Blockchain in Traditional Assets

Before 2020, the popularity of Blockchain was restricted to nerdy tweets and closed groups of BitCoin Maxis. But come pandemic, the interest in Blockchain technology and what all it has to offer has gone up many folds worldover. Just taking the google hits on the Keyword Blockchain, you can see it almost quadruple from 175k to over 780+ a day!

But what can be behind this rise in popularity?

I mean, I understand that Blockchain is probably at the ascension of the hype cycle. But the other major reason is the asset classes which leverage blockchain technology saw their value grow many fold over the last 4 years, from their peak of ?10L in 2018 to the 2021 peak of nearly ?50L.

Using Bitcoin as a proxy as it is the most popular digital asset built using Blockchain

So that brings us to today’s topic. Can Blockchain be used as a means of building our wealth? And does investing in the future of blockchain still remain as one reserved for the early tech adopters, or can it spill over into more familiar asset classes as well ?

But a bit of brief on why I chose this topic for today’s edition of my newsletter. Well, one is because I was trying to research into whether NFT is a bubble or not (more on that later), but also I chanced upon Fidelity’s report on Blockchain and the future of Finance, as well as JP Morgan’s entry into the MetaVerse and what that means for the rising tech- Blockchain.

And that in my opinion is really debate worthy. Like how much of these innovations will be there in metaverse, will it be restricted to the digitally savvy, or will we see spill overs of the benefits into the physical world. And no, we will not just be talking about NFTs. I know a lot of us when we think of blockchains and its benefits in the physical world often think of NFT but that is not the scope of this newsletter.

?I know a lot of people as you, when we think of, you know, blockchain and the physical world, Immediately. The one use case that comes into our mind is on the blockchain front. We're not going to be talking about that. We will touch upon it, but not so exhaustively on blockchain NFTs alone.

But first let us take a step back and first lay down the different asset classes, shall we?

Types of Assets

So the first asset type most of us Indians would be familiar with would be the savings and deposits. Be it our Savings accounts or fixed and recurring deposits. These are the most liquid of assets you’d have. But the returns on it are abysmally low. Like our savings accounts get only a 3-4%, while inflation sits at 6%.

At the next level of not so highly liquid and not as safe either are the Equities and Stocks. And these if you’ve invested wisely over the years could’ve given you quite a decent amount! And given the number of new demat accounts opened since the lockdowns I am guessing a lot of retail folks like you and me have realised that too.

Slightly more complex to get into but with decent returns and a tad lesser risk are Bonds. Corporate and Government. And because they are so tricky, and lets face it, slightly less transparent and accessible most of us mere mortal prefer investing in them via mutual funds. But of course startups like Wint, Grip, GoldenPi are trying to democratize that market.

Next, we have the illiquid assets, which are the ones that cannot be readily converted into cash. And one that takes up the bigger slice of the pie in terms of value of the investment is, you guessed it, Real Estate.?And we will get to real estate in just a bit.

But let us look at the newer, shinier asset class, the digital ones.

Types of Digital Assets

How does one define digital asset ? Any digital material owned by an enterprise or individual including text, graphics, audio, video and animations. A digital asset is owned by a company if it was created on the computer by its employees or if it was custom developed for and purchased by the organization. Images scanned into the computer are also a digital asset if the original work was owned by the company.

Going by this definition there are in essence 3 ways to check whether something counts as a digital asset or not. It is “Owned” by a legal entity, person or corporate. It has some value to the person owning it. And because it resides on the internet, it has to be searchable, i.e. have some form of Metadata.

But to understand the evolution of digital assets it is also important to understand the evolution of the Web.

So really, the importance of digital assets came about because the web where we spend so much of time started rewarding our behaviours, in a way that did not depend on a central authority or group of entities. And this was Possible because of Blockchain.

But before we go any further let us also take a?brief look at the types of digital assets, and broadly I would categorize them as Coins and Tokens. Now most people use them interchangeably. But there is a fine line between the two.

when we talk about coins, they are built natively on the blockchain. Which is why you will hear a lot Bitcoin enthusiastic saying that original discovery of the blockchain was and will be Bitcoin. Which is why Bitcoin is going to moon. But anyway that is another discussion for another time hopefully!

And now that we know its built natively on the blockchain it takes that much of computational power to “Mine” a coin. And that is the only way to distribute coins btw.

