TokenHome liquid real estate

Introduction

This post is inspired by this article I read on 7th June 2021. Since no details were provided I decided to design my own implementation.

TokenHome is a fictitious platform that makes real estate more liquid, not only giving those with less disposable income access to the benefits of real estate investment, but also providing home owners with a flexible way to safely borrow against their home without fear of losing their home (as with legacy mortgages).

I’ll update the post if any new caveats, insights, etc come to mind, so watch this space.

This is how it works. 

The actors involved

• “homeowner” who wants to safely borrow against their home
• “tokenholder” who wants to invest in the property market in a tokenised way (will become clear below)
• “TokenHome” the ficticious organisation that matches homeowner and tokenholder and acts as an intermediary. [I've since discovered that 1 or more real entities exist that use the name "TokenHome". This post has nothing whatsoever do with any real company or organisation of any kind. "TokenHome" is used here in a 100% ficticious context.]

What happens from the homeowner’s point of view?

• The homeowner wants to borrow against their home so they approach TokenHome.
• The homeowner can choose an amount they want to borrow from TokenHome. They pick an amount and a duration for the loan. They can pick more than one combination, e.g. a €50k loan for 5 years and a €5k loan for 1 year.

What does TokenHome do?

• TokenHome creates a basket of tokens for each loan duration, where the value of each loan is divided amongst the tokens.
• E.g. Continuing the above example that would be 2 baskets, one contains tokens the total of which represents €50k; the other tokens that collectively represent €5k
• For simplicity let’s say the 50k basket is divided into 50000 tokens each with a loan value of €1; the 5k is divided into 5000 tokens each with a loan value of €1
• The tokens are put up for sale on TokenHome’s web3 marketplace. This can also be an auction.
• When all the tokens in a basket are sold to any number of buyers the homeowner and a representative from TokenHome pay a visit to a solicitor and a new deed for the property is drawn up in which the ownership of the house is divided legally between the homeowner and TokenHome according to the % loan amount relative to the latest official value of the house (WOZ).

What does the homeowner do now?

• The homeowner receives the proceeds of the token sale (minus half the solicitor fees - the token buyer pays the other half (not TokenHome). 
• The interest on the loan is the increase in WOZ value. 
• The homeowner can chose one of two courses of action:
• Either repay the loan before the deadline + the weighted difference in WOZ value + the solicitors fee (to update the property deeds). In this case TokenHome must comply, the loan repayment incl any WOZ difference is paid out to tokenholders and the tokens destroyed. Note that the payout may be identical to the value paid for the tokens for short term loans, so there must also be a reward system for tokenholders that either involves transaction fees or the utility tokens (see later on). There are now numerous existing tokenomics models from which a suitable reward system can be adopted.
• Or not repay the loan. In this case TokenHome is no longer obliged to “sell” their stake in the property back to the homeowner. The deeds remain as they are until sale of the house, at which point the homeowner is legally bound (also arranged when deeds were modified) to sell the property at minimally the WOZ value.
• TokenHome is legally bound to comply to the sale at this point, but homeowner can be offered the option to sell only their share of the property to the buyer. (The buyer would of course be made aware of everything). This may be attractive to the homeowner in a difficult market, as the buyer may be happy to pay less for the same house, even if it means they don’t have 100% ownership.
• If the buyer chooses to sell 100%, the token holders receive their relative share of the proceeds and the tokens are destroyed.

And what about the token holders of nobody is selling?!

• When a property is sold, whether or not TokenHome’s name stays on the deeds, TokenHome will unlock any profit the token holder may have made on the sale for withdrawal. The token holder can take it or leave it. 
• Token holders can sell their token at any time they choose on the open market (interwebs). The underlying asset will be viewable on the TokenHome marketplace, including WOZ value. Any unclaimed profits made from house sales will also be visible. 
• TokenHome has no obligation to buy back tokens from tokenholders, although they are free to make offers to  buy tokens from tokenholders like anyone else.
• Tokenholders never have any right to the property. They are purchasing a financial instrument. Clearly TokenHome will need to comply to NL’s new strict crypto law, as well as having the necessary licenses to issue financial instruments (the tokens - see also below)

