The Development of Real World Assets in the Crypto Assets Market

The concept of real world assets ( RWA ) appeared in the Crypto Assets market as early as 2018, bearing many similarities to the asset tokenization and security token issuance of that time. However, due to inadequate regulation and a lack of significant return advantages, these early attempts failed to form a mature market scale.

In 2022, as U.S. interest rates rose, the yields on U.S. Treasury bonds significantly exceeded the lending rates of stablecoins in the crypto industry. Therefore, tokenizing U.S. Treasury bonds as RWA targets has become increasingly attractive to the crypto industry. Some mature DeFi projects and traditional financial institutions have begun to explore RWA.

In the past two years, a small number of real estate RWA projects have emerged in the market. They aim to expand the real estate investment market, diversify real estate investment products, and lower investment thresholds. This study will conduct case analyses of these projects, exploring the advantages and disadvantages of real estate RWA design and its potential market. The discussion will mainly involve relevant policies, regulations, and market conditions in the North American real estate market.

Methods of Tokenizing the Real Estate Market

The real estate market is a huge investment field. Research from March 2023 shows that the North American listed real estate market is valued at $1.3 trillion, while the global listed real estate market is $2.66 trillion.

The core objectives of the tokenized real estate market include: creating more diverse and flexible real estate investment products, attracting a broader range of investors, and enhancing the liquidity and value of real estate assets. There are three main forms of expression:

1. Fragmented real estate ownership financing
2. Specific Area Real Estate Market Index Product
3. Mortgage lending with real estate tokens

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

Real Estate Investment Trusts ( REIT ) have many similarities with Real World Assets (RWA) in providing fragmented property investment opportunities, both effectively lowering the investment threshold and enhancing 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 scrutiny, operations, and investment structure within a strict regulatory framework provide a reference framework for real estate RWA projects.

By observing the operation of real estate RWA projects in the past two years, we have gained some clear insights into their advantages and disadvantages.

The main advantages of real estate RWA projects include:

• Lower the investment threshold
• Improve asset liquidity
• Increase investment transparency
• Achieve fragmented ownership
• Broaden the investor base

The main disadvantages include:

• Legal and regulatory uncertainty
• The cost of asset management and maintenance is high
• Potential conflict of interest
• Liquidity Risk
• Technical Risk

Specific projects encounter different situations in actual operations due to differences in management and product approaches.

Case Analysis

RealT

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

RealT purchases residential properties and tokenizes the properties held in accordance with U.S. regulations. The management, maintenance, and rent collection of the properties are handled by third-party institutions. After deducting fees, the rent is distributed to the token holders. RealT is responsible for the tokenization process, but is legally separated from the company that holds the real estate assets.

Taking a property in Montgomery as an example, the total value of the property tokens is 323,020 USD, with each token priced at 52.10 USD, totaling 6,200 tokens. The monthly rental income is 2,600 USD, and after deducting 622 USD for operating and management expenses, the monthly net profit is 1,978 USD, amounting to an annual total of 23,736 USD. Each token receives a distribution of 3.83 USD, with an annual profit rate of 7.35%.

RealT provides 100% of the tokens to the market without needing to co-invest with clients, maintaining an almost risk-free operating model. The management institution takes 8% from the rent and receives the remaining portion from maintenance fees, while the investment platform only charges a 2% tokenization and supervision management fee.

However, decentralized ownership also brings challenges. When investors have too small a stake, the company's management costs may become too high and unsustainable. There may be conflicts of interest between RealT and token holders. If RealT's shareholding ratio is too large or too small, it may affect management efficiency and the fulfillment of supervisory responsibilities.

By analyzing the ten recently sold out real estate tokens from RealT, it was found that most properties are located in Detroit, with about 500 token holders, among which two properties have over 1,000 holders. Approximately 90% of investors invested less than $500, 9% invested between $500 and $2,000, and 1% invested more than this amount. This indicates that RealT has successfully created a real estate investment market for retail investors to a certain extent, and has increased the liquidity of the housing market.

According to blockchain data, RealT has distributed approximately $6 million in rental income. The platform fees range from 2.5% to 3% of the rental income, which amounts to about $150K-$180K in revenue over the past two years. However, the specific profit that RealT gains from the rental income remains unknown.

From a corporate structure perspective, RealT has established multiple entities in Delaware, including the core operating entity Real Token Inc., the parent company of the real estate company Real Token LLC, and a series of LLCs formed for each investment property. This structure is designed to isolate risks and ensure that issues related to a single property do not affect other properties or the operations of the parent company.

Parcl

Parcl is a DeFi investment platform that allows users to trade the price fluctuations of the global real estate market. Parcl provides real estate-related synthetic assets through an AMM structure. Parcl has launched a price data source to create real estate indices for specific regions. Investors can speculate on the trends in property prices.

This approach avoids the legal issues associated with actual real estate operations. Although it is questionable whether Parcl truly qualifies as a real estate RWA project, it has received investment from several well-known companies in the industry and is worth noting when discussing the diversification of real estate RWA products.

Parcl's testnet was launched on Solana in May 2022, with a current TVL of $16 million. However, after more than a year of operation, Parcl seems to have not attracted much attention, with daily trading volume of less than $10,000 and fewer than 50 active users.

Although the Parcl product is user-friendly and upgrades quickly, the index market design is relatively mature, and the team is actively promoting it, it still maintains a relatively low market attention and share. This indicates that the Crypto Assets market may not yet be ready to embrace real estate index products.

Reinno

Some large Crypto Assets companies are also exploring Real World Asset (RWA) products in real estate. Ripple announced that its team is trying to support users in tokenizing properties and securing mortgages. MakerDAO is also collaborating with partners to support property collateralized lending.

Reinno is a project that was launched in 2020 and ceased operations in 2022. Although it did not leave much of a mark on the market, it introduced two notable real estate RWA-related products.

The first is a loan service based on tokenized real estate. Property owners can submit property documents to Reinno, and upon approval, Reinno will create a special purpose vehicle company and establish a smart contract for the real estate tokens. Owners can use the tokens as collateral for borrowing.

The second is mortgage financing. After users purchase real estate using a bank mortgage, they can tokenize the ownership of the property for financing. The funds obtained are used to repay the bank mortgage, and the users subsequently repay the loan to the protocol at a fixed interest rate.

Reinno's operations are still centralized and offline, where clients usually need to submit property documents in person. This approach carries obvious risks, such as difficulties in litigation when borrowers default and the "double spending" issue caused by the transfer of property ownership. These risks could be one of the reasons for the project's cessation of operations; 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 concept that has not yet formed a clear market scale or leading projects. Currently operating projects are relatively small in scale and user base. This field requires strict compliance operations and a mature legal framework. Some projects adopt risk-isolated corporate structures or choose related financial products as investment targets to reduce operational risks. However, to fully realize the potential of real estate RWA, legislative progress and operational compliance are indispensable.

In terms of legislation, there is still no clear and consistent framework for real estate RWAs. Different regulatory bodies in the United States have divergent classifications of tokens and there is also a lack of an international regulatory framework for reference. This inconsistency leads to unclear rules and a chaotic process, threatening potential investors and jeopardizing the long-term viability of property tokenization.

Despite the chaotic regulatory environment, many well-known companies are attempting real estate RWA, and a small number of projects have preliminarily proven the feasibility of the products during 1-2 years of operation. As real estate is a large sector in the financial investment field, real estate RWA is expected to experience rapid development with the establishment and improvement of relevant legal frameworks.