Introduction

The concept of Real World Assets (RWA) is not a recent introduction in the cryptocurrency market. It has been in existence since at least 2018, when asset tokenization and Security Token Offerings (STO) shared many similarities with today's RWA concept. However, due to immature regulatory frameworks and a lack of significant potential return advantages, these early attempts did not develop into mature market scales.

By 2022, as the United States continues to raise interest rates, the yield of US Treasury bonds significantly exceeds the stablecoin lending rates in the cryptocurrency industry. Therefore, tokenizing US Treasury bonds as RWA targets is becoming increasingly attractive to the cryptocurrency industry. Mature DeFi projects such as MakerDAO, Compound, and Aave, as well as traditional financial institutions such as Goldman Sachs, JPMorgan, Siemens, and even some governments, have begun to explore RWA.

In the past two years, a small number of real estate RWA projects have appeared in the market. They aim to expand the real estate investment market in various ways, diversify real estate investment products, and lower the entry barriers for real estate investors. This study will conduct a case analysis of these projects, analyze the design advantages and disadvantages of real estate RWA, and their potential market. As these projects mainly target the real estate sector in North America, the discussion of relevant policies, regulations, and market conditions will mainly involve the real estate market in North America.

Methods for Tokenizing Real Estate Markets

The real estate market is a vast field full of investment opportunities. According to a Statista study released in March 2023, the value of the listed real estate market in North America reached a massive $13 trillion. The global listed real estate market is valued at $2.66 trillion.

The core appeal of tokenizing the real estate market is to achieve one or more of the following goals: creating more diversified and flexible real estate investment products, attracting a wider range of investors, and increasing the liquidity and value of real estate assets. These products typically take three main forms:

1) Fractional real estate ownership financing.

2) Specific regional real estate market index products.

3) Collateralized lending using real estate tokens.

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

If you are familiar with Real Estate Investment Trusts (REITs), they are a type of company that holds profitable real estate and manages or finances it through real estate. REITs provide investment opportunities similar to mutual funds, allowing ordinary investors to access real estate investment income and total returns similar to dividends, and help the local real estate market grow. REITs and real estate RWA have many similarities in providing fractional real estate investment opportunities, effectively reducing investment barriers and enhancing the liquidity of real estate assets. However, traditional REITs typically do not provide investors with management opportunities or ownership, maintaining a centralized operating model. Nevertheless, within a strict regulatory framework, their review of assets, operations, and investment structures provides a reference framework for real estate RWA projects.

Through observing the operation of real estate RWA projects over the past two years, we have gained a clear understanding of their advantages and disadvantages.

Generally, real estate RWA projects have the above advantages and disadvantages. However, when delving into specific cases, it is found that due to differences in management and product methods, each project encounters different practical situations during operation.

Case Analysis

In this chapter, I have selected three real estate RWA projects for analysis. Each project adopts different methods to tokenize the real estate market and has a certain representativeness in its respective field. It is important to note that these projects are still in the early stages, and their products have not yet undergone long-term and extensive market validation and testing.

‣RealT

RealT, launched in 2019, is one of the earliest real estate RWA projects, focusing on tokenizing US residential real estate for retail investment through the Ethereum and Gnosis blockchains (mainly on Gnosis).

RealT purchases residential properties and tokenizes the held properties in accordance with US regulations. The responsibility for managing, maintaining, and collecting rent for these properties is entrusted to a third-party management agency. After deducting expenses, the rental income generated by these properties is distributed to their token holders. While RealT is responsible for the tokenization process, they are legally isolated from the company holding the real estate assets. As stated on their website, if the company defaults, token holders have the right to designate another company to manage the held properties. However, it is worth noting that the agreement does not require RealT to participate in the investment of the real estate tokens they push to the market. Token holders can receive a monthly share of the rental income from the properties, with the amount reduced by approximately 2.5% for maintenance reserves and typically around 10% for management fees.

Taking the property in Montgomery as an example, the total value of the real estate tokens is $323,020, with a price of $52.10 per token, and a total of 6,200 tokens issued. The property generates a monthly rental income of $2,600. After deducting a total of $622 in operating and management fees, the net profit is $1,978 per month, totaling $23,736 annually. Therefore, each token receives a distribution of $3.83, resulting in an annual profit rate of 7.35%.

