Discover more from Charterless
Homebase, Solana and the mind boggling Implications of Real Estate on chain
Reporter Michael Lewis is the luckiest man to cover unlucky financial events.
Thanks for reading Charterless! Subscribe for free to receive new posts and support my work.
In the days after FTX’s collapse, entertainment newsletter The Ankler reported that Lewis had been spending time with FTX Founder Sam Bankman-Fried for an upcoming book.
Even if you don’t recognize his name, you know Michael Lewis.
He wrote the book that became The Big Short starring Brad Pitt, Ryan Gosling, Christian Bale and Steve Carrell. The Big Short tells the story of another massive financial collapse, of how the US mortgage industry became a massive speculative bubble that almost took down the entire global economy when it collapsed.
If you ask the typical American about crypto, the first name they will know is SBF.
If you ask the typical American about mortgage backed securities, they will know about the 2008 financial crisis.
So if you tell our typical American that you want to marry crypto and its SBF-laden craziness with real estate backed securities like those that touched off the Great Recession, they are liable to think you are a scammer or a nihilist.
When I first met Domingo and the Homebase team, that was my reaction, too.
But in the year that I’ve known them, I’ve gone from hostile to skeptical to true believer. Crypto is going to come for your home.
And here’s the really crazy thing – you’re going to be glad that it did.
When the crypto bubble burst (repeatedly) in 2022, commentators were quick to point out that its impacts seemed to be limited to the crypto economy.
This was good news for the primary economy. But it also demonstrated that the crypto economy remained circular. A digital financial system for digital goods, or to be less charitable, made up money for made up assets.
That’s not entirely fair – the stablecoin sector is worth in excess of $120B. But those stablecoins, though they represent real world value, are mostly chasing digital assets.
In a report last month, BCG sized the value of “Real World Assets” on-chain at $310B. That represents roughly 20% of the entire crypto-space (not bad) or .2% the size of the 120T global securities market (not great).
All of this is to say – crypto has a long way to go if it is going to make a dent in the world of traditional finance. In An Unreal Primer on Digital Assets, Teej Ragsdale, Jack Chong and Mukund Venkatakrishnan argue that DeFi will first find product market fit on the long-tail of speculative assets that are not served by additional securities standards. That includes everything from digitally native products like collateralized-NFT protocols to developing markets’ debt to investments in DAOs or DeFi protocols.
Why? Because it is easier for a new technology to integrate and provide a standard for net new assets than it is to convince existing products that are humming along to switch to a new, less-proven system.
Real estate, in many ways, is the king of assets. US Mortgage backed securities alone account for $12 Trillion in assets. They are also, as 2008 taught us, one of the most sophisticated and therefore dangerous financial markets in the world.
Securitization standards were created for loans in the United States in the early 1990s, and those standards powered a revolution – enabling cheaper loans for homes, for cars, for businesses, for. Everything. If you’re an institutional investor in real estate, today’s market functions well.
So why would the real estate market move on-chain? As with everything in life, the answer comes down to Removing Friction and Increasing Value.
Imagine that you are moving to a new town and would like to buy a home. Today that process looks a bit like this:
Finding a real estate agent. Agents are important because they have access to MLS (multiple listing service) which they use to look for homes that may not be on the market yet.
Scouring Zillow/Realtor.com for homes. As you find homes you like, you have to contact the sellers agent to setup a walkthrough of the house, either digitally or physically.
Making an offer. Once you find a home you like, you work through your agent to help you prepare and submit a buy offer. The seller’s agent is the one that receives the offer, shares it with the homeowner, who either will accept, reject, or counter your offer.
Negotiating with the seller. If the seller counters your offer, you and your agent will negotiate the terms of the sale until you reach an agreement.
Home Due Diligence. This typically involves getting a home inspection and checking liens on the property through a title company to make sure the property is in good condition.
