the discount then you can simply use todays rent as a static number.
Which essentially means if you had rights to rent for the next 25 years that would be equivalent to the current value of the property.
A perpetual right to rental proceeds from a property reflected by a contract is a strong asset that can be recorded on the blockchain in a non custodial manner.
This right would steadily generate between 3–5% annually in the form of rental proceeds while no securitization or tokenization is needed. The value of such a contract would be equal to the current value of the property.
The property would be still owned by the land lord who may live there by paying the rent.
If and when he or she wants to sell, they can do so but they have to pay back what was paid for.
Consider an example.
John owns a property worth $500,000 but needs the cash to invest in his business. His wife Tina does not want to give up the home and wants to continue to live there. She and John also think the property will go up in value in the long run so they want to continue to hold it.
They sell the rights to rent on the Konkrete platform for $500,000. They continue to live in their own home but now have to pay the rent at market rates which could come to 4% annualized. This $20,000 is paid out in a monthly (or weekly etc) distribution to the investor (could be a syndicate) who own these rights.
These rental rights are recorded on the blockchain and can be then used a blockchain native non custodial collateral that can serve as the basis of a real estate backed stable coin.
Ten years down the line let’s say the property is now worth $800,000 on the market. John and Tina have been paying rent which has so far cost them 40% over ten years of original value which is $200,000. They now wish to sell. They are free to do so but in order to extinguish the rental proceeds contract they would have to pay $500,000.
Which means they would pocket the net difference of $300,000 and still come out ahead by $100,000 if you offset the rent paid out till date.
The coins that were using this collateral will then be burnt and the proceeds would be distributed to the holders. You can create a liquidity cash pool but those are details that can be worked out.
Such a stable coin would be a hard asset and also generate a healthy ~4% yield for its holders. The reason you would go for a stable coin rather than trading each of the rights separately because the coin makes it all fungible and more liquid and less risky through diversification across multiple properties for holders.
Obviously for something like this to work you would need significant distribution. Real estate transactions are quite large. Which is why we will be rolling this out only when we have already built out significant distribution using Factorium.
These rights could be factored as one of the offerings alongside others on Factorium.