For this property, RealT offers 100% of the tokens to the market, meaning RealT does not need to co-invest with clients and maintains a nearly risk-free operating model. The management agency takes 8% from the rent and the remaining portion from the maintenance fees, while the investment platform charges a 2% fee for tokenizing the properties, selecting the management agency, and supervising management. Through this approach, the RealT team can save a significant amount of management time, focusing on finding qualified properties and tokenizing them for the market.

However, while fractional ownership helps spread the risk among investors, it also introduces challenges. When investors' stakes are too small, the company's management costs become unsustainable. Laurens Swinkels' report explains the conflict of interest between real estate token holders and RealT. RealT selects a management agency to manage the properties it owns; if RealT has a large ownership stake in the properties, they will strive to reduce management costs, as poor management will have a greater negative impact on them. However, if RealT's ownership stake is too large, it will reduce the liquidity of the tokens, and small property shareholders will not fulfill their supervisory responsibilities. All token holders expect major shareholders to supervise the hired management agency efficiently. On the other hand, if RealT's ownership stake is very small, RealT may lack sufficient motivation to diligently select a management agency and actively participate in supervision, making it very difficult to effectively supervise the management agency for numerous retail investors.

By examining the latest ten sold-out real estate token properties in the RealT market and using relevant blockchain explorers to determine the number of holders for each property, it is evident that RealT has diversified the properties into different numbers of tokens to ensure each token's price is around $50. Most properties are located in Detroit, and there are approximately 500 token holders, with two properties having over 1,000 token holders. Now, combining the token quantities held by each holder to calculate the investment range of RealT investors.

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

Furthermore, based on transaction data queried from RealT's primary operating network Gnosis wallet address (wallet address: 0xE7D97868265078bd5022Bc2622C94dFc1Ef1D402), RealT has distributed approximately $6 million in rental income. Platform fees fluctuate between 2.5% and 3% of the rent, equivalent to platform revenue of approximately $150K to $180K over the past two years, depending on maintenance, insurance, and tax expenses. However, since RealT is not required to participate in real estate investments and there are no specific restrictions or explanations on its level of involvement if chosen, the profit RealT gains from rental income is unknown.

From a corporate structure perspective, RealT has established Real Token Inc. as the core entity in Delaware. This entity does not own any real estate assets; it only serves as the operating entity for the RealT project. Additionally, RealT has also established Real Token LLC as the parent company of a series of real estate companies in Delaware. Like Real Token Inc., Real Token LLC (LLC: Limited Liability Company) does not own any real estate assets; its main purpose is to simplify legal procedures, allowing users to invest in all properties by contracting with only one company. Finally, RealT has established a corresponding series of LLCs for each invested property. As a subsidiary of Real Token LLC, each series LLC owns specific properties and their corresponding tokens. This structure aims to ensure that financial or legal issues with one property do not affect the operations of other properties under RealT or the parent company.

‣Parcl

Parcl is a DeFi investment platform that allows users to trade price movements in the global real estate market. Parcl is used to market synthetic assets related to real estate through an AMM architecture. Parcl has launched Parcl LabsPrice Feed to create specific regional real estate indices based on its sales history records. The length of the historical records can vary based on the frequency of property transactions. After the index is created, investors have the opportunity to speculate on the price trends of real estate and establish long or short positions in the region's real estate prices.

This approach allows Parcl to avoid legal issues involved in actual real estate operations because there are no real property transactions. It can also be questioned whether it truly qualifies as a real estate RWA project, as it does not meet the standards mentioned above. However, it is a relatively popular RWA project, receiving investments from Coinbase, Solana Ventures, DragonFly, and many other well-known companies in the industry, and its uniqueness justifies its inclusion in discussions of diversified real estate RWA products.

Parcl's testnet was launched on Solana in May 2022, and its TVL is currently $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 daily active users.

(The decrease in trading volume on October 26 is due to the upgrade of Parcl V3, the change of pool addresses, and the closure of many trading pairs, so the trading volume after this date is not included.)

Parcl's products are user-friendly and upgrade quickly, and the design of Parcl Labs price provider and index market is relatively mature. In terms of operations, the Parcl team actively launched Parcl Point, Real Estate Royale, and other user acquisition plans. Despite these advantages and the support of many well-known investment institutions, Parcl still maintains a relatively low market attention and market share, with a small user base and limited trading volume. This may to some extent prove that the cryptocurrency market is not yet ready to embrace real estate index products.

