Pushing Real Estate Data to the Chain
Off-Chain Asset Tokenization is Inherently Trusted. Does it Need to Be That Way?
Markets Require Information
Information is how individual market participants place their bets. If you want to see what happens when a market is unable to access information, look no further than the ’08 financial crisis, where data about the healthiness of mortgages was obfuscated and unavailable to market participants.
Healthy Markets Need Healthy Data
RealT is one of the first companies to tokenize off-chain assets and issue representative tokens on Ethereum. Digitizing deeds has enabled hundreds of different global participants to access to the U.S. real estate market. Innovations in other sectors have enabled us to provide access to the U.S. real estate market to those that could never have accessed it before; Ethereum, ERC20, Docusign, and automatic KYC services are all part of the RealT stack that allows us to democratize U.S. real estate in a compliant and cost-efficient manner.
When RealT investors buy RealTokens for a specific property, they receive a packet of documents that enable them proof-of-ownership, linking the property to their token. This way, if RealT ever were to disappear, token-holders would retain a claim on the asset and all the funds generated from its liquidation. RealTokens are a claim on the asset, regardless of whether RealT exists or not.
As far as documentation goes, this is a good start. However, real estate markets need much more information. Future development with RealT intends to leverage IPFS in order to enable access to these documents persistently and immutably, reducing dependence on a 3rd party documentation service (Docusign/HelloSign etc). Other documents, such as inspections, insurance, property taxes can be hosted and accessible via IPFS, and enables a single piece of property to have its own digital identity, accessible via Ethereum.
The above documents provide objective, verifiable pieces of data that represent the history of a property; things that are easy to verify their truthfulness.
However, this is only one part of what it takes to inform market participants and is arguably the smaller of the two parts.
In order to fully enable property buyers/sellers/owners with the most accurate information, current and trustworthy property valuations must be accessible to the market.
One of the benefits of owning a property with RealT is low-maintenance property ownership. You will never be expected to source a tenant, repair an appliance, or pay property taxes. We do that for you. One of the many tasks that property owners need is an independent 3rd party appraisal: a professional analysis of the valuation of the property.
Property owners in Argentina or Hong Kong cannot be expected to fly to Detroit to ensure that the property they own is valued at an appropriate value.
Property appraisals are inherently different from documents like inspection reports or tax filings. Property appraisals are estimations of fair market value. They are market predictions from experienced parties about fair market value of a property.
A Property Appraiser is an Oracle
If you pay for an appraisal of your home, you are paying for a professional to provide you with “the market rate” for your home, based on both micro and macro market conditions, and cross-referencing it with the asset you have on-hand.
It is inherently a subjective exercise, yet one that the real estate market depends on. The typical sale of a property often has multiple appraisers, because more opinions are better to have.
Two Types of Real Estate Price Oracles
There are two separate “oracles” for real estate valuations, each with their own pros and cons
- Independent Appraisers
- Algorithmic ‘Big Data’ Solutions
- Low Frequency of Data
- High Accuracy of Data
- High Cost of Data Production
Independent appraisers are the traditional real estate valuators. Their strength is their accuracy. They take their time evaluating one property in its entirety, to take in all relevant info, and put out a researched and analyzed price valuation. Independent appraisers take their time to produce an as-accurate-as-possible value for the property. As a result, independent appraisal of a specific property is a costly endeavor. The discovery process takes time and energy from the appraiser, which someone needs to pay for. The independent appraiser as an oracle is an expensive and accurate system. It follows that this system is also slow-to-update. There is no need for daily or weekly appraisals of the property; real estate markets aren’t that volatile.
RealT has committed to once-yearly appraisals on all properties listed by RealT. We will talk about how this data makes it on-chain later (Hint, it has to do with Chainlink).
Algorithmic “Big Data” Valuations
- High Frequency of Data
- Low Cost of Data
- Low Accuracy of Data
Services like Clear Capital or Estated offer algorithmically-generated valuation information for real estate properties. Traditional financial institutions need services like this to understand the valuation of the real estate relevant for a particular transaction, specifically for lenders who are allowing for real estate collateralized loans.
