The Rise of Real-World Assets: Blockchain Innovation in the Real Estate Market

Real World Assets (RWA) are not a new concept in the cryptocurrency market, as they have existed since 2018. The asset tokenization and security token issuance at that time bore many similarities to today's concept of RWA. However, due to an incomplete regulatory framework and a lack of significant potential return advantages, these early attempts failed to develop into a mature market scale.

In 2022, with the continuous rise of interest rates in the United States, the yield on U.S. Treasury bonds significantly exceeded the stablecoin lending rates in the crypto industry. This made tokenizing U.S. Treasury bonds as RWA assets increasingly attractive to the crypto industry. Some mature DeFi projects, as well as traditional financial institutions, began to explore the RWA space.

In the past two years, several real estate RWA projects have emerged in the market. These projects aim to expand the real estate investment market in multiple ways, diversify real estate investment products, and lower the investment threshold for real estate. This study will conduct a case analysis of these projects, exploring the advantages and disadvantages of real estate RWA design and its potential market. Since these projects mainly target the North American real estate market, the relevant policies, regulations, and market conditions discussed will primarily focus on the North American region.

Methods for Tokenizing the Real Estate Market

The real estate market is a vast field that contains enormous investment opportunities. A study conducted in March 2023 showed that the value of the North American publicly listed real estate market reached an astonishing $1.3 trillion. Meanwhile, the global publicly listed real estate market size is $2.66 trillion.

The core objectives of tokenizing the real estate market include: creating more diversified and flexible real estate investment products, attracting a broader range of investors, and enhancing the liquidity and value of real estate assets. These products are primarily manifested in three forms:

1. Fragmented real estate ownership financing
2. Specific Area Real Estate Market Index Product
3. Real Estate Token Mortgage Lending

In addition, the tokenization of real estate on the blockchain has the potential to enhance the transparency of real estate assets and the democratic governance.

If you understand Real Estate Investment Trusts (REITs), you will find that REITs and Real Estate RWAs have many similarities in providing fragmented property investment opportunities. Both effectively lower the investment threshold and enhance the liquidity of real estate assets. However, traditional REITs typically do not offer management opportunities or ownership to investors, maintaining a centralized operating model. Nevertheless, their asset review, operations, and investment structure within a strict regulatory framework provide a template that can be referenced for Real Estate RWA projects.

By observing the operation of real estate RWA projects over the past two years, we can summarize some of their advantages and disadvantages:

Advantages:

• Lower the investment threshold
• Improve asset liquidity
• Enhance Transparency
• Achieve global accessibility
• Automated Management

Disadvantages:

• Regulatory uncertainty
• Technical Risks
• Market Volatility
• Manage Complexity
• Liquidity issues

However, upon深入研究具体案例时, we found that due to differences in management and product approaches, each project encountered different actual situations during its operation.

Case Study

The following analyzes three representative real estate RWA projects. It is important to note that these projects are still in their early stages, and their products have not yet undergone long-term and extensive market validation and testing.

RealT

RealT was launched in 2019 and is one of the earliest RWA projects in real estate, focusing on tokenizing residential real estate in the United States for retail investors through Blockchain technology.

RealT purchases residential properties and tokenizes the properties held in accordance with U.S. regulations. The responsibilities of managing, maintaining, and collecting rent for these properties are entrusted to third-party management agencies. After deducting expenses, the rent generated from these properties is distributed to their token holders. It is worth noting that the protocol does not require RealT to participate in the investment of the property tokens they bring to market.

For example, if we take a property, the total value of the real estate tokens is $323,020, with each token priced at $52.10, totaling 6,200 tokens issued. The property generates $2,600 in monthly rental income. After deducting a total of $622 in operating and management expenses, the monthly net profit is $1,978, amounting to $23,736 annually. Therefore, each token receives a distribution of $3.83, resulting in an annual profit rate of 7.35%.

RealT provides 100% of the tokens to the market, which means that RealT does not need to co-invest with customers and maintains an almost risk-free model for operation. The management agency takes 8% from the rent and receives the remaining portion from maintenance fees, while the investment platform charges a 2% fee solely for tokenizing properties, selecting management agencies, and overseeing management.

However, decentralized ownership also brings some challenges. When an investor's stake is too small, the management costs of the company can become unsustainable. Furthermore, there may be conflicts of interest between RealT and the property token holders.

According to data analysis, about 90% of RealT investors invest less than $500, approximately 9% of investors invest between $500 and $2,000, and 1% of investors invest more than this amount. This indicates that RealT has successfully created a real estate investment market for retail investors to some extent and has increased the liquidity of the housing market.

From the company's structure perspective, RealT adopts a series of limited liability company (LLC) frameworks, aimed at ensuring that the financial or legal issues of one property do not affect the operations of other properties or the parent company.

Parcl

Parcl is a DeFi investment platform that allows users to trade on the price movements of the global real estate market. Parcl has launched a price data source to create real estate indices for specific areas based on sales history. Investors can speculate on property price trends and establish bullish or bearish positions.

This approach avoids the legal issues involved in actual real estate operations. Parcl has received investments from several well-known companies, but after more than a year of operation, it seems to have not attracted much attention, with low daily trading volume and active user numbers.

Despite Parcl's products being easy to use and rapidly upgraded, and the team actively launching various user acquisition programs, market attention and share remain relatively low. This may partly explain that the cryptocurrency market is not yet fully ready to embrace real estate index products.

Reinno

Reinno is a project that was launched in 2020 and ceased operations in 2022, which introduced two products related to real estate RWA that are worth mentioning.

The first product is a loan service based on tokenized real estate. Property owners can submit property documents to Reinno, and after approval, Reinno will create a special purpose vehicle company for them. Then, Reinno will create a smart contract for the real estate tokens, which owners can deposit as collateral for loans and engage in borrowing.

The second product is mortgage financing, where users can tokenize the ownership of real estate after using bank mortgages to purchase properties for financing. The funds obtained are used to repay the bank mortgage, and thereafter, the client repays the loan to the protocol at a fixed interest rate.

Reinno's operating model has some obvious risks, such as the difficulty of holding borrowers legally accountable in the event of default, and the "double spending" issue that may arise from property ownership transfers. These risks could be one of the reasons for the project's cessation of operations, and in the future, real estate RWA will require a more mature legal framework to address these issues.

Conclusion

Real Estate RWA is a relatively emerging field that has not yet formed a clear market size or generated dominant projects. The projects currently in operation are relatively small in terms of market size and user base. This field requires strict compliance operations and a mature legal framework for regulation. Some projects adopt a risk-isolated corporate structure or choose real estate-related financial products as investment targets to reduce operational risks.

However, to fully realize the maximum potential of real estate RWA, legislative advancements and operational compliance are indispensable. Currently, there is no clear and consistent regulatory framework established for real estate RWA. There are discrepancies in the classification of tokens among different regulatory agencies, and there is a lack of an international regulatory framework for reference. This regulatory inconsistency may pose a threat to potential investors and impact the long-term viability of property tokenization.

Nevertheless, many well-known financial enterprises and cryptocurrency companies are still actively exploring the real estate RWA sector. Some projects have already demonstrated the feasibility of their products in preliminary short-term operations. Considering the enormous scale of real estate in the financial investment field, with the establishment and improvement of the relevant legal framework, real estate RWA is expected to usher in rapid development.