Crowdfunding, Real Estate & Blockchain

Overview

Several experiments and projects mixing real estate with blockchain already exist. In broad strokes the projects function like this:

1. The project researches real estate properties and chooses a certain property that should be brought onto the blockchain.
2. A crowdfunding proposal is put up: Everyone can commit a certain amount of digital money towards the crowdfunding. The amount of money committed by a single person will represent their share of the property.
   a) If the project funding goal is not reached, the money is returned.
   b) If the project funding goal is reached, the digital money is used to buy the property and the people who committed money receive tokens representing their share.
3. On the legal side in the “real world”, a SPV in the form of a LLC is incorporated to take ownership of the property.
4. This LLC will also be responsible for administering the property.
5. Rental income (minus expenses) is passed on to the token holders according to to their share holdings.

Liquidity & Capital Efficiency

The blockchain offers some advantages compared to the traditional market when it comes to liquidity and capital efficiency:

1. The tokens that represent ownership into the property can be freely traded. To avoid the disadvantages of peer-to-peer trades, a liquidity pool can be established which allows token holders to trade 24/7 at the market price.
2. Token holders can choose to provide their tokens as liquidity into these token pools, earning a small % fee for every trade. This small % fee is paid by the person trading, but it is still comparatively small to what a similar trade would cost in the traditional financial system.
3. Tokens can also be put up as collateral by their owner, which would allow them to borrow against the real estate share (thus increasing capital efficiency of the token holder - and since real estate property prices rarely have large sudden drops in prices, the collateral should be safe from liquidation compared to other collateral - like BTC - used in the crypto world).

All of these functions are provided by smart contracts on blockchains like Ethereum and can run without any human intervention once they have been setup. Settlement of transactions usually happens within a few minutes.

Capital Pooling & DAOs

DAO stands for “decentralised autonomous organisation”. Essentially it’s a (usually online) community or organisation whose ruleset is governed by smart contracts on the blockchain and whose members vote on decisions with tokens. Some DAOs are run as investment DAOs: They pool digital money together and invest into other crypto projects — or for example into tokenised real estate.

The pooling of money can happen with different forms of crypto currencies - for example BTC, ETH or USDC. Usually the digital money is deposited into a smart contract, which will automatically return the funds in case a certain threshold isn’t reached within a certain time period.

Once capital has been pooled together by a group of people (or group of organisations) and a real estate property is tokenised, that group of people itself can become a DAO: There is a core set of rules that is encoded into smart contracts (think “constitution” or “bylaws” of the organisation - this may for example govern the distribution of rental income) and decisions are taken via a token majority vote (eg voting on which company to hire for winter maintenance).

Further Reading

1. Article about Real Estate Tokenisation: https://medium.com/alpaca-vc/waking-up-from-the-dream-of-real-estate-tokenization-d90c497e435c
2. EY Article: https://www.ey.com/en_ch/real-estate-hospitality-construction/tokenization-from-illiquid-to-liquid-real-estate-ownership
3. KPMG Presentation: https://assets.kpmg.com/content/dam/kpmg/cn/pdf/en/2020/04/real-estate-tokenization.pdf
4. Propy: https://propy.com/browse/