Building the Resident Rewards Program

A rent-to-invest opportunity for tenants to grow equity

This week at Hedgehog we launched a brand new pilot: The Resident Rewards program. The project aims to benefit both tenants and landlords; tenants get an opportunity to build equity while they rent, which they could use later as a down payment for a home, to travel, or any other personal plans. Landlords are incentivised to retain tenants, and save money by avoiding changeover in tenancies. You can find out more about the program here.

The prospect of the program is exciting and can mean a lot for the future of the next generation of renters. We are keen to share how we got to the point of launching it. Hopefully, it’ll inspire more building owners to implement programs like these, so renters, landlords and society as a whole can benefit from them.

To facilitate this specific investment product, we used blockchain technology. Firstly, we implemented an onboarding process, which allows everyone to use blockchain technology without any complicated set up. We then used the technology to prove ownership, and also to ensure that the change of ownership of the asset settles in seconds, rather than days or weeks. All of this allowed us to mint and issue digital tokens representing an interest in the value of the building the residents live in.

Removing the barriers to adoption

One of the biggest challenges when it comes to building a product designed for wide adoption with blockchain technology is getting people to actually use it. Understanding of how blockchain works is not widespread, and being able to confidently navigate the world of private keys, browser extensions for wallets, and keeping seed phrases secure is a rare skill. We use a combination of multi party computation (MPC) via Web3Auth and account abstraction in order to remove these barriers, creating an experience which is as simple as accessing your bank account or any other investment app. MPC lets us use the user’s login details (such as their social sign in with Apple or Google) alongside their device and other identifying information to manage a private key for their wallet. The user never needs to know the private key, or remember a seed phrase to keep it safe. Instead, their regular login methods they use today are used to authenticate requests to the blockchain. This results in a familiar authentication experience, with all the power of blockchain enabled.

We also use ERC-4337 (also known as account abstraction) to build smart contract rules into users’ wallets. The main use case we apply this to (for now — there are a lot of possibilities here) is to sponsor gas fees in transactions involving Hedgehog tokens. What this means is that Hedgehog will pay for all the fees rather than users (one reason we use Polygon blockchain is the comparatively low gas fees). To do this, we use stackup and introduce a paymaster to sponsor the transactions. This removes a whole complicated step in the adoption process, where a user would have to access a crypto exchange, purchase currency of the right type, and transfer it to the appropriate wallet. Our users don’t need to do any of this to access the same powerful features that blockchain provides.

Ultimately we believe this will offer users a powerful form of self-custody, while reducing many of the traditional risks associated with managing a blockchain wallet. As the custody landscape and regulation continues to evolve, this should become a very interesting option for companies looking to reduce the onboarding barrier, but also give users the control associated with self-custody of assets.

Putting it on-chain: blockchain based signatures

The investments we offer require a subscription agreement to be signed. This introduces an obvious question — if a signed subscription agreement exists, and a token representing the same investment also exists, which one represents ownership? Is it the name on the agreement, or is it the holder of the token? We wanted to eliminate this ambiguity, and move as much of the process “on chain” as possible.

We built an on-chain signature solution, where a hash (a piece of data with a fixed size which is the result of applying a mathematical function to the input data) of the subscription agreement is stored on-chain, and a record that the agreement was read and understood (i.e. a signature) is stored along with the security token representing the investment.

This allows us to record the beneficial owner of the security alongside the holder of the token, with all information kept on-chain so there is no ambiguity. Part of the transfer restrictions built into the token smart contract require this subscription agreement to be present, which prevents the two pieces of information ever drifting apart.

This also means we can generate a PDF of the signed document from the information stored on the blockchain. This creates an interface with more traditional finance processes which will require a contract, as well as DeFi processes, which will use the information stored on the blockchain. Any PDF generated by our systems can be verified for authenticity. If it’s modified in any way, in an attempt to commit fraud or change the terms of the agreement, we can check the hashes of the document against the records stored on the blockchain. This can give third parties strong assurance that the document they’re reviewing is authentic and has not been modified.

Bringing it all together: Atomic transfers and the Hedgehog Token Standard

The final part we needed to do was make the process as smooth as buying a stock or making a bank transfer. Residents shouldn’t have to wait for some manual process to take place after they sign the subscription agreement before they receive their tokens. Once they’ve done all they need to do, they should see their tokens in their wallet. This meant making the transaction process atomic (either it happens or it doesn’t) and removing any manual steps in the way.

We encoded this atomic transaction into the token smart contract itself. This checks that all the prerequisites are met (in this case, that there is a valid subscription agreement signature available) and if so, it mints and transfers the tokens. This ensures that users have access to their tokens as soon as possible, and asset owners don’t have to manually administer the issuance of tokens once prerequisites are met. This is a powerful concept which reduces the settlement time from days or weeks (more typical of this type of asset) down to seconds.

We are now looking to extend this concept further. By including KYC checks and money into the atomic transaction conditions, we are aiming to almost entirely reduce settlement risk when buying and selling these securities. This would be a huge step to introducing liquidity in this asset class, as easier transactions mean more volume of trading is possible. There is a lot of work to do here, and regulatory hurdles to overcome, but we see this as the future for this asset class and crucial to bringing access to as many investors as possible.

We’ve ensured we are compatible with ERC-20 and ERC-1400, as we want our tokens to be as flexible as possible and keep many integration options open. The additional atomic transfers functionality goes beyond these standards however, and creates what we’ve become to call a Hedgehog Token Standard. We see a powerful future for atomic transfers, and will be working to add more functionality to this token standard in the near future.

Wrapping up

We broke a lot of new ground when it comes to the technology involved in this project, and proved ideas we’ve speculated on can work in practice. This is an important step in our tokenisation journey, but it is also just the beginning. We now want to expand on the capabilities of the token smart contract we’ve built, and make it as powerful as possible. We want to prioritise working closely with other parties to make this future a reality. Writing this blog and “building in public” is part of that. If you find what we’re working on interesting, and want to talk about account abstraction, atomic transfers, or anything else to do with the smart contracts we’re creating, then reach out and let us know!