Real estate tokenization: First mortgage tokens on the Open Money Market
This article is a culmination of a series of previous articles where we laid down some of the foundational concepts necessary. We will connect all the dots here.
discusses what kind of assets can be tokenized.
and
talks about the tech architecture of such asset tokens.
talks about how real estate developers can raise funding using DEFI channels.
We intend to take a first mortgage loan and tokenize it in the form of ERC20 tokens. Such a loan will be completely underwritten or prefilled via large investors. This loan is now an asset on the book of the large investors.
They can represent this asset as a set of ERC20 tokens and now borrow against it on the Compound style Open Money Market.
An explanation of how the Open Money Market would work can be found here:
and
In order for an asset token to be used as collateral on the Open Money Market it needs to have liquidity on Uniswap.
We have discussed how Uniswap decentralized liquidity works here:
and a discussion how to benchmark the collateral factors of non standard assets can be found here:
So in order to be able to tokenize a first mortgage (FMT tokens) and borrow against it on the OMM, you need to have liquidity for the FMT on Uniswap.
So the real question we are trying to address is how do we achieve liquidity for FMT?
The expectation here is that the large investors who prefill the first mortgage loan are trying to de-equitize their position by borrowing on the OMM. That way they can recycle their funds for the next loan or other purposes before the project completes.
But they are perfectly satisfied with the quality of the asset they originally invested in (First mortgage) and are happy to buy back in if the new investors want to cash out at any point in time.
The large investors would become liquidity providers on Uniswap for the FMT tokens (against ETH base pair).
While this does mean that their funds are locked for the duration of the project it can still be made lucrative for the large investors to do this.
Incentivization of liquidity providers can be done in 2 ways:
- Liquidity providers get a standard 0.3% fee. There is no impermanent loss as the underlying asset is not going down.
- Just like what Syntetix does, we will look to provide liquidity providers with reward KKT Tokens. The fees generated from the platform will be split among the KKT token holders.
KKT would be a bit like MKR where it represents ownership of the ecosystem.
Liquidity fees plus bonus KKT tokens which provide additional fees and ownership of the system would form the key incentives for getting the liquidity.
Note that we may have to build some lock mechanisms where those who are providing liquidity are locked into providing that for a certain period of time before they can step out of the pool and they have to broadcast their intention to withdraw from the pool significantly in advance, allowing others to front run them.
This model of real world asset tokenization to make borrowing against it possible from DEFI will form the basis of the work done at Konkrete in the coming days, months, and years to come.
We expect to go into a closed beta by mid March.