Real Estate Backed Stable Coins: Why and How
The problem of money printing is now well understood. Governments worldwide and in the US and Europe in particular have increased money supply substantially over the last few decades and a significant spike in the recent covid years which is now culminating in inflationary pressures and a crisis of confidence in the Dollar.
BTC tried to address this with a fixed monetary policy, but BTC is widely seen as a speculative asset rather than an actual currency. After expounding its virtues as currency its proponents now liken it to Digital Gold. Whereas in reality its performance is often directly correlated with the availability of loose money. When it is around BTC spikes and when recession fears strike it recedes fast.
This article is not meant to be a hit job on BTC, you can find it here instead.
The key issue is BTC is nowhere near displacing the dollar regime. There are several issues with BTC as a currency, things like gas costs and speed of transactions are solvable. The bigger problem is that we live in a Dollar denominated world. The Dollar has network effects. You might get someone to pay you in BTC, but you will invariably need to pay someone else in Dollars. Which means you need to convert your BTC to Dollars. A BTC only closed ecosystem simply does not exist (beyond the dark web).
This means you are always keeping one eye on what one BTC represents in the form of dollars. While BTC maxis argue 1 BTC = 1 BTC, the shopkeeper wants to know how many dollars do the BTC you want to pay him represent. He needs to pay his employees and suppliers, who all accept dollars.
The sheer price swings which BTC has relative to the Dollar make it non tenable as a currency in the real world which is dollar denominated. This fact explains why stable coins which are fiat pegged have had far better success in actual use case as currency.
However being fiat pegged means they have the same issues as fiat. They steadily lose their purchasing power as fiat itself steadily gets inflated. If you are able to buy less stuff with a 100 Dollar bill than you were a year back, the same would be true for 100 USDC despite it being on the blockchain.
The underlying asset matters, not the medium in which it is represented. Whether it is paper, in a bank account or on the blockchain. 100 Dollars still are 100 Dollars (unless they are UST ofcourse!).
You need a currency that acts as a hedge against inflation yet manages to grow in circulating supply to support the needs of a growing economy. The challenge with a fixed supply commodity backed currency is that they often turn deflationary where it is better to hoard them rather than spend them on transactions.
If you think your gold ingot is going to be worth more tomorrow than what it is today, you tend to not spend it on a non essential item. This limits the growth of the economy built on such a currency.
It is also important that such a currency is not another fiat which is created out of thin air, whether by a bunch of mandarins sitting around a table or in a decentralized manner. Its mint should be an exercise in value creation rather than value destruction. You need money to behave like money where it facilitates and promotes transactions rather than hoarding. But when money is printed out of thin air then it leads to inflation which is a value destroying exercise as far as that currency unit is concerned.
We should be able to mint more money (to support a growing economy), its mint should be value creating and a mint should be hard to perform but once minted its provenance should be easy to validate.
If the whole hard to do, yet easy to verify reminds you of Proof of Work, that is intentional.
Such a new monetary unit should ideally not be pegged to the dollar (although there is legroom around this which I will go into later). It does however need to avoid the wild price swings wrt the dollar. Ideally it should gently appreciate over time.
Let’s review some candidates.
Claim tokens: Ctokens (or aTokens)
These represent assets lent on money markets such as Compound AAVE. They are typically extremely liquid wrt Dollars and earn an income over time. The problem with these is that not only are you exposed to smart contract risk, but you are also exposed to inflationary pressures. The interest rates will offset some of it, but when money supply is loose, interest rates on borrowing drops and the dollar value depreciates faster than what the interest can do. Their growth is also limited to onchain existing stable coin supply.
Ohm and treasury rebasing tokens
While it is quite obvious that Ohm style tokens are a ponzi, they did introduce the concept of asset backed treasury. They would then rebase their supply based on (partially) to the treasury value. Other tokens such as AMPL and AAVE atokens also use the elastic supply model. The interesting thing about these is the number of tokens in your wallet automatically increase (or theoretically reduce) based on the performance of the asset while still being dollar denominated. I just wanted to drop in these here to lay the groundwork for a potential concept in which the model can be replicated.
Share backed tokens
We are now entering real world asset backed territory. Firstly a bit of confession, I have changed my tune on the custodial issue a bit since the last time I wrote about this. USDC, USDT, BUSD etc are all custodial and are all widely accepted and adopted. Most chains except Ethereum and Bitcoin are heavily centralized and even on Ethereum, the biggest assets are centralized assets such as USDC, USDT, BUSD etc. In the short term what matters is the ability to transact with whoever you want in a permissionless manner. Decentralization does matter in the long run but it can be worked towards even in the case of custodial assets.
For instance if you have an offchain asset which is held by the custodian on behalf of the token holders, the custodian would have to hold an on chain deposit. This deposit can be slashed via an onchain vote in the event the custodian does not perform as per the instructions of the token holders.
Arguably the profit from corