The Development of Real World Assets in the Crypto Assets Market

The concept of real-world assets ( RWA ) is not new in the Crypto Assets market; it has existed since 2018, when asset tokenization and security token issuance were quite similar to today's RWA concept. However, due to the lack of a complete regulatory framework and the absence of significant potential return advantages, these early attempts did not develop into a mature market scale.

In 2022, with the increase in US interest rates, the yield on US Treasury bonds was significantly higher than the lending rates of stablecoins in the crypto industry. Therefore, tokenizing US Treasury bonds as RWA targets has become increasingly attractive to the crypto industry. Some mature DeFi projects and traditional financial institutions have started to explore RWA.

In the past two years, a small number of real estate RWA projects have emerged in the market. They aim to expand the real estate investment market in various ways, diversify real estate investment products, and lower the threshold for real estate investment. This study will conduct a case analysis of these projects, examining the advantages and disadvantages of the design of real estate RWA and its potential market. Since these projects primarily target the North American real estate sector, the relevant policies, regulations, and market conditions discussed will mainly pertain to the North American real estate market.

Methods of Tokenizing the Real Estate Market

The real estate market is a vast field full of investment opportunities. Research from March 2023 shows that the value of the North American publicly listed real estate market reached $1.3 trillion. Meanwhile, the global publicly listed real estate market is valued at $2.66 trillion.

The core demand of the tokenized real estate market is to achieve one or more of the following goals: to create more diverse and flexible real estate investment products, to attract a broader group of investors, and to enhance the liquidity and value of real estate assets. The main forms of these products usually fall into three categories:

1. Fragmented real estate ownership financing.

2. specific area real estate market index product.

3. real estate tokens for collateralized lending.

In addition, the tokenization of real estate on the blockchain also has the potential to enhance the transparency of real estate assets and the democratic governance.

If you are familiar with Real Estate Investment Trusts ( REIT ), it is a type of company that holds profitable real estate and manages or finances real estate through this property. REITs provide investment opportunities similar to mutual funds, allowing ordinary investors to gain income and total returns from real estate investments akin to dividends, and helping the real estate market in the area grow. REITs and Real Estate RWAs have many similarities in providing fragmented property investment opportunities, as they both effectively lower the investment threshold and enhance the liquidity of real estate assets. However, traditional REITs typically do not offer management opportunities or ownership to investors, maintaining a centralized operational model. Nevertheless, their review of assets, operations, and investment structures under a strict regulatory framework provides a reference framework for Real Estate RWA projects.

Through the observation of the operation of real estate RWA projects in the past two years, we have gained a clearer understanding of their advantages and disadvantages.

Generally, real estate RWA projects have some advantages and disadvantages. However, upon a deeper study of specific cases, it is found that due to differences in management and product approaches, each project encounters different actual situations during the operation process.

Case Study

This chapter analyzes three real estate RWA projects. Each project uses different methods to tokenize the real estate market and has certain representativeness in their respective fields. It is important to note that these projects are still in the early stages, and their products have not yet undergone long-term and extensive market validation and testing.

RealT

RealT was launched in 2019 and is one of the earliest real estate RWA projects, focusing on tokenizing U.S. residential real estate for retail investors primarily on the Gnosis blockchain via Ethereum and Gnosis (.

RealT purchases residential properties and tokenizes the properties held in accordance with U.S. regulations. The management, maintenance, and rent collection responsibilities of these properties are entrusted to a third-party management agency. After deducting fees, the rent generated by these properties is distributed to its token holders. While RealT is responsible for the tokenization process, they are legally separated from the company that holds the real estate assets. As stated on their website, if the company defaults, token holders have the right to designate another company to manage the held property. However, it is worth noting that the agreement does not mandate RealT's involvement in the investment in the property tokens they bring to market. Users holding property tokens can receive a portion of the rent from the property each month, with the amount needing to be reduced by approximately 2.5% for maintenance reserves and typically around 10% for management fees.

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Taking this property in Montgomery as an example, the total value of the real estate tokens is $323,020, with a price of $52.10 per token, and a total of 6,200 tokens issued. The property generates $2,600 in rental income per month. After deducting a total of $622 in operating and management expenses, the monthly net profit is $1,978, totaling $23,736 annually. Therefore, each token receives a distribution of $3.83, resulting in an annual profit margin of 7.35%.

For this property, RealT has provided 100% of the tokens to the market, which means RealT does not need to co-invest with clients and maintains an almost risk-free model for operation. The management agency takes 8% from the rental income and receives the remainder from maintenance fees, while the investment platform charges a fee of 2% for tokenizing the property, selecting management agencies, and supervising management. Through this method, the RealT team can save a significant amount of management time, focusing on finding qualified properties and tokenizing them for the market.

