Accelerating DeFi Adoption in Real Estate

Citadao.io | 9 Dec 2022

Using DeFi for Real Estate

Real estate has always played a unique and integral role in the economy, affecting how almost every consumer makes decisions around money. For most people, personal real estate holdings serve as both their primary investment and their greatest source of wealth and savings. Commercial real estate holdings also constitute a major economic driver and the sector is responsible for creating many jobs.

Learning from the Past Mistake

Let’s take a look at the real estate industry in the world’s largest economy, the United States. Historically, real estate has accounted for roughly 18% of US GDP, with real estate construction alone accounting for 6.2% of US GDP in 2018 (down from a pre-recession peak of 8.9% in 2006). The real estate market and the broader economy often mirror each other, with rising home prices providing a boost to the economy (and falling home prices dragging down the economy). During times when home prices are in decline, the number of home equity loans available become limited. This in turn causes homeowners’ cash to be tied up in their homes, severely curtailing personal consumption. When you consider how close to 70% of the US economy is based on personal consumption, it’s easy to see how a bad real estate market is a strong indicator of economic recession. Conversely, a strong real estate market means more disposable income, more construction jobs, spending on furnishing new homes, and other effects which ripple through to create a flourishing economy.

The 2008 recession provided direct confirmation of these close links between the real estate market and the broader economy. Home mortgages were used to support trillions of dollars of financial derivatives, such as mortgage backed securities, which were then purchased by pension funds, corporations, and wealth managers. When borrowers defaulted, the market lost confidence in the value of these mortgage backed securities and the ensuing rush to exercise credit default swaps drove the entire US economy to the brink of collapse.

DeFi the Next Innovation for Real Estate Finance

Since then, lending standards have risen, homeowners have taken less equity out of their homes, and subprime mortgages now make up a smaller percentage of the mortgage market. Nonetheless, a significant portion of the finance industry is still based on securitization of real estate. In addition, historically real estate tends to surge when there is a correction in stocks, since real estate is a hard asset unlike stocks. Wall Street traders closely track indices such as VIX and Case-Shiller in order to reposition their investments in response to changes in the real estate market.

Up until now, Wall Street has taken only a passing interest in DeFi. But with Citadao directly linking real estate value to blockchain assets, it’s very possible that Wall Street will see their turf being encroached upon by DeFi organizations and start paying attention. At that point, it will be very interesting to see what their response will be. Unlike Decentralized Autonomous Organizations (DAO) like Citadao, Wall Street banks must navigate their own complex bureaucracy when pursuing new projects. It’s certainly possible that they would try to create their own tokenized real estate platform, but it’s very unlikely given the institutional inertia they would face.

Complementary rather than Competitive

Given that the Citadao platform by its very nature allows real estate investments to be more liquid, diversified, and composable, it’s more likely that Wall Street banks may simply obtain these benefits by holding tokens linked to real estate through Citadao. In that case the banks would be able to mix and match their exposure to various real estate properties based on their specific investment thesis and risk tolerance, and do so in a completely liquid way that allows them to retain full optionality. Rather than seeing Citadao as competition, they may very well see it as a complementary source of value that can be deployed alongside their more traditional investments. They may even deploy Citadao’s tokenized real estate into more complex financial products such as derivatives. In the process, they would be legitimizing DeFi’s role as an important (and sometimes superior) part of the broader financial world.

The billions of dollars of value locked into DeFi smart contracts seem like a rounding error from the perspective of the trillions being managed by Wall Street banks. However, by adding value from Wall Street’s traditional turf of real estate into the DeFi ecosystem, Citadao may be able to convince them to finally pay attention and incorporate DeFi assets into their portfolios. This win-win scenario would provide both a new flow of funds into DeFi, and provide a more liquid and diversifiable asset for Wall Street to gain exposure to real estate. ■

The Author

CitaDAO is a Decentralized Finance (DeFi) platform for Real Estate to be tokenized on-chain, built on the Ethereum ecosystem. It is run as a Decentralized Autonomous Organization (DAO). CitaDAO has successfully tokenized an industrial real estate in Singapore in May 2022 at a premium to its Real World Value, validating its vision that Real Estate on Chain is more valuable than Real Estate In Real Life.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official position of Proptech Institute, including its directors, employees and affiliates.

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