The Evolution of Real World Assets in the Crypto Assets Market

The concept of real-world assets ( RWA ) is not new in the crypto assets market. As early as 2018, asset tokenization and security token offerings ( STO ) had emerged, which share many similarities with the current RWA concept. However, due to the lack of a sound regulatory framework and the absence of significant potential return advantages, these early attempts failed to develop into a mature scale.

In 2022, as the U.S. interest rates were raised, the U.S. Treasury yield significantly surpassed the borrowing 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, along with traditional financial institutions, have begun to explore the RWA space.

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 in multiple ways, enrich real estate investment products, and lower investment thresholds. This article will conduct a case analysis of these projects, discussing the advantages and disadvantages of real estate RWA design and its potential market. Since these projects are primarily targeted at North American real estate, the discussion will focus on the North American market.

Methods for Tokenizing the Real Estate Market

The real estate market contains huge investment opportunities. Research in March 2023 showed that the value of the North American listed real estate market reached $1.3 trillion, while the global listed real estate market amounted to $2.66 trillion.

The core demand of the tokenized real estate market is to achieve one or more of the following goals: to create more diversified and flexible real estate investment products, to attract a broader range of investors, and to enhance the liquidity and value of real estate assets. These products mainly take three forms:

1. fragmented real estate ownership financing
2. specific area real estate market index product
3. real estate tokens for collateralized lending

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

Real Estate Investment Trust ( REIT ) shares many similarities with Real World Assets (RWA) in providing fragmented real estate investment opportunities, effectively lowering the investment threshold 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, their scrutiny of assets, operations, and investment structures within a strict regulatory framework provides a reference framework for Real World Asset projects.

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

Advantages:

• Lower the investment threshold for real estate
• Improve the liquidity of real estate assets
• Provide investors with more diversified investment options
• Potentially increase transparency in the real estate market

Disadvantages:

• The legal and regulatory framework is not完善
• Lack of mature operational experience
• Additional costs may arise during the tokenization process.
• The investor protection mechanism needs improvement.

In-depth research of specific cases reveals that due to differences in management and product approaches, each project faces different actual situations during the operation process.

Case Analysis

This chapter selects three Real World Asset (RWA) projects in the real estate sector for analysis. Each project employs a different method to tokenize the real estate market and is representative in its respective field. It should be noted that these projects are still in the early stages, and their products have not yet undergone long-term extensive market validation and testing.

RealT

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

RealT purchases residential properties and tokenizes the held properties in accordance with U.S. regulations. The management, maintenance, and rent collection responsibilities for these properties are delegated to third-party institutions. After deducting expenses, the rent generated by the properties is distributed to the token holders. Although RealT is responsible for the tokenization process, there is a legal separation from the company holding the real estate assets. As stated on its website, if the company defaults, token holders have the right to appoint another company to manage the held property. However, the agreement does not mandate RealT's involvement in investing in the property tokens they bring to market. Users holding property tokens can receive a share of the rental income from the property each month, with the distributed amount needing to deduct approximately 2.5% for maintenance reserves and typically around 10% for management fees.

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

For this property, RealT offers 100% of the tokens to the market, which means RealT does not need to co-invest with clients, maintaining an almost risk-free operating model. The management organization takes 8% from the rent and receives the remaining portion from maintenance fees, while the investment platform charges a fee of 2% solely for tokenizing the property, selecting the management organization, and supervising management. This approach allows the RealT team to save a significant amount of management time, focusing on finding qualified properties and tokenizing them for the market.

However, while decentralized ownership helps to spread risks among investors, it also introduces challenges. When investors have too small a stake, the management costs of the company can become unsustainable. Additionally, RealT chooses to have a management agency oversee its owned properties; if RealT has a significant ownership in the properties, they will strive to reduce management costs, as poor management will have a substantial negative impact on them. However, if RealT has too large a stake, it will first reduce the liquidity of the tokens, and secondly, the small shareholders of the properties will not fulfill their supervisory responsibilities. All token holders expect major shareholders to monitor whether the management agencies employed are efficient and diligent. On the other hand, if RealT holds a very small stake, there may be insufficient motivation to diligently select management agencies and actively participate in oversight, making effective supervision of the management agencies very difficult for numerous retail investors.