Qualifying for a mortgage. This is typically the longest and most important step in the process. Most homes are financed via mortgages, where an owner puts a 20% down payment on the home and takes out the remaining 80% via bank loan. This process is easily the longest, requires weeks of bank due diligence to check your credit score, conduct an appraisal on the house to ultimately decide if you qualify for the loan.
Closing the sale. Once you’ve conducted your due diligence, you’re happy with the home, and you’ve secured your mortgage, you’ll sign relevant closing documents (such as deed of the home) to transfer ownership of the home and finalize the sale.
In a bit more detail that looks like this:
That’s a lot of friction.
Now - folks are still going to want to research and tour houses, so a world of “one-click-buy” homes is probably out of the question. But consider all the other frictions that happen once you decide to buy.
There’s asynchronous negotiation, a long mortgage process, a long diligence and verification process, and finally a long closing process.
What if that could be handled instantly?
Imagine this world:
Home Title on Chain. The house deed could be placed entirely on-chain. This would eliminate the need for much of the manual work of finding, exchanging and custodying the home title. If that title included an ability for inspectors to record the results of diligence on-chain, then validators could inspect and provide diligence in advance of sale that would be certified for any potential bidders.
Mortgage. Today, mortgages are originated by banks, sold to servicers and eventually packaged as securities. But, imagine instead if a buyer could log-in to a platform with their digital wallet. That wallet could be connected to their existing financial credentials, importing their credit history, their income and any other financial data. Automated agents could then issue smart contract offers for a mortgage that the purchaser could accept or decline immediately. Once accepted, that smart contract would be in effect, as well as be instantly tokenizable.
Tokenization. Today, securitizing mortgages is a long and opaque process available only to institutional investors. Tomorrow, every mortgage could be represented by a transparent contract on-chain that could be subdivided and sold to individual retail investors via standard fungible tokens. This approach would allow massive pools of investors, and new capital, access to the market. It would allow individuals to own and invest in real estate according to their needs. It would allow owners to sell portions of their home, or use portions as collateral.
All three of these changes would work to reduce friction in the buying process. That convenience is nice, in and of itself, but its second order potential is mind boggling.
After a period of low rates, interest rates rose this year. A 30-year mortgage for individuals with excellent credit is currently pegged at ~6.2%. This market price reflects both the demand of mortgage holders and the supply of capital via investors.
By enabling tokenization, and introducing new forms of securitization, on-chain real estate will dramatically increase the amount of available capital, and the number of individuals and investors willing to furnish capital for real estate. The result could be a second revolution in financing, equivalent to the first securitization rush of the 1990s, that would dramatically lower rates for home buyers. Not to mention that enabling homebuyers to directly sell tokens representing home equity would provide yet another path toward making homes more affordable.
And that’s not all. That’s just making the existing market more efficient. Tokenization also has an exciting new possibility. It can create entirely new markets.
Tokenization is not just about moving assets onto the blockchain. Because tokens are not just deeds, but are, themselves programmable, they can enable new forms of ownership that are not currently possible. Here’s a few new types of ownership that could become reality:
Splitting the Bundle. When you buy a home today, we say that you have acquired a bundle of rights. Those rights include the Right of Title (the right to a deed that says you own the house), the Right of Disposition (the right to sell the house), the Right of Enjoyment (the right to use the house as you see fit), the Right of Exclusion (the right to keep people off your property) and the Right of Control (the right to build on or alter the property). Because homeownership is already so complex, those rights have always been bundled together. But in a world of tokenized ownership, it’s easy to imagine separating them and selling the different rights as distinct tokens. A group might purchase and tokenize a house, then sell tokens that enable individuals to purchase shares of the Right to Enjoyment (creating a mini timeshare), but retaining the rights of Disposition, the Rights of Control and the Right of Title to themselves. Alternatively, they might auction off the Rights of Control and the Right of Enjoyment, but keep the other rights. Tokenization enables flexible ownership. That’s a totally new behavior.