Whereas when it comes to Tokens, it is like a layer that sits on top of an exisiting blockchain network. Which is why they are relatively easier to distribute. Take the most popular case of tokens, NFTs. Literally everyone is making one now.

But NFTs aren’t truly decentralised as there is a central agency whose blockchain you use to create and distribute the tokens. And hence they reserve the rights to price that token creation any way they deem fit. Huh, that explains the high GAS fees doesn’t it?

Real Estate as an Asset Class

“All of this is a good crash course Kamalika, but how does this tie in with physical assets ? And more importantly why did you bait us so long with Real Estate investing ?”

I am sure a lot of you are thinking just that. Well I shall cover that in the coming section, but bear with me a little bit as I cover how “lucrative” the real estate market has been historically.

So over the last 5 years, real estate rates grow 37%, that is just over 7% per annum. While inflation sat at 6.5%, wiping out all of your gains, if any, after paying an interest of 7-11% on it. And then there were rental yields. Reports suggest that for a fully furnished property, rental yields can go as high as 5%. Which means I’d take at least 20 years to recover the capital I put in to the house in the first place.

And yet, real estate continues to be a prime target for several people, in their financial planning exercises.

But what if I told you there could be investments that gave you a yield of 13% on properties ? And that too without much furnishing and fanfare required ? I am talking about Commercial Real Estate.

Still this form of investment stays out of reach for most retail investors. If you guessed that’s because of the high costs of acquiring such assets you aren’t wrong! The smallest ticket size would be upwards of 5 cr. Which is far more than you’d pay for a decent home space.

But then there are other teething issues. First is the complexity of getting access to such properties early on. And if any of you have lived even briefly in Mumbai, you’d understand the pain of habing to go through a network of brokers in order to find a decent property, and their cuts are sky high to say the least. Then there are the contractors. And finally we also have the friendly banker, all too willing to finance the deal for a handsome cut of course. So while affordability is one part, accessibility thanks to layers of middlemen is another. And finally we have the issue of transparency as well.

?How does REIT help?

Now, to solve the first part of the problem, affordability, the government has come up with REIT or the Real Estate Investment Trust. Think Mutual Funds for Properties. While the returns from REIT have been decent it still isn’t as mainstream as stocks. Why is that? The number one reason was that the entire registration process was pretty complex, replete with numerous bureaucratic red tapes. So while it made fractional ownership possible, the mental hassle over took the economical benefits. Besides this approach still didn’t solve for a gatekeeper from regulating access as well. By the way if you’re looking to get into REIT as per my research some of the good ones are Embassy REIT and Brookfield India

And yet, the issue with middlemen and authenticity continues.

Blockchain for Real Estate

A major challenge for people investing in real estate has been to do with incomplete projects, resulting in capital being stuck in the same. Now imagine, you could invest in the project on a pro-rata basis, depending on the milestones achieved. You could discover the projects that interest you, and put in an initial nominal investment. But later and more significant investments could go through as and when you see progress.

Well, such programmability is definitely one use case that blockchain implements pretty well. Now all you’d need to feed in is the sat images of the projects that show its progress over the months. And a smart contract sits at the other end to execute the transaction once the said milestones are reached.

Not only that, several blockchain real estate companies like ATLANT are also providing a platform where people can trade in real estate, much like we do on stock broking sites like Zerodha. Then the cherry on the cake, where you do not have to deal with Brokers, Lawyers, corporators and Banks , literally reducing the parties involved to you and the real estate builder. ?And finally, it also solves another issue which we spoke about right at the start , about illiquid assets. By providing fractional ownership possible, home owners could potentially liquidate small portions of their property as and when the need for emergency cash arises.

But that said, I do acknowledge that for this to become mainstream we still have a long way to go. Foremost issue being educating people about new evolving technologies, and building trust in the system.

I am planning to cover CBDCs in the upcoming editions. So in case you missed the last edition of it, you can Read it here . Also you could participate in the conversation later today by RSVPing here

P.S : If you liked this, then do subscribe to my newsletter, Kam Questions, where I look under the hood of popular (mis)conceptions to decipher what is actually happening. While my niche is the Fintech space, I also attempt to write about other Digital Businesses and their Strategies too. So if you think someone else will benefit from the content I put out, do share it with them. Its free :D

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