Last week Aave V2 made its debut and introduced many new features that will push the boundaries of decentralized finance, including private markets to better suit the needs of institutions. The Aave x RealT collab in the making is one of these new features that will take DeFi to the next level and bring mortgages onto Ethereum.
RealT launched in 2019 as one of the first projects tokenizing real estate on Ethereum and to be integrated into the DeFi ecosystem. RealT Allows investors to directly buy shares of LLC managing properties and each RealT Token holder regularly earns their share of the property revenues directly into their wallet with stablecoins.
RealT grew to be the community favorite in this market, and Aave is excited to explore new synergies with them!
The Aave Protocol allows for the creation of new money markets. These multiple markets have different purposes and parameters, and we are excited to announce that we’ll support a proposal to add a RealT Market to the protocol. This is a market where RealT tokens can be used as collateral to borrow stablecoins.
Due to the fully compliant nature of RealT assets, this market will be limited to whitelisted Ethereum addresses by a KYC process with RealT. This is a brand new step in DeFi, with RealT being the first decentralized-but-permissioned market of the ecosystem.
On the Aave RealT market users will be allowed to deposit their tokens into the Aave Protocol and use them as collateral to borrow stablecoins, opening up new use-cases for their assets.
We think RealT assets are a great portfolio diversification tool for the ecosystem, Real Estate being less correlated to crypto assets.
The ability to use RealT assets as collateral makes “mortgage” loans on Ethereum available to a wider audience for the first time, allowing users to use their Real Estate exposition to finance their liquidity needs, spending or diversified investment strategies.
Intrinsically RealT assets collect stablecoins on a regular basis, and this can be leveraged in these loans as “income” that can contribute to the repayment of the loans organically, creating loans that at least partially repay themselves!
Even before the resounding success of DeFi, RealT saw the potential of an integration into DeFi. The two partners were destined to meet and create a new experience for the real estate market that is accessible to all, Aave being an avant-garde DeFi protocol and RealT being a pioneer in the tokenization of physical assets.
RealT Tokens holders will, therefore, be able to take advantage of Aave’s ability to provide them with a loan on their investments deposited as collateral, whether it’s to simply get a new TV, go on vacation, or leverage in borrowing on Aave to buy other RealT Tokens again, the possibilities are numerous and make the initial value much more liquid.
In the more or less near future, RealT will allow private tokenization, which means that a person who currently owns real estate (in a traditional way) in whole or in part (well, with a traditional mortgage) could tokenize his property, not to sell it, but to change the financing model in order to move from a centralized system (bank or insurance) to a decentralized model or to free up part of the capital to make it work and finance other needs.
For Aave’s liquidity providers, the RealT Market could be an excellent market for decreasing its exposure to the risk of default, which can happen as we experienced with MakerDao on Black Thursday. Aave has paid close attention to these points and has held up well, however, the risk remains. The RealT market will be more stable and exposure to this risk is therefore reduced.
The real estate market is volatile and prices are subject to change, and RealT price updates must be accurate and in line with the real world property market. In order to ensure that these price feeds are correct, Aave utilizes Chainlink’s decentralized oracle service. As the Real Estate market is a touch less volatile than crypto markets, the need for frequent updates and swift liquidation is less present with the RealT Market. Therefore, the price feed oracle powered by Chainlink will update the valuation of the RealT tokens just a few times per year and every RealT user will be notified in advance of the price update, allowing them to react and make sure their loans are sufficiently collateralized to avoid liquidation as much as possible.
If a liquidation is needed, liquidators need to be whitelisted by RealT to be able to pay back debt on behalf of the borrowers and collect RealT assets for their service. RealT and Aave are in contact with several entities that have declared interest in protecting the Aave market.
Last but not least, if that line of defense fails, RealT will be the buyer of last resort for the underwater positions and will collect the collaterals.
RealT tokenized properties are backed by real world assets in the form of properties. These are less volatile than cryptocurrencies. However, in the US property crash of 2008 the prices fell by 50% over the course of one year, and this could very well happen again and soon. Initially, to protect against liquidations, the Loan-to-Value ratio will remain below 50%.
These tokens are not openly traded — they require KYC and the selling process is complex. It will be difficult and time consuming to liquidate, thus requiring a low liquidation threshold and high liquidation bonus.
The risk team will look closely at the RealT market data and follow the evolution of this brand new market, and if the data allows, it will publish updated recommendations for LTV and risk parameters to the Aave governance.