Mutual Investment. Historically, the government has promoted homeownership both as a savings vehicle, and because owning a property invests individuals in their community. Imagine if tokenization could make that literal. When you purchase a home, you could purchase 90% of your home, and also hold a token representing a literal investment in an index fund of homes in your neighborhood. This type of arrangement encourages neighbors to work together to promote the welfare of the neighborhood as what is good for one of them becomes good for all of them.
Multigenerational Ownership. It is common, especially in poorer communities, for multiple households to live in a house. But today, it is difficult to enable multiple people from multiple generations to share legal rights over a home. Tokenization could make this process trivial, allowing each generation to own shares of a home, and allowing them to easily reconfigure these rights as a family grows and changes over time.
As a matter of principle, I like to think of myself as a “pragmatism maxi.” I tend to avoid religious debates over which chain is the one-chain to rule them all. But I think, when it comes to this kind of a use case, the argument for Solana as the obvious L1 for real estate is pretty clear. Securities innovation happens when the barriers to experimentation are low. High gas fees, high friction to bridge assets across multiple chains – all of these are frictions. The ideal is clearly a simple, fast and cheap L1 with proven liquidity and battle tested infrastructure.
Of course, it might seem like any blockchain would dramatically reduce friction over the existing process. And that’s true. But there are a whole class of applications that become possible when friction moves from “lower” to “zero.”
There’s a world where paying your monthly rent might directly entitle you to portions of equity – allowing renters to become buyers for under a cent of gas fees.
There’s a world where home securities can be fractionalized and bundled by any possible heuristic at the drop of a hat. That requires the ability to mint thousands of NFTs representing shares in fractions of a second – Solana’s compressed NFTs allow that for a fraction of the price of mass-minting.
There’s even a world where owning shares of a property directly entitles you to buy other shares – for example, a primary buyer having the right to buy tokens back directly. That type of control is possible through code written in executable NFTs, a unique standard to Solana.
These technologies might be possible on other blockchains, but today … well, there’s a clear reason that HomebaseDAO and other Real World Assets are building on the Solana ecosystem.
Crypto has a way of incentivizing speculation. And, of course, every new form of financial innovation that I have listed above has a potential for abuse.
So why should we allow any of these types of new financial schemes in our housing industry?
The answer, ironically, is plain when you watch The Big Short.
MICHAEL BURRY: I need you to get me the top 20 selling mortgage bonds.
YOUNG ANALYST: So you want to know what the top 20 selling mortgage bonds are? MICHAEL BURRY: No. I want to know what mortgages are in each one.
YOUNG ANALYST: Wait, aren’t those bonds made up of thousands and thousands of mortgages?
MICHAEL BURRY Yes.
It is the utter opacity of the current real estate market that made bubbles so prominent. When everyone believes that a product is safe, and researching it is difficult, it is shockingly easy for risks to metastasize to systemic proportions.
But, if instead, all of the data about mortgages, all of the terms, all of the financial information was open and readily available on-chain, if all of that data was viewable on a block explorer, if it was analyzable with artificial intelligence programs, then we would expect that investors could bet for and against mortgages to ensure that the risk was priced appropriately. Information asymmetries create bubbles. Transparency creates efficient markets.
And transparency in a world where LLMs can quickly answer any question about any particular property or any particular security … Well, that just might change everything.
Furthermore, in the event of bubbles or housing recessions, the government’s path toward intervening would become far more clear. One of the most potent critiques of the Bush and Obama administration’s response to the 2008 financial crisis was that the government bailed out banks rather than homeowners. This is, of course, a simplification. The government bailed out banks to keep the markets operating to protect the interests of homeowners.
But a world with transparent, liquid markets could be protected directly. Rather than investing through banks, the government could pump investments directly into the market – protecting asset prices, purchasing toxic assets, and ensuring that the market operates smoothly. And it could do so without privileging the interests of large institutions over retail traders.
That might prevent Michael Lewis’s next big scoop.
And frankly, a world without more blockbuster worthy financial scandals is one that we should aspire to create. Even if it means less time spent with Ryan Gosling and Brad Pitt.
Thanks for reading Charterless! Subscribe for free to receive new posts and support my work.