‣Reinno

Large cryptocurrency companies such as Ripple and MakerDAO are also exploring products related to real estate RWA. In July, Ripple announced that their central bank digital currency team is attempting to support users in tokenizing real estate and using it as collateral for loans. MakerDAO is also collaborating with Robinland to support real estate collateralized lending. RealT also offers the option to use tokenized real estate as collateral for loans, but this service is limited to the real estate tokens they issue. Essentially, this service is more similar to token lending products and does not substantially enhance the capital liquidity of individual real estate owners.

Reinno is a defunct project launched in 2020 and ceased operations in 2022. Although it did not leave much of a mark in the market, it introduced two products related to real estate RWA worth mentioning.

The first product is a loan service based on tokenized real estate. When property owners need financing, they can submit property documents to Reinno. Once approved, Reinno will create a special purpose vehicle company (also known as SPV, a subsidiary created by a parent company to isolate financial risk. Its legal status as an independent company ensures its obligations are secure even if the parent company goes bankrupt. In the US, SPVs are typically the same as LLCs.) for them in Delaware. Then, Reinno will create a smart contract for the real estate tokens, which owners can use as collateral for loans and borrow, with the loan limit based on the token value.

(The reason why RealT, Reinno, and many other projects choose to register in Delaware is because: 1. Delaware has the most comprehensive, fastest-updating, and most professional corporate legal system in the US and even globally, providing more security and reliability compared to other US states and jurisdictions worldwide; 2. Most US tech startups, two-thirds of Fortune 500 companies, and 80% of US IPO companies choose to register their companies in Delaware; 3. Anyone worldwide can easily set up a Delaware company from home using online services, with the lowest cost being only a few hundred dollars. This registration service even provides access to all the tools and documents needed to operate the company, including an Employer Identification Number (EIN) and tax ID, and automatically generates company bylaws.)

The second product is mortgage financing, where after users purchase a property with a bank mortgage, they can tokenize property ownership for financing. The funds obtained are used to repay the bank mortgage, and the customer subsequently repays the loan to the agreement at a fixed interest rate.

Reinno's operations are still centralized and offline, and typically, customers need to visit the office and submit property documents. Adopting an approach like Reinno's has some obvious risks. First, if the borrower chooses to default and stop repaying the loan, it would be difficult for Reinno, as a tokenization service provider and not the lender, to sue the borrower. In reality, Reinno does not actually own the mortgaged property; the loans are essentially provided by users who choose to provide funds on Reinno. Due to the lack of a direct loan contract between the borrower and the lender, especially in the context of fragmented real estate token financing, there is no comprehensive legal framework to protect these lenders. Reinno has not provided detailed measures to mitigate this default risk. Secondly, if the property owner decides to sell the house after borrowing or stops repaying the mortgage to the bank after completing the collateral financing with Reinno, Reinno cannot effectively prevent this transfer of property ownership, resulting in the lenders effectively "double-spending" the value of the property. These obvious risks may be one of the reasons for the project's cessation of operations, and future real estate RWAs will need a more mature legal framework to address these issues.

There are some other real estate RWA projects that have not been included for the following reasons: 1. They are very similar to the mentioned projects and have a smaller market share; 2. They are still in the conceptual stage and lack sufficient information for meaningful discussion; 3. They are an RWA project and can support real estate business, but their business is currently focused on other RWAs, such as bonds or securities. Here is the list of these projects for those interested to explore on their own.

Conclusion

Real estate RWA is a relatively new concept that has not yet established a clear market size or produced leading projects. Currently, the projects operating in this field 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 have adopted risk-isolating corporate structures or chosen real estate-related financial products as investment targets to reduce operational risks. However, legislative progress and compliance operations are essential to fully realize the potential of real estate RWA—buying, selling properties, and mortgage legislation.

In terms of legislation, there is no clear and consistent framework for real estate RWA to follow. The US Securities and Exchange Commission classifies most tokens as securities, the Commodity Futures Trading Commission considers some tokens as commodities, the US Department of the Treasury's Financial Crimes Enforcement Network classifies certain tokens as currencies, and the Internal Revenue Service considers some tokens as taxable property. Additionally, there is no international regulatory framework for reference. Inconsistent regulatory agency classifications of real estate tokens lead to unclear rules and chaotic processes, both of which threaten potential investors and jeopardize the long-term viability of real estate tokenization.

However, despite such a chaotic regulatory state, many well-known financial institutions and cryptocurrency companies are still striving to explore real estate RWA, and a small number of projects have limitedly proven the feasibility of the product in 1-2 years of operation. Real estate, as a massive sector in the financial investment field, is believed to experience rapid and vigorous development with the establishment and improvement of relevant legal frameworks for real estate RWA.

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