DISRUPTING TRADITIONAL REAL ESTATE THROUGH BLOCKCHAIN TECHNOLOGY

Abstract

The rapid advancement of technology has forced many industries to adapt or be at risk of dying out. These developments have made many labor-intensive and tedious tasks redundant, replaced by robots or complex algorithms, far more efficient than a human could be (Martens and Tolan, 2018). However, Real Estate seems to be an industry stuck in the past, with long transaction times, opaque markets, and hefty fees (Cheng et.al, 2010). Additionally, as the property market continues to boom amidst uncertain economic conditions, capital is being locked up in Real Estate, making investors “asset rich, cash poor”, due to the difficulties associated with getting instant liquidity from such a big ticket item. In contrast, blockchain technology is a rapidly developing field that seeks to bring transparent, automated, and near-instant settlement - all without relying on centralized institutions such as a bank. Moreover, the concept of tokenization, or creating a digital copy of an asset on the blockchain, has already been applied to various Real World Assets including carbon credits, supply chain management, and stocks (Z?le and Strazdi?a, 2018) in order to make them easily transferable and to leverage of the immutability and transparency of the blockchain. To understand how blockchain technology could serve to benefit the “asset rich, cash poor” Real Estate industry, this study used both quantitative and qualitative data to analyze two On-Chain Real Estate Applications, CitaDAO and Propy, and whether they could enhance market liquidity. Through the use of Amihud’s illiquidity Index (Amihud, 2002), we first measure whether blockchain technology could be a better alternative to Real Estate Investment Trusts (REITs) in terms of market liquidity. We then compare the typical method of unlocking liquidity Real Estate liquidity, Home Equity Loans, and contrast it with DeFi Lending Markets, comparing their Loan-To-Value ratios, interest rates, and transaction times. Lastly, we gain a more holistic view of both the risks and potential of Real Estate on the blockchain through an interview with CEO of CitaDAO Joel Lin, through a Question and Answer Format. From the Amihud Illiquidity Index, we were able to determine that tokenized properties could trade at the same degree of market liquidity as several publicly traded REITs, despite only having a fraction of their transactional volume, a factor which is weighted heavily for in the index. DeFi lending markets also faced similarly positive results, ranking better than traditional home equity loans in terms of time-to-settlement, but coming out equal on interest rates and Loan-To-Value ratios. Lastly, while the media associates blockchain technology and tokenization with money laundering and terrorist financing (Wang and Zhu, 2021), the real risks involve liquidity crunches and security risks, which the industry is still unable to fully protect against.