Author: Weilin, PANews
The real estate industry has significant influence and status worldwide. According to Statista's data, the global real estate market is expected to reach a remarkable $634.90 trillion by 2024. Looking ahead, the industry is projected to grow at a compound annual growth rate (CAGR) of 2.77% per year (2024-2029), reaching a market size of $727.80 trillion by 2029.
However, the traditional real estate industry's transaction process has many limitations, such as lengthy procedures, excessive reliance on intermediaries, and susceptibility to fraud risks. With the rise of blockchain technology, this landscape is facing disruption. Blockchain technology, through distributed ledgers, smart contracts, Dynamic Non-Fungible Tokens (NFTs), and tokenization, significantly improves the transaction process, transaction costs, and security of real estate. These advancements have the potential to simplify property ownership processes, reduce fraud, and create more convenient investment opportunities for global users.
In the future, due to the expansion of technologies like blockchain and artificial intelligence (AI), the real estate transaction process may be greatly shortened, even completed within a day. These innovations, through process automation, increased transparency, and efficiency improvements at every stage, are fundamentally transforming the industry. Financialization and disintermediation will profoundly change the traditional real estate market, making the liquidity of real estate assets approach the level of the stock market.
Previously, PANews introduced the star real estate project Propy in the RWA (Real World Asset) track and its core product PropyKeys, and how they have broken through the pain points of traditional real estate transactions to make transactions more secure and convenient. This report will use the recent integration of Automation by Propy and the decentralized oracle network Chainlink as an example to deeply analyze the trend of real estate tokenization and its growth potential.
01 Pain Points of the Traditional Real Estate Industry
Due to the high cost and lengthy process of home purchases, as well as the reliance on numerous intermediaries, investors, buyers, and sellers are demanding a transparent, one-click process that meets the needs of their era. The Propy team believes that the traditional real estate transaction process is long, cumbersome, and primitive, with the following issues:
It takes weeks or months to find the right buyer or seller
Buyers and sellers often have difficulty accessing accurate and complete information during the transaction process and rely heavily on intermediaries. This information asymmetry increases the complexity and uncertainty of transactions, affecting the fairness and transparency of the market.
The intermediary process is cumbersome, involving too many manual processes and stakeholders
These stakeholders include buyers, sellers, brokers, banks, lawyers, and government agencies. Each stage requires a large amount of paperwork and verification procedures, resulting in a complex and time-consuming process. This inefficiency is particularly evident in the US market and cross-border transactions, with the long transaction time and high costs posing significant challenges.
Operational work is burdensome
Since physical assets are not programmed, a significant amount of operational work is required to ensure the execution of contracts, transactions, and payments.
High security risks, facing fraud and data breaches
Fraud is a significant problem in the real estate industry, with large sums of money involved. According to data from the FBI's Internet Crime Complaint Center (IC3), the agency received 9,521 real estate-related complaints in 2023. While this number may not seem large, in terms of losses, these criminal cases resulted in a total loss of $145,243,348 (this amount exceeds the losses from identity theft, ransomware, malware, and many other types of crime).
02 Solution: The Combination of Blockchain Technology and Real Estate, the Introduction of Dynamic Non-Fungible Tokens (NFTs) by PropyKeys
Propy officially launched PropyKeys in March this year, allowing users to mint digital addresses and deeds for real-world properties, with the goal of putting 1 million home addresses on the blockchain by 2025. Its additional features include AI-generated landmark NFT minting and a novel staking mechanism, aiming to create a gamified experience that makes home ownership more accessible, secure, and interactive.
Dynamic Non-Fungible Token (NFT) Technology
Dynamic NFTs are a way to tokenize real estate assets. Owning an NFT can be equivalent to owning the real estate, and transferring the NFT can signify a change in property ownership. NFTs can be held and automatically update key data. Dynamic, updated NFTs can facilitate information exchange between transaction parties, such as home improvements, renovations, and past sales. Over time, dynamic NFTs become more useful. For example, an NFT can store pictures or videos of a property, showing its condition at a particular time. As ownership changes multiple times, the added videos/images allow buyers to see the property's evolution, providing deeper insights for their purchase decisions. Adopting dynamic NFT technology can not only accelerate the transaction process but also increase security.