This allows these financial services to generate a ballpark valuation of a property, in order to mitigate the risk of an asset not sufficiently accounting for the size of a loan from a delinquent borrower.
Firms that exercise these strategies understand that Big Data generated valuations aren’t perfectly accurate, but they are able to mitigate this risk simply by having a high number of transactions, as well as other strategies. The alternative of an independent appraiser going to each property they need appraised is neither cost effective or scalable.
These are the two sources of truth that RealT has at its disposal to push verifiable, independent price data to the Ethereum blockchain, and help provide the Ethereum real estate market with the information needed to make educated decisions.
However, this data cannot pass through RealT before it reaches Ethereum. The whole point of being an independent property appraiser is that they are independent. If the data passes through RealT before being pushed on-chain, then that data is tainted, simply because it was handed by an interested party.
RealT V2 Needs Oracles
RealT V2 is currently in the works, and in RealT V2, liquidity for real estate properties requires a price-feed for every single property in the system. We will be releasing specifics about how RealT V2 works as time goes on, and things become more concrete. One thing we know for certain is that RealT V2 requires trust-minimized off-chain property valuations being published on Ethereum without passing through RealT as an entity.
Redundancy provides security. This is the thesis behind Chainlink, the blockchain oracle system. Chainlink and it’s LINK token provides a crypto-economic system that rewards or incentivizes the publishing of honest data to the chain. The Chainlink whitepaper explains how Chainlink can operate in the future on a Proof-of-Stake type model; where LINK is staked upon the promise of providing honest data to the chain. Dishonesty would be penalized if other LINK stakers believe you are publishing bad data.
Chainlink offers the vehicle to which RealT can get independent property valuations onto the Ethereum blockchain, without having to directly manage the data ourselves. Chainlink, and their trust-minimizing oracle system, represent crucial infrastructure for building out the RealT V2 contract system, and ultimately making real estate as liquid as possible.
With Chainlink, RealT will easily be able to create a system of valuation attestation for all RealT properties, using a network of independent, local property appraisers, and online API services like Estated and Clear Capital. By necessity, this network will need to be bootstrapped and guided by RealT, but the ultimate goal for RealT is to reduce our participation down to a minimum. Ideally, this will simply result in RealT paying for the appraisals and API services, while all the data handling and transmission is managed by non-RealT entities.
Scaling with LINK
RealT is in its early stages, and our RealTokens are yet to diffuse across Ethereum. However, as RealT scales to more properties across more markets, and as our customers go from hundreds to thousands and beyond, providing a LINK-backed price-feed for our properties will be integral to integrating RealTokens across Ethereum’s growing DeFi.
Likewise, as RealT tokenizes more properties, there will be higher demands for trust, in regards to the appraisals. More properties on-chain will create more demand to price-attestations, and therefore require more stake to provide similar levels of trust. The Chainlink oracle system is also in its early stages, but in the future RealT aims to match the level of stake we place behind our attestations to the amount of demand for price data.
We imagine a world with thousands of tokenized properties, and providing a LINK-backed price feed for all of them!
Removing Trust from Tokenization
RealT isn’t just a real estate tokenization company; we’re an off-chain asset trust company. It is our obligation to our customers to remove as must trust as possible, in order to provide maximal assurances to our customers.
Blockchain technology is about scaling trust. Trustless assets on Ethereum will always be preferred over trusted ones. For centralized token issuers for real-world assets, providing higher levels of trust than a competitor is a key differentiator in the blockchain industry.
We look forward to scaling with Chainlink and providing as much trustlessness to RealTokens as possible!
Join RealT in breaking down barriers!
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If you’re a developer and want to connect your smart contract to existing data and infrastructure outside the underlying blockchain, reach out to Chainlink here!
Chainlink can help you quickly and securely launch your data-enabled application or Chainlink Price Reference Data Contract on mainnet today.