The Development of Real World Assets ( RWA ) in the Crypto Assets Market

The concept of real-world assets ( RWA ) in the cryptocurrency market is not a recent phenomenon. As early as 2018, there were attempts at asset tokenization and security token offerings ( STO ) that were similar to today’s RWA concept. However, due to an inadequate regulatory framework and the lack of significant potential return advantages, these early attempts failed to develop into a mature market segment.

In 2022, as the United States continued to raise interest rates, US Treasury yields significantly surpassed the stablecoin lending rates in the crypto market. Therefore, tokenizing US Treasury bonds into RWA has become increasingly attractive for the crypto industry. Mainstream DeFi projects and traditional financial institutions, even some governments, have begun to explore the RWA space.

In the past two years, several real estate RWA projects have emerged in the market. They aim to expand the real estate investment market in various ways, enrich real estate investment products, and lower the entry threshold for real estate investors. This study conducts case analyses of these projects, exploring the advantages and disadvantages of real estate RWA design and the potential market. As these projects primarily target North American real estate assets and investors, the discussion on relevant policies, regulations, and market conditions will mainly focus on the North American real estate market.

Methods for Tokenizing the Real Estate Market

The real estate market is a vast field full of investment opportunities. According to a March 2023 study by Statista, the North American listed real estate market is valued at up to $1.3 trillion, while the global listed real estate market reaches $2.66 trillion.

The core goal of tokenizing the real estate market is to achieve one or more of the following objectives: to create more diversified and flexible real estate investment products, to attract a broader range of investors, and to enhance the liquidity and value of real estate assets. These products mainly take three forms:

1. Real Estate Ownership Segmentation Financing
2. Specific Area Real Estate Market Index Product
3. tokenized real estate as collateral

Moreover, tokenization and blockchain integration have enhanced the transparency and democratic governance of real estate assets.

Real Estate Investment Trusts ( REIT ) share similarities with Real World Assets (RWA) in providing partial real estate investment opportunities, effectively lowering investment thresholds and increasing liquidity of real estate assets. However, traditional REITs typically do not offer management opportunities or ownership to investors, maintaining a centralized operating model. Nevertheless, their rigorous asset scrutiny and investment construction within a strict regulatory framework provide a solid blueprint for real estate RWA projects.

In the past two years of operating the real estate RWA project, we have gained a clearer understanding of its advantages and disadvantages.

Real estate RWA projects usually have the characteristics mentioned above. After delving into specific cases, I found that due to different management and product approaches, each project encounters different situations in actual operations.

Case Study

This chapter selects three real estate RWA projects for analysis. Each project uses a different method to tokenize the real estate market and is the most popular in its respective field. It is important to note that these are still early projects, and their products have not yet undergone long-term extensive market validation and testing.

RealT

RealT was launched in 2019 and is one of the oldest real estate RWA projects on the market, focusing on providing investment in US residential real estate primarily on the Gnosis blockchain through Ethereum and Gnosis (.

RealT acquires residential properties and tokenizes entities that hold property deeds according to U.S. regulations. The management, maintenance, and rent collection responsibilities of these properties are delegated to third-party management agencies. After deducting expenses, the rent generated from specific properties is distributed to their token holders. While RealT is responsible for the tokenization process, they are legally separate from the companies holding the real estate assets. According to their website, in the event of a company default, token owners retain the option to appoint an alternative company to manage the holding property deed company. It is noteworthy that they do not require co-investment in the properties they introduce to the market. Property token holders receive a portion of the property rental income monthly, excluding approximately 2.5% for maintenance reserves and a typical management fee of around 10% of the value.

Taking a property of a certain Montgomery as an example, the total value of the real estate tokens is $323,020, with each token priced at $52.10, 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 costs, the monthly net profit is $1,978, resulting in an annual income of $23,736. Therefore, each token receives a distribution of $3.83, with an annualized yield of 7.35%.

For this property, RealT offers 100% of the tokens, meaning RealT does not need to co-invest with clients and can maintain an almost risk-free operating model. The management institution collects 8% of the rental income and maintenance fees, while the investment platform only charges 2% for property tokenization, selecting management institutions, and overseeing management. In this way, the RealT team can save a significant amount of management time, focusing on finding qualified properties and tokenizing them for the market.

However, while fractional ownership facilitates risk sharing among investors, it also brings challenges. When investors' financial interests are too small, the management costs of the company become unviable. A report explains the conflict of interest between real estate token holders and RealT. RealT chooses management agencies to manage the properties it owns; if RealT has a significant ownership of the properties, it can reduce agency costs; therefore, inefficient management can have negative impacts on them. However, if RealT's equity is too large, it may negatively affect token liquidity, and minority shareholders may also become free riders. These owners may expect major shareholders to supervise whether the hired management agencies are financially viable. On the other hand, if RealT's equity is very small, RealT may lack sufficient motivation to choose management agencies or participate in the oversight process, and many investors may also find it difficult to effectively supervise the management agencies.

I selected the latest ten sold-out tokens on the RealT market and used relevant blockchain explorers to find the number of property holders for each.