The relationship to crypto

• TokenHome will be a DAO (decentralised autonomous organisation) secured by PoS (proof of stake) and structured according the latest best practices for DAOs, regarding:
• governance (decision making). This will use a voting system linked to size of stake of governance token (see below) 
• tokenomics, which includes things like token types, supply, distribution etc. For example it is common at the moment to use a utility token for transaction fees etc and a governance token, for establishing a stake in voting on governance of the DAO.
• The utility token and the governance token have nothing to do with the tokenised loans however. For these non-fungible tokens will be used, now well known as NFTs. There are already standards for NFTs (one really, ERC-721) although it tends to be customised somewhat depending on the use case. The standardisation ensures such things as wallet compatibility at least.
• The project would do well to start on Ethereum, but in parallel work on launching on multiple L1 and/or L2 networks, such as Polygon, Cardano, Kusama, Solana, Near.

Real estate market value

The Dutch real estate market approx total value in 2019 was $184.3 Billion. Considering the large gains in the property market, I'd say this is likely to be >$200B today [24th June 2021] (https://tinyurl.com/globalrealestate1920).

If that entire market was captured on a crypto platform it would currently come in at number 3 after Ethereum and before the stablecoin Tether.

Global real estate is today likely to be >$10 Trillion, considering it was just under this in 2019.

That's approximately 14x the Bitcoin market cap and 7.5x the market cap of all crypto as it stands today [24th June 2021]. It's only 5x the total crypto market cap at its recent all-time-high on 12th May 2021, but all in all a significant figure. 

Addenda

Updates that don't fit neatly into the blurb above.

Non-profit DAO

• Of critical importance is that TokenHome is not a monolithic enterprise slurping up real estate for profit. This needs to be a NON-PROFIT organisation (DAO), so that small groups of individuals cannot funnel profit from any of the properties owned by TokenHome into their own pockets. TokenHome takes small transaction fees for the various interactions made. These go into the treasury. Any profits made from property sales, where TokenHome owns a % of the property go to NFT holders. If TokenHome holds NFTs, then these profits will either be distributed (airdropped) amongst holders of TokenHome’s utility token ($TOKHOM) or go into the treasury or both. It’s probably wise however that TokenHome NEVER holds NFTs.
• A non-profit that owns huge swathes of real estate is much friendlier than a for-profit owning huge swathes of real estate. 

Solicitors and activities in the physical world

• Since we don’t live in a fully fledged crypto world yet, there will be activities that need to be carried out physically: phone calls, meetings, deeds being signed in front of solicitors, etc. How will this work.
• The DAO will delegate these activities to solicitors and selection and delegation will be done by the DAO proposing and voting. As with other existing crypto DAOs, there will be a governance token ($TOKGOV) and % ownership of this token = stake in voting. 
• Ideally, once a number of solicitors have been vetted and selected, the delegation of activities will be randomised. Perhaps randomness will be weighted by % governance stake. This reduces the risk of bias/ bad actors etc. Perhaps parties involved in the day-to-day activities - e.g. the solicitors- would need to operate in a PoS manner, perhaps even with an additional token, so that they also have something to lose by being bad actors.

Netherlands ⇒ Global

• Although this concept has been written up from a Dutch viewpoint, the goal of the DAO should be to establish a legal non-profit entity in as many countries in the world as possible in order to give everyone everywhere access to the 2-sided benefits of this platform (exposure to the real estate market and risk-free borrowing, as stated above).

Critical legal stuff (critical to the health and survival of the platform)

• NFT holders never ever ever have a legal claim on the underlying assets. In order to prevent powerful entities grabbing up actual real estate. This needs to be made legally watertight.
• Every single NFT is always backed 1-to-1 with a tangible asset. This is outlined in the main text, only reiterated here for its importance. NFTs are only actually sold to buyers (this may not be entirely clear above) when the deeds of the property have been legally updated passing the % ownership to TokenHome. So when NFTs are put up for sale on the marketplace, it’s a case of buyers committing to a purchase and locking funds, but these do not pass to TokenHome until the deeds are modified, at which point the purchases are finalised and the NFTs transferred to the buyers. If the deeds do not get updated, buyers’ funds will simply be released. 
• Since the DAO will potentially own large amounts of real estate (globally) the power distribution and rules surrounding the DAO must be very carefully formulated to ensure that no one entity can take control.