Crypto-based Mortgage | Loans Tap $80 Billion DeFi Economy

3 min read

  • The securing of the first-ever cryptocurrency-based mortgage for a single-family property in South Carolina marks a historic event.
  • This emphasizes the growing trend of tokenizing real-world assets (RWAs) on the blockchain, including high-end real estate and luxury collectibles.
  • The digitization of physical assets is revolutionizing traditional real estate transactions, offering competitive rates, reduced fees, and faster processes.
  • These changes are poised to reshape the $2 trillion collectibles sector, providing access to the $80 billion DeFi economy.

By Sean Parsons

At the intersection of real estate and finance, a watershed moment has arrived – the world’s first crypto-based mortgage for a single-family investment property in South Carolina. A homebuyer secured the property by financing half of the purchase with a DeFi loan at an 8% interest rate over a two-year term, with the total closing cost amounting to a mere $10.

This transaction highlights a growing trend – the tokenization of real-world assets (RWAs) on the blockchain to access DeFi capital markets. The proliferation of RWAs on the blockchain represents a seismic shift for both traditional and decentralized financial markets.

Understanding Real-World Assets (RWAs)

RWAs are digital representations of physical assets ranging from prime real estate to collectible items like luxury handbags. By creating these digital counterparts on the blockchain, individuals can seamlessly tap into the $80 billion DeFi economy – selling or borrowing against their physical assets with ease. This concept draws parallels with traditional commodity trading, where warehouse receipts represent underlying assets.

Every year, over 30 million Americans visit local pawn shops to take loans on their personal goods. These individuals must contend with traditional challenges such as price discovery and exploitative interest rates. Lacking access to larger, more efficient markets, they are at the whim of their neighborhood lender, and are subjected to whatever rates they can get.

Awaiting these collectors is a global, open 24/7 decentralized marketplace. This arena facilitates a stream of live bids and loan offers from anywhere around the globe. With DeFi, transactions are facilitated through permissionless smart contracts, bypassing traditional intermediaries and fostering global access to financial services.

There are many companies attempting to bridge the gap between the physical and digital realm by tokenizing physical collectibles on the blockchain. The process is relatively straightforward and is based on the concept of warehouse receipts. The collectibles are securely stored within a network of vaults, and mints an NFT receipt for the original asset holder representing the right to redeem the item from the vault. Without any further action, the NFT holder immediately gains access to the robust decentralized financial markets. This transformation will greatly impact the $2 trillion collectibles market, representing a paradigm shift akin to the internet revolution in the early 2000s.

The burgeoning market of RWAs on the blockchain shows no sign of slowing down. A recent example involved a fashion collection of Supreme clothing dating back to 1995, which was used as collateral to secure a loan of $1.1m. Typically, an RWA loan adopts a “loan-to-own” model, granting the lender full ownership of the underlying asset in case of default. As DeFi continues to embrace RWAs, platforms are building the infrastructure to syndicate loans not just on collectibles, but on real estate, as well.

Tokenizing Real Estate on Ethereum

It’s not easy to bring a physical house on the blockchain. Just ask Roofstock onChain, Web3 subsidiary of Roofstock, the leading online marketplace for investors in the single-family rental (SFR) home sector. The process involves transferring the property title to a newly formed LLC, which is then tokenized as an NFT, granting ownership of both the LLC and the underlying property to the NFT holder. This approach allows NFT owners the freedom to live in the home, rent or sell it, or even use it as collateral for a loan. In the case of Roofstock onChain’s 4th and most recent home sale, the buyer opted to leverage DeFi to facilitate one of the first mortgages on the Ethereum network.

Tokenizing real estate enables borrowers to access competitive loan offers from around the world, disrupting traditional mezzanine and bridge financing models. In contrast to conventional real estate transactions, where closing costs can soar to as high as 10% of the financing amount, DeFi loans can result in savings of up to 95% on these fees for the homebuyer.

The commercial real estate market today sees $4.5 trillion in outstanding debt, 80% of which is held by big banks. Decentralized lending on real estate RWAs is a novel concept which will undoubtedly change the way people borrow on their properties to access better rates, lower fees, and faster deal closing.

The Future of RWAs and DeFi

The widespread adoption of tokenized real world assets on the blockchain presents an array of opportunities by unlocking the decentralized economy. DeFi enables democratized capital markets for items like comic books, trading cards, and real estate, making some of the world’s oldest markets more readily accessible and liquid.

In an increasingly digital world, real world assets on the blockchain offer tremendous growth potential and serve as a critical use case for blockchain technology as a whole. This disruptive force is poised to reshape the financial landscape, ushering in a new era of decentralized finance and redefining the way we interact with tangible assets.

Author Bio

Sean is the Co-Founder and CEO of Kettle, a decentralized lending platform for real world assets. Prior, Sean helped launch, the one-stop-shop for all things NFT liquidity. Additionally, Sean was a Product Manager on Microsoft’s Windows Operating System team, where he led efforts on security features that would be rolled out to billions of devices worldwide. In this role, Sean led the development efforts on confidential computing and hardware security features for the Azure cloud platform. Sean earned his B.S. and M.S. from Penn State University studying Data Science.

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