There are many ways to utilise an ICO (initial coin offering) for a real-estate backed project. In the early days of this whole blockchain revolution, real estate was always touted as one of the main use cases for it. When Hyperledger first came out – in the initial days, when both Dans (Dan O’Prey and Daniel Feichtinger) were essentially working on the project – I had an idea for a crowdsourced real estate project.
Now that this whole Ethereum and ICO market is blooming, my idea can actually be implemented. It’s only a matter of time before someone launches an ICO using this technique.
Investors invest in a project to gain returns. Let’s take the example of Dubai, because there are many real estate projects coming up there. Here’s something a builder such as Nakheel or Emaar could use to utilise Ethererum’s smart contract capability, as well as crowdfunding for its projects. For purposes of keeping the mathematics and concept simple, we will denote everything in US dollars. Let’s assume Emaar wants to build a set of townhouses.
- Each townhouse has a market value today at US $2.5m.
- Emaar wants to build four of them, for a grand total of $10m.
- Emaar also needs two years to build this quad-house.
- Emaar needs the money to build this project (truth be told, I wouldn’t be surprised if it actually needed the money … anyhow, I digress).
- The maturity period on this ICO is 24 months.
So Emaar does an ICO. The ICO is an Emaar ICO (so the reputation is already established by the party wanting to do the ICO). This is no Tom, Dick, Harry, Jane, Mary, Joe doing it. This is Emaar. Emaar issues ETT (Emaar Townhouse Tokens).
- The total token supply is 10 million. Each ETT = 1 US dollar.
- The ICOs are equally placed in four contracts.
- Each contract corresponds to one house (i.e. 2.5 million ETTs).
- At the end of the maturity period, the tokens will be sold as follows:
- Each contract holding 2.5 million ETTs will be returned at a value of USD $1.1 (i.e. a 10% gain) back to the holder, i.e. the 2.5 million ETTs are now valued at USD $2.750m. This is called the Min_Street_Value.
- This USD $2.750m is the minimum street price of the house at the end of two years, for which a buyer would be committed to after the token sale has concluded (i.e. some person or entity will step forward and place into it the smart contract, USD $2.750m worth of Ethereum tokens, which will be cashed out on the last day of the 24-month period).
This is extremely important … So regardless of what happens in the future, each token holder is guaranteed a return of 10% and their principal back in full. Any other person can come in and place a higher bid, and this bid (in Ethereum) would have to be higher than the Min_Street_Value bid. So person X places a bid for ETT of $1.2, i.e. 2.5 million ETTs = USD $3.000m. The contract is programmed as such:
At the end of Maturity_Period, the Ethereum Smart Contact will check if there’s a buyer that has put in coins and a bid that’s higher than the Min_Street_Value. In this case, there is a bid from person X for $1.2 per ETT, so that contract will automatically execute (if there’s no bid higher than $1.2 per ETT) in the system. This pretty much guarantees these things:
- The money is never lost in this ICO, as there’s buyback guarantee.
- There’s a physical asset backing this ICO.
- There’s a proper name of repute backing the ICO.
- There’s a guaranteed buyback price for this ICO.
If the property price will be higher by the time it comes to completion, then the buyers who are interested can bid for it – via their bank etc. – and place the money via the ETT coins into the blockchain + smart contract.
Not only does this scenario utilise the crowdfunding aspect of the ICO, it also looks at micro (or fractional) ownership of an asset for a small while, before a final buyer comes and claims the asset at a market value price. Exciting times ahead.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image by Alesandro14, Shutterstock.com