However, while decentralized ownership helps to spread risk among investors, it also introduces challenges. When an investor's stake is too small, the management costs of the company can become unsustainable. Reports have explained the conflict of interest between real estate token holders and RealT. RealT selects management institutions to manage the properties they own; if RealT has a large ownership stake in the property, they will strive to reduce management costs; because poor management will have a significant negative impact on them. However, if RealT's ownership stake is too large, this will first reduce the liquidity of the tokens, and secondly, the small shareholders of the property will not fulfill their supervisory responsibilities. All token holders expect major shareholders to oversee whether the hired management institution is efficient and diligent. On the other hand, if RealT's stake is extremely small, RealT may lack sufficient motivation to diligently select management institutions and actively participate in oversight, making it very difficult for numerous retail investors to effectively supervise the management institutions.

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By looking at the latest ten real estate tokens sold out on the RealT market and using relevant blockchain explorers to find out how many holders each property has. RealT divides properties into different amounts of tokens to ensure that each token is priced around $50. Most of the properties are located in Detroit, and there are about 500 token holders, with two properties having more than 1,000 holders. Now, calculate the investment range of RealT investors by combining the number of tokens held by each holder.

Approximately 90% of RealT investors invest less than $500, about 9% of investors invest between $500 and $2,000, and 1% of investors invest more than this amount. This indicates that RealT has successfully created a real estate investment market for retail investors to some extent and has increased the liquidity of the housing market.

According to the transaction data queried from RealT's wallet address on its main operating network Gnosis, RealT has distributed approximately $6 million in rent. The platform fees fluctuate based on maintenance costs, insurance, and taxes, typically ranging from 2.5% to 3% of the rent, which corresponds to platform revenue of about $150K to $180K over the past two years. However, since RealT is not mandated to participate in real estate investments, and if it chooses to participate, there are no specific restrictions or guidelines on the level of participation, the profits RealT earns from rental income remain unknown.

From the perspective of corporate structure, RealT established Real Token Inc. in Delaware as the core entity of the company. This entity does not own any real estate assets; it merely serves as the operating entity for the RealT project. In addition, RealT also established Real Token LLC in Delaware as the parent company of a series of real estate companies. Like Real Token Inc., Real Token LLC)LLC: Limited Liability Company( does not own any real estate assets; its primary purpose is to simplify legal procedures, allowing users to invest in all properties by signing a contract with just one company. Lastly, RealT established a corresponding series of LLCs for each invested property. As a subsidiary of Real Token LLC, each series LLC owns specific properties and corresponding tokens. This structure is designed to ensure that financial or legal issues of one property do not affect the operations of other properties or the parent company under RealT.

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) Parcl

Parcl is a DeFi investment platform that allows users to trade the price fluctuations of the global real estate market. Parcl is used to market real estate-related synthetic assets through an AMM architecture. Parcl has launched Parcl Labs Price Feed to create a specific area real estate index based on its sales history. The duration of the historical record can vary depending on the transaction frequency of the properties. After the index is created, investors have the opportunity to speculate on the price trends of properties, establishing bullish or bearish positions on the real estate prices in that area.

This approach avoids the legal issues involved in actual real estate operations because there is no real property transaction. You might also question whether it truly qualifies as a real estate RWA project, as it does not meet the aforementioned criteria. However, it is a relatively popular RWA project, receiving investments from many well-known companies, and its uniqueness makes it reasonable to include it in discussions on the diversification of real estate RWA products.

Parcl's testnet was launched on Solana in May 2022, and its TVL is currently $16 million. However, after more than a year of operation, Parcl does not seem to have attracted much attention, with a daily trading volume of less than $10,000 and fewer than 50 daily active users.

Parcl's products are easy to use and rapidly upgraded, with Parcl Labs price providers and index market designs being relatively mature. In terms of operations, the Parcl team actively launches Parcl Point, Real Estate Royale, and other user acquisition programs. Despite these advantages and the support of numerous well-known investment institutions, Parcl still maintains a relatively low market attention and market share, with a small user base and limited trading volume. This perhaps proves to some extent that the Crypto Assets market is not yet ready to welcome real estate index products.

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) Reinno

Some large Crypto Assets companies are also exploring products in the direction of real estate RWA. One company announced that its central bank digital currency team is trying to support users in tokenizing real estate and using it for mortgages. A certain institution has also collaborated with partners to support real estate mortgage lending. RealT also offers the option of using tokenized real estate as loan collateral, but this service is limited to the real estate tokens they issue. Essentially, this service is more similar to token lending products and does not significantly enhance the capital liquidity of individual real estate owners.

Reinno is a defunct project that was launched in 2020 and ceased operations in 2022. Although it did not leave much of a mark on the market, it introduced two products related to real estate RWA that are worth mentioning.

The first product is a loan service based on tokenized real estate. When property owners need financing, they can submit property documents to Reinno. Once approved, Reinno will create it in Delaware.