Turning Traditional Properties Into 24/7 Liquid Assets
I live in Australia and real estate, like in many other countries, is quite expensive. For most people it will be impossible to diversify their retirement savings into something like real estate without either loading up on debt or putting all of their eggs in one basket. It’s hard to have a balanced portfolio of stocks, crypto and real estate unless that portfolio is quite big. Yes, there are real estate investment trusts (REIT), but they bundle a lot of different properties in an intransparent way and all you can do is buy a piece of the bundle. It’s like you would only be able to buy ETFs but not shares of a corporation. Or even simpler, it’s as if you could only buy a whole cow instead of a steak.
What if we could take a real estate property and divide it into many small pieces of ownership that can then be flexibly combined by individuals, just like we do with shares of corporations? That’s what’s behind the idea of tokenized real estate and web3 technology seems just about mature enough to make this a reality.
If you don’t like a property anymore, simply swap it.
Tokenizing real estate turns an illiquid asset into something that has 24/7 liquidity. If you don’t like the property anymore, simply swap it on Uniswap. A liquid market creates a better view on the actual price: frequent swapping of tokens will create a transparency allowing anybody to see what the market currently thinks its worth. The most interesting function though is the ability to diversify with much less capital than before. An average degen could ape into some nice beachside property and a shopping mall in a prime location at the same time.
Although tokenized real estate has been in the making for quite some time, it looks like CitaDAO may have figured out how to pull it off, by combining yield farming opportunities with real estate tokens as collateral. A whole set of tools and processes to support governance and real estate management functionalities shows that they have thought this on chain real estate play through from end to end.
Bringing real estate on chain
It sounds easy, but there are a lot of things involved in bringing real estate on-chain to enable its tokenization. To kick things off, CitaDAO is planning the first IRO (introducing real estate on-chain) to take place as a proof of concept soon. The property? A ~ 21 million dollar, ~ 7k sq ft commercial building in Cardiff, UK.
Site of potential on chain commercial property in Cardiff, UK.
Once the process begins, interested participants will have 10 days to commit funds into a pool, which is nothing more than a smart contract on the Ethereum blockchain to collect funds. Normally, the sale of such a property would include a 3–5% fee for the agency which in this case is given out to contributors to the pool (distributed like this). If the target amount of ~ 21m is reached, the process is complete and the building will be brought on-chain and tokenized for the participants. For this to happen, it will be transferred to a registered corporate entity to hold the asset in the non crypto world while representing its ownership by an NFT (ERC-721) and ERC-20 tokens on the Ethereum blockchain.
The property’s details are layed out here giving community members an idea of rental income, increase in rent over time and the location of the property. The tokens handed out to community members are backed by a real physical building that collects rent. If this doesn’t show the real world use of web3, I don’t know what will.
Where it goes from here
CitaDAO is not done after this first proof of concept and has a strong pipeline for further IROs to take place in 2022. By running IROs and offering tokenized real estate in multiple countries around the world CitaDAO intends to create a global portfolio of physical properties that is interoperable within the Ethereum ecosystem.
Strong roadmap moving ahead
Tokenomics of CitaDAO
The CitaDAO protocol makes use of two different token types. The first is the KNIGHT token, which is the governance and utility token of CitaDAO and the second, the real estate token (RET), where a new version is created for every real estate property that is brought on chain (A zoomable, full-screen version of the diagram can be found here). The best way to start is by looking into how real estate gets on-chain.
IRO — introducing real estate on-chain
The Cardiff commercial building mentioned above will trial run this process and if it succeeds, it will be minted into an NFT on the Ethereum blockchain, and subsequently fractionalized into tokens distributed to participants of the IRO. It’s rather brilliant. It works like this:
Detailed breakdown of how real estate is brought on chain
Legal Perspective to On Chain IROs
To ensure the property can be transferred and there are no legal problems, a due diligence process is run by lawyers prior to the IRO. If given the green light by the lawyers, the landlord can then list the property with CitaDAO to run through the phases described above. Should the IRO fail i.e. should the target amount not be reached, all depositors would receive a full refund and rewards would not be distributed. Reward in this case is the agency fee that, in the meat space, is paid to the agency, but with CitaDAO is given to depositors of the pool. Similarly to the meat space, there is no agency fee if the property is not sold.
From House to NFT and Back Again
A two way bridge between meat space and metaverse, ensures the process of bringing property on-chain can be reversed. A buyout enables individuals to purchase all RET tokens of a property to claim the NFT and receive the title of the real estate off-chain. The buyout process gives other RET holders the opportunity to place a counter bid and prevent the buyout.
What’s in it for the DAO? Well, CitaDAO claims a fee as part of the due diligence process, takes 2% of the minted RET tokens should the IRO be complete, and charges an additional fee on the buyout to accrue value for the DAO.
When a property is on-chain is when it actually starts to get interesting. Not only can RET token holders swap tokens on exchanges like Uniswap, they can also provide liquidity and earn additional yield. CitaDAO rewards liquidity providers on xToken Terminal, with KNIGHT tokens on top of regular liquidity provider rewards (the fees they earn from others exchanging tokens on Uniswap).
Off-Chain Revenue Sources
An additional contributor to liquidity on exchanges is how CitaDAO uses rental income from properties. The Cardiff commercial building yields ~ 4.3% annually which is used to buy back the RET tokens from markets for USDC and burn them. This creates a steady demand for the token and a steady, reliable liquidity.
Post IRO, the registered corporate entity or special purpose vehicle (SPV) will invite independent global property managers to propose one year contracts to manage the property. The SPV then selects a property manager based on their proposal for the projected rent, the operating cost and other fees (details here). All of this is done transparently for token holders to observe and the process selects the lowest offer by default.
The CitaDAO DAO
As a DAO with its own governance token, KNIGHT, CitaDAO allows users to vote on project related matters. The fees claimed during the IRO process are just part of why this DAO is interesting. If CitaDAO executes on its pipeline to launch 6 further IROs in 2022, then with the 2% take on RET tokens for every IRO, the KNIGHT token will quickly turn into a diversified, real estate backed token. Think about that for a moment. The DAO will hold 2% of all of these tokenized properties in their treasury. This has the potential to set a new bar for how normal people can participate in a diversified real estate market.
CitaDAO will have a total supply of 10 billion KNIGHT tokens with the lion’s share going to community and liquidity incentives (~79%) with a 4 year vesting schedule (the details can be found here). The vesting schedule is aligned to the roadmap of bringing 400 properties on-chain by 2023 and will incentivise liquidity for RET tokens representing the properties.
On Chain Real Estate
Tokenized real estate has been around for years and many have failed or were simply too early. CitaDAO does a few things differently to ensure their success in this space. The most important is being a true DeFi project with all the money legos and integrations into the existing infrastructure. Offering real estate tokens on existing AMMs and incentivizing liquidity with their own DAO token is a great concept that could make the difference to push them into the “this works” category. Being a true DeFi project opens the door for a lot more to come which we will be exploring in a future article.
Openness and interoperability with the wider ecosystem is always beneficial as others might use your legos to build something on top. Contributing to the wider space will help to stay relevant and grow adoption of new users. CitaDAO is ticking all of these boxes giving it potential to finally, successfully turn illiquid assets like homes, apartments and commercial buildings into 24/7 exchangeable DeFi assets that could enable a whole host of further innovation unimaginable to us today. bring meat space real estate to the blockchain.
Florian Strauf is a technical writer exploring and visualising the tokenomics of various web3 projects.
Disclaimer: this isn’t investment advice. This article has been written for informational and educational purposes only and it reflects my personal experience and current views, which are subject to change.
BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.
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