![Bricks and Blocks: A Study of Real Estate in the RWA Market])https://img-cdn.gateio.im/webp-social/moments-dab211e0a60d06e6971df918fdfd7e26.webp(

As shown in the chart, RealT divides properties into different amounts of tokens, with each token priced at approximately $50. Most properties are located in Detroit, with about 500 token holders, and two properties have over 1,000 holders. Now, combine this with the number of tokens held by each holder to understand the investment range of RealT investors.

![Bricks and Blocks: A Study of Real Estate in the RWA Market])https://img-cdn.gateio.im/webp-social/moments-c1c5e1d087322a31c0503638bef22e30.webp(

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

According to the transaction data of the RealT wallet ) Gnosis wallet address: 0xE7D97868265078bd5022Bc2622C94dFc1Ef1D402(, RealT has paid a total rent of approximately 6 million dollars. The platform fees fluctuate based on maintenance costs, insurance, and taxes, approximately 2.5%-3% of the rent, amounting to about 150,000 to 180,000 dollars in platform revenue over the past two years. However, since RealT does not mandate participation in real estate investment, and there are no specific restrictions or guidelines regarding the level of participation if one chooses to invest, the earnings RealT gains from rent income remain undisclosed.

From a corporate structure perspective, 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. Additionally, RealT established Real Token LLC in Delaware as the parent company of a series of real estate companies. Like Real Token Inc., Real Token LLC does not own any real estate assets; its main purpose is to simplify the legal process, allowing users to participate in investments in all properties by signing a contract with one company. Finally, RealT establishes 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 related to one property do not affect the operations of other properties or the parent company under RealT.

![Bricks and Blocks: A Study of Real Estate in the RWA Market])https://img-cdn.gateio.im/webp-social/moments-98de8e550c8f155cd34513c6f18133cf.webp(

) Parcl

The Parcl protocol is a DeFi investment platform that allows users to trade price fluctuations in the global real estate market. Parcl is used to gain perpetual exposure to synthetic assets using an AMM architecture. Parcl introduces the Parcl Labs price feed, which creates indices for real estate in specific regions based on sales history. The duration of the sales history can vary according to the frequency of property transactions. After the index is created, investors have the opportunity to speculate on property values, being able to go long or short on real estate prices.

This approach allows Parcl to avoid legal issues, as the platform does not involve actual real estate in its operations. Some may question whether it is truly a real estate RWA project, as it does not meet the aforementioned criteria. However, it is a relatively popular RWA project that has received investments from several industry leaders. Including the discussion of the diverse possibilities of real estate RWA is reasonable.

Parcl's testnet was launched on Solana in May 2022, with a current TVL of $16 million. After more than a year of operation, Parcl seems to have not garnered much attention, with a daily trading volume of less than $10,000 and fewer than 50 daily active users.

Parcl's products are simplified and developed quickly. Parcl Labs' price feeds and index markets are well-designed and easy to use.

In terms of operations, the Parcl team is actively launching user acquisition programs such as Parcl Point and Real Estate Royale. Despite these advantages and the support of numerous well-known investment institutions, Parcl still maintains a relatively low-key market position, with a small user base and limited trading volume. Perhaps the market is not yet ready to accept real estate index products.

![Bricks and Blocks: A Study of Real Estate in the RWA Market]###https://img-cdn.gateio.im/webp-social/moments-51f60a9aeef26de0b7ff4137c0ddf278.webp(

) Reinno

Some large Crypto Assets companies are also exploring the possibility of allowing users to tokenize real estate as collateral for loans. A certain company announced in July that its central bank digital currency team is working in this direction. A certain DAO has integrated with RobinLand to support real estate mortgages. RealT offers the option to use tokenized real estate as collateral for loans, but this service is limited to the tokens they issue. Essentially, this service is more like a token lending product and does not significantly increase the capital liquidity of real estate owners.

Reinno was an abandoned project launched in 2020 and ceased operations in 2022. Although it did not leave much of a mark on the market, it introduced two noteworthy real estate RWA-related products.

The first product is a loan service based on tokenized real estate. When property owners need financing, they can submit property documents to Reinno. After approval, Reinno will create a special purpose company for the transaction in Delaware. Then, Reinno will create smart contracts for the real estate tokens, which owners can deposit as collateral for the loan. The loan limit will be based on the value of the tokens.

The second product is mortgage financing. After users purchase real estate and obtain a mortgage, they can tokenize the property ownership to obtain financing. The funds obtained can be used to repay the bank mortgage, and then the client repays the loan at a fixed interest rate.

Reinno's operations are still centralized and offline, requiring customers to visit the office and submit real estate documents. There are some obvious risks associated with this approach of Reinno. First, if a borrower chooses to default and stop repayments, Reinno, as a tokenization service provider rather than a lender, will find it difficult to sue the borrower. Reinno does not actually own the mortgaged property; the loans are actually provided by users who choose to lend on Reinno. Currently, due to the lack of communication between lenders and borrowers.