Real Estate as Collateral in the Blockchain Era

The real estate sector has always been an important market for many parties. From consumers and investors to lenders and economists, usually have a close look on the real estate market and analyze its performance. It goes without saying that every party checks the market from their own perspective. The consumers and investors might have similar perspectives while lenders and economists probably have different views.

From a lender’s point of view, the real estate market and how it performs is quite important, as one of the main assets that is utilized as collateral to secure loans are real estates. Let’s dive deep in and see what it is and how it works.

What do lenders do?

You must be familiar with what lenders do. Lenders lend money and that’s all. Basically, businesses who seek financial resources to expand their business are one of the main customers of lenders. Besides, home buyers either for investment or for residential purposes, borrow from lenders to buy a property. The lenders are technically banks and financial institutes who have access to financial resources and their main business is to lend money and receive the principal and interest. However, they need collateral to secure their money in case the borrower becomes incapable of fulfilling their commitments. Real estate properties in general and commercial properties in particular are among the most popular collaterals when it comes to lending money.

As such, the real estate sector is not only popular for investment, business and residential purposes, but also is a perfect collateral for the financial services market.

Blockchain and the Real Estate Sector

Tokenized real estate has emerged recently as an application of Blockchain. Today, a property of any type can be converted to NFTs within a blockchain network. There are plenty of great benefits associated with property tokenization. It brings more transparency and better liquidity to the real estate market as well as making real estate fractional ownership possible. The process of tokenizing a property leads to crafting multiple NFTs that represent a fraction of a real property within a blockchain network. Tokenized tangible assets can be a property in Dubai, a piece of diamond that is stored in a vault in Lichtenstein or an artwork. Information about the ownership, authenticity, trade history, etc is stored in a shared ledger that can not be changed or replicated. Likewise, all applications that are associated with the underlying asset accompany the NFT that represents that asset or a fraction of it within the blockchain.

Real Estate NFT as Collateral

Real World Assets and DeFi has brought all traditional financial services into the blockchain world. Like the traditional financial service sector, where people can borrow money as a mortgage or a business loan, you can borrow money within the blockchain. The process is almost the same, however it is faster, easier and cheaper, as they are the smart contracts that take care of the whole process and not the humans. To secure a loan in DeFi, lenders need collateral, just like how it works in the traditional finance procedure. Here is where the NFTs that are backed by a real estate property play an important role. Borrowers can purchase tokenized property and utilize them as collateral to secure a crypto loan. There are a few platforms like Aave, Nexo, Coinloan, etc, where you can borrow crypto in exchange of an appropriate collateral like a real estate NFT.

Final Words

Blockchain is changing the landscape of almost all businesses and markets across the globe. Real estate tokenization, as one of the recently emerging applications of the blockchain is rising in popularity. It brings a lot of benefits to the real estate market as well as the DeFi. As discussed earlier in this article, tokenized properties can be used as collateral for lending services within DeFi. It is not only a perfect solution for securing loans, but also provides more liquidity for investors and lenders. 

Blockchain, DeFi and their applications are changing the game for most markets. However, you must be very careful as the technology is still suffering from lack of proper regulations and legislations. If you are interested in asset-backed NFTs, always make sure the legitimacy of the project, as well as the local regulation and laws for the sake of safeguarding your investment.