Check the ten latest sold-out property tokens on the RealT market, and use the relevant blockchain explorer to find out the number of holders for each property. RealT divides properties into different amounts of tokens to ensure that the price of each token is around $50. Most properties are located in Detroit, with approximately 500 token holders, and two properties have over 1,000 holders.

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

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According to the transaction data queried from RealT's wallet address on its main operating network Gnosis, RealT has distributed approximately $6 million in rental income. The platform fees fluctuate based on maintenance costs, insurance, and taxes, typically ranging between 2.5% and 3% of the rental income, amounting to around $150K to $180K in platform revenue over the past two years. However, since RealT is not mandated to participate in real estate investments, and if it chooses to participate, there are no specific limitations or descriptions of the extent of its participation, the profits RealT earns from rental income remain unknown.

From the perspective of corporate structure, RealT established Real Token Inc. in Delaware as the core entity of the company. This entity does not own any real estate assets; it serves solely as the operating entity for the RealT project. Additionally, RealT also established Real Token LLC in Delaware as the parent company of a series of real estate companies. Like Real Token Inc., Real Token LLC 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 just one company. Finally, RealT established a corresponding series of LLCs for each property invested in. As subsidiaries of Real Token LLC, each series LLC owns a specific property and the corresponding tokens. This structure is designed to ensure that financial or legal issues of one property do not affect other properties or the parent company's operations under RealT.

Parcl

Parcl is a DeFi investment platform that allows users to trade on the price fluctuations of the global real estate market. Parcl is used to market real estate-related synthetic assets through an AMM architecture. Parcl has launched Parcl Labs Price Feed to create real estate indices for specific regions based on its sales history. The duration of the historical record may vary based on the transaction frequency of the properties. After the index is created, investors have the opportunity to speculate on property price trends, establishing bullish or bearish positions on the real estate prices in that region.

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This method avoids legal issues involved in actual real estate operations because there is no real estate buying and selling. Some may question whether it truly qualifies as a real estate RWA project, as it does not fully meet the aforementioned criteria. However, it is a relatively popular RWA project that has attracted investments from some well-known companies, and it is reasonable to include it in discussions about the diversification of real estate RWA products due to its uniqueness.

Parcl's testnet launched on Solana in May 2022, and its TVL currently stands at 16 million USD. However, after more than a year of operation, Parcl seems to have not attracted much attention, with daily trading volume below 10,000 USD and daily active users under 50.

Parcl's products are user-friendly and rapidly upgraded, and Parcl Labs' price providers and index market design are relatively mature. In terms of operations, the Parcl team is actively launching Parcl Point, Real Estate Royale, and other user acquisition programs. Despite these advantages and support from 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 indicate that the Crypto Assets market is not yet ready to embrace real estate index products.

Reinno

Some large crypto asset companies are also exploring products in the direction of real estate RWA. Some companies have announced that their central bank digital currency teams are trying to support users in tokenizing real estate and using it for mortgages. There are also projects collaborating with other companies to support real estate mortgage lending. Some projects offer the option of using tokenized real estate as loan collateral, but this service is limited to the real estate tokens they issue. Essentially, this service is more akin to token lending products and does not substantially enhance the capital liquidity of individual real estate owners.

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 products related to real estate RWA that are worth mentioning.

The first product is a loan service based on tokenized real estate. When property owners need financing, they can submit their property documents to Reinno. Upon approval, Reinno will create a special purpose vehicle (SPV) for them in Delaware. Then, Reinno will create a smart contract for the real estate tokens, which owners can deposit as collateral for loans, with the loan limits based on the token value.

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

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Reinno's operations are still a centralized and offline model, where customers usually need to visit the office and submit property documents. There are some obvious risks associated with this approach. First, if the borrower chooses to default and stop repaying the loan, Reinno, as a tokenized service provider rather than a lender, will find it difficult to...