RE friends, crypto is going to forever change the future of asset management. As the most broadly held asset class on Earth, this means that Real Estate valuations are going to be forever changed by this technology. It will be 100X bigger than anything that the web did for Real Estate – if you follow these steps and put the homeowner first. These ideas are yours for the taking. I’ll take questions in the comments.
Much love from Cape Town, David G
Real Estate on the Blockchain #REotBC
Blockchains enable trusted transactions without intermediaries. The opportunity to securely distribute trade in property with better liquidity is obvious. The opportunity to coordinate new patterns of trade via more innovative transactions is not obvious and will be where the ultimate value lies. As with the web, moving our current world “onto the blockchain” is a (relatively) losing strategy in a rapidly expanding opportunity space. As with the web, the obvious opportunity to automate the physical world is a distraction from adding new value to it. As with the web, there will be obvious arbitrage opportunities that must be ignored to maintain user focus.
Unlike the web, this opportunity is not about data or services. This is about assets and other resources (of all types, both real and imagined). This will be Zillow’s blind spot (where I used to work) because they specialize in hacking data. We are now asset hackers, capable of adding coordination value and global network demand to new and traditional assets with just a few lines of smart contract code. I’ll also call out “smart contracts” here. The real estate world is full of paper contracts so I need to mention that this is unfortunate naming; they are unrelated. Projects that attempt to codify paper contracts will fail and those products will miss the opportunity. The last thing that a globally liquid transaction needs is a lawyer’s checklist attached to it. That’s not how in-world transactions work and it won’t be how the blockchain works.
There are pragmatic product patterns emerging for both platform and application opportunities in Real Estate. There are 5 patterns/opportunities that I see coming.
1. Property Title Ceding Protocol.
I’m working on a project in legal services. What we’ve learned is that you shouldn’t mess with the way paper contracts work. If lawyers were going to go digital, they’d be using Kindles. Moving title deeds to the blockchain may happen but it will be painful and expensive. If it does happen, those contracts will serve the same purposes that they do today. It’s a distraction. The real gap and the simplest product is to rather build a gateway between traditional rights (and obligations) of title and a digital asset to which those rights are ceded. You would need to figure out the legal ceding of those rights per legal jurisdiction and there will be some KYC clearinghouse required to provide access to global liquidity for property tokens. For those operations, you’d extract exchange fees at scale. For whoever owns this protocol, it doesn’t matter who owns creation of property tokens but doing so will be valuable too (it’ll be the fun fight). Note: I’ve reviewed this “paper contract to smart contract” pattern in more detail in an analysis of the Mattereum project.
2. Property Asset Management Token (for homeowners)
The most valuable token protocols in the property market will not focus purely on security – that’s just the ticket to the game and traditional title does it well enough. The added value to tokenizing a property at the homeowner level must be an asset management offering. My house with your token must be more valuable than my house secured with someone else’s token. How are homes made more valuable? Tokens discover better lending deals when they are equity and income aware in a globally liquid lending marketplace. Lending is just one resource-discovery use-case for smart home tokens – maintenance services, rental yield management, short-term rentals for homeowners etc all become optimization problems with tokens that can interoperably find better resources to add value and income or reduce costs in the automated management of my real estate asset’s yield. IMO, the Google of blockchains, generally, is this resource matching pattern. Note that this pattern will obviate much of the upper-funnel value in advertising and branding.
3. Property Token Exchange
Owning the global P2P property exchange is the obvious goal of owning the smart home tokens protocol. Less obvious is how you incentivise its use beyond convenience (which should be compelling). First, you need a good answer for why a property could fetch more value on your exchange than it could in the traditional market. Global liquidity is one dimension but giving capital value to the asset management attributes of high-yield homes is more interesting. Short-term rentals properties, for example, could attract more value if their income performance accrues to the value of the token – allowing whoever owns the exchange to profit from the more valuable (equity management) side of the AirBnB opportunity.
With a global token exchange, you set the rules for liquidity in real estate. A homeowner could eventually retain their deed and sell their token if the ceding protocol allowed for that division of rights. This creates new financing product opportunities. In the future, people (especially the aged) are going to need to keep their home but sell its future capital gains to afford to live in cities – we now have a tool for doing that relatively easily. Governments are obviously going to hate the impact on transfer taxes but you are moving most of their administration to a zero-overhead cloud.
4. Property Token Derivatives Marketplace
Asset-backed derivatives are the most valuable capital opportunity in blockchains. You needn’t monetize the asset-backed token to offer fractionalization, aggregation, indices, futures, options, loans and other derivatives of tokenized property assets. The initial value proposition is obviously segmentation and analysis of the marketplace. It’s infinitely easier if you own #1 and #2 but you could build this marketplace on other token standards and will likely have to support them. If the local property trends can attract global liquidity in search of speculative returns, you’ll create immense new capital value in global real estate assets. I’d rather invest in futures in the Beijing 2-bedroom apartments above the 20th-floor and remain a renter in Cape Town (if that makes any sense).
In all large asset classes, there is an opportunity to create a global economy beyond borders. That strategy demands and rewards a single currency for liquid global trade in the underlying asset. All global (and all US property) property is far more valuable than all USD (and all currency, frankly). Real Estate is the largest opportunity after lending and derivatives for a single currency and has a better shot than both, functionally. It’s the ultimate moat.
Look at what the Binance exchange is doing with their currency – they introduce it as a pass-through for discounting exchange fees if you pay in that currency. You start there and with the payments for all the services in the 4 new opportunities discussed above doing the same thing – support any currency but zero-rate or discount the pass-through use of a property-coin. Demand and breadth of holdings grow organically at first – there can be no air-drops in traditional asset-backed currencies (IMO).
For distribution, you must solve for the MVP use cases first. Obviously, the answer here is global transactions – buyers in Beijing using the same currency to purchase homes in Miami and London without exchange costs. Grease this wheel by solving for KYC/AML requirements by jurisdiction. With increasing currency value, you can offer and demand more interest in local transactions via a property-coin.
The other place to find early liquidity for a new currency is everywhere traditional currencies have failed. This is the final bonus pattern to consider:
6. Token to end homelessness – a social good project
Blockchain asset-hackers are problem solvers. We have unique ability to bring corporate-like coordination and productivity to any resource outside of a firm. There are implications for solving the challenge that philanthropists cannot measure their desired outcome at the cause level despite infinite contributions at the non-profit level. These resources can now be applied in an automated fashion against an aggregate token with the outcome optimized via smart contracts. To understand this pattern better, see the ixo project.
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