PropyKeys utilizes dynamic NFT technology with three tiers, employing different strategies for different users. The first tier means users perform basic address minting, proving asset ownership. The second tier means users have uploaded property ownership documents, ensuring their property deeds cannot be tampered with under any circumstances, enhancing asset security. At the third tier, users can accelerate the buying or selling process, using NFTs as collateral to achieve 100% RWA. This gradual upgrade increases user engagement and makes the complex real estate and RWA application scenarios more accessible.
Simple Real Estate Tokenization (NFTs), Representing Individual Real Estate Assets as NFTs
The key feature is that owning the NFT is equivalent to owning the real estate, and transferring the NFT can signify a change in property ownership. NFTs can contain key data such as past sales records and addresses. In theory, selling a house can be as simple as listing an order on an NFT marketplace. Buyers only need to click a few buttons, and if they have sufficient funds, the purchase can be completed in minutes - in stark contrast to the current real estate transaction process that takes weeks.
In 2022, the first real estate-backed NFT in the US was sold on the Propy platform for over $653,000 in ETH.
In 2022, Propy sold its first NFT-backed property in the US, located in Gulfport, Florida
Further Tokenization: Fractionalizing Real Estate Assets (Fungible Tokens)
Another way to tokenize real estate is to fractionate ownership, i.e., achieve partial ownership of real estate, using Fungible Tokens (FTs).
Each token can represent a specific percentage of property ownership. Owning all the Fungible Tokens is equivalent to owning the entire real estate. Fractionalizing real estate allows buyers to purchase a small portion of a property, making real estate more accessible.
With proper design, fractional real estate tokens can allow investors to build customized real estate asset portfolios, and potential homebuyers to gradually achieve their goal of living in and owning their ideal property, while companies can also develop customized real estate products.
Tokenized Real Estate Cash Flows and Tokenized Real Estate Asset Baskets
In this "Tokenized Real Estate Cash Flows" model, property owners can separate property ownership from cash flow ownership. The cash flow rights (often monthly rental income) can be sold to other parties for a specific period. Tokenized real estate cash flows can provide property owners with additional options and reduce the cost of real estate ownership.
Additionally, a real estate asset basket can be created. Fungible Tokens can collectively represent all properties and cash flows, with the cash automatically flowing to token holders.
The key benefits of tokenizing a large-scale real estate portfolio are the ability to provide minimally trusted collateral and automated execution based on verifiable data. Putting the ownership of real estate and cash flows on-chain can achieve higher verifiability of the underlying collateral (properties and their cash flows), enable automated payments, and increase transparency of asset health.
03 Case Study: PropyKeys Integrates Chainlink Automation
In April 2024, PropyKeys integrated Chainlink Automation on the Base network to distribute staking rewards. As of September 14th, 276,284 addresses have been minted on PropyKeys.
From the technical background of Automation, smart contract functions cannot be triggered automatically, and an off-chain transaction needs to be sent by an external party to execute the contract functions. Automated market maker (AMM) protocols usually rely on user-initiated transactions to wake up the contract, while many other smart contracts use external parties commonly referred to as "keepers" to monitor predefined conditions and trigger on-chain contracts when those conditions are met. The predefined conditions can be a specific time, an event, or complex off-chain computations.
Before the emergence of keeper services, smart contract development teams had to use centralized servers or DevOps teams to manually trigger contracts. However, this not only risked single points of failure in the protocol, but also wasted valuable resources that should have been used to develop the underlying business logic or functionality on DevOps.
Chainlink Automation is like a decentralized transaction automation bot that can automatically run smart contracts. Developers can submit custom tasks to Chainlink Automation, which define the functions of the smart contract and call these functions based on specific conditions. Automation will monitor these conditions through secure off-chain computation and trigger the function execution when the conditions are met. Ultimately, developers can effectively improve the robustness of decentralized applications, reduce development costs, simplify the user experience, build feature-rich hybrid smart contracts, and ensure end-to-end automation.
After integrating Automation, Chainlink Automation allows PropyKeys developers to automate critical on-chain functions at scheduled intervals or in response to external events. Based on Chainlink Automation, Propy has achieved highly reliable, high-performance, and decentralized automation, with transactions being quickly identified and confirmed even during periods of severe network congestion.
