Shares of real estate tokenized by RealT and Aave will be used to get money from banks as collateral for loans.
It is a system that lets people lend money to each other without having home mortgages are the most expensive purchase most people make in their lives. Aave is getting into the business of tokenizing these loans.
Aave said yesterday that it was working with RealT, a company that makes real estate tokens, to let people use their tokenized real estate as collateral to get loans from Aave.
It’s the latest in the money lego trend of decentralized finance when different DeFi protocols are put together to make something new. In the excitement, it’s easy to forget that there are risks. A bad smart contract or hack could cost someone their home.
How Tokenized Mortgages Work
It’s not novel to tokenize land. Instead of owning an entire house, users can buy house shares. Aave’s Stani Kulechov told Decrypt. Uniswap tokenized dwellings allow anyone to buy a piece of property.
RealT of Florida has gone further. It wants users to use Aave’s decentralized lending protocol, which now supports a $1.7 billion lending market, to stake real estate tokens as collateral for loans.
Its attractiveness is that these RealT tokens may be used as collateral for stablecoin loans, which are cryptocurrencies pegged to a fiat currency like the US dollar.
To pay for a bag of chips, you may use your RealT tokens, which reflect your home equity, as security for a dollar loan. Your following income will allow you to repay the dollar and regain your equity in the home.
Imagine paying off your entire mortgage, white picket fence and all. You won’t make money until you sell or rent that house. But if you tokenize it, you may use it to borrow USD stablecoins on Aave.
Kulechov says this is significant when a property’s value increases and the owner wishes to utilize the equity without selling.
Home equity lines of credit offer similar benefits without a blockchain but with origination fees and interest.
The equity is fungible and can be traded on secondary marketplaces. Chainlink, the decentralized price oracle service, will determine the worth of these RealT tokens a few times a year. RealT users will be informed in advance to ensure their loans are adequately secured.
A couple of caveats: First, no release date has been announced due to Aave’s decentralized structure. Secondly, the loan market will be confined to allow listed Ethereum addresses by a KYC process with RealT, according to Kulechov.
Not Your Keys, Not Your House
Decentralized finance is a very new business. A metrics site called DeFi Pulse says that the company had $1 billion in smart contracts at the start of June. By the end of the month, that number had grown to $9 billion.
The space is still full of bugs and flaws in its desire to be new. People don’t know the answer to many questions. Suppose someone hacks Aave or gets their hands on your private keys. They could then lend out your house to get a short-term loan.
They also take a long time to pay off. We don’t know if Aave will be around next year. High stakes.
But crypto has always been a big dream. In Kulechov’s view, this is just the beginning. He wants to see a day when we can all pay for our mortgages with crypto.
He said that when you use your house as collateral, it’s almost like you’re taking out a loan. This is the next step. When someone wants to buy a house, the house is tokenized, which means that someone can give a loan directly to the person who wants to buy the house.
For now, it’s not clear if the DeFi house is built on sand, but it will be soon.
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