Time-tested infrastructure helps Propy save costs: eliminating the cost of internal automation infrastructure, reducing resources used for DevOps, and improving speed and efficiency.
Propy can achieve faster scaling: faster scaling, avoiding the challenges of building and maintaining reliable multi-chain automation infrastructure. At the same time, it unlocks new use cases and more functionality.
Currently, Chainlink's oracle network securely supports over $16 trillion in on-chain transaction value.
04 Challenges and Future Trends of Tokenized Real Estate
Challenges from Regulation and Users
Although the development of the tokenized real estate sector is promising and has great growth potential, there are still some challenges facing the participating projects and developers in real-world deployment.
Regulatory considerations in different jurisdictions are an important issue. Any tokenization project must comply with local laws and regulations. When tokenizing real assets, liquidity, market infrastructure, data security, transparency, standardization, and interoperability are some key challenges. While there are significant hurdles to tokenizing real estate, Propy is actively working to address these issues.
To strengthen compliance, Propy has integrated KYC (Know Your Customer) and AML (Anti-Money Laundering) checks into its platform to verify the identity of all participants. The company also collaborates with legal experts to ensure its tokenization process complies with relevant real estate and securities regulations. Propy's platform is designed to be flexible and adaptable to different jurisdictions to ensure compliance with various legal requirements.
Additionally, Propy uses blockchain technology to create secure and immutable transaction records. By storing real estate data and ownership records on a decentralized ledger, Propy enhances transparency and reduces the risk of fraud. The platform also implements advanced security protocols to protect user data and transaction information.
Furthermore, real-world assets (RWA) face challenges in large-scale adoption, user education, and user behavior change. To this end, Propy's focus in 2024 is on community engagement and education, frequently hosting webinars and workshops, and also working to develop partnerships with entities such as Base, Coinbase, Parcl, and Chainlink. In this way, Propy helps real estate professionals and ordinary customers better understand blockchain technology and its future potential in the real estate industry.
RWA Sector Trends: Asset Class Diversification and Scalability
1) Asset Class Diversification
As the tokenization of real-world assets (RWA) evolves, the asset classes will become increasingly diverse, covering commercial real estate, industrial real estate, and real estate financial assets. This also includes tokenized funds, involving short-term financial assets such as short-term government bonds, repurchase agreements, and commercial paper. In addition, private lending and supply chain finance are also gradually becoming new expansion areas. In the future, it is expected to expand to mortgage-backed securities, construction loans, bridge financing, and securitized products, further diversifying the asset types.
2) Scalability
Integrating DeFi elements into tokenized real estate assets has greatly enhanced their scalability. Staking and re-staking, secondary market derivatives, indices, and hedging strategies all create more liquidity and financial innovation opportunities for real estate-related tokenized assets, promoting the deep integration of traditional finance (TradFi) and decentralized finance (DeFi) and seeking more liquidity solutions.
3) Future May Include Commodities, Art, and Intellectual Property
The tokenization of real estate and private lending is just the beginning. In the future, we can expect other asset types, such as commodities, art, and intellectual property, to gradually achieve tokenization. Even ETF/ETP products are expected to emerge in the tokenization wave, further diversifying investors' choices.
In the future, as challenges are gradually solved and real estate RWA becomes more widespread, the speed of real estate transactions will increase significantly, with transactions being completed within 1 day, greatly simplifying the transaction process. In terms of asset management, digital transformation will accelerate, such as the gradual popularization of warehouse information management. Financialization and disintermediation will fundamentally change the traditional real estate market, making the liquidity of real estate assets close to the level of the stock market, and driving the entire industry into a new stage of development.
References:
https://x.com/i/spaces/1lDxLlwaOgQxm
https://chain.link/education-hub/tokenized-real-estate
https://blog.chain.link/smart-contract-use-cases-unlocked-by-chainlink-automation-zh/#:~:text=Chainlink%20Automation%20is%20like%20a,key%20advanced%20functions.
https://propykeys.medium.com/propykeys-integrates-chainlink-automation-to-power-staking-rewards-distribution-003b3c7170b1
https://www.panewslab.com/zh/articledetails/9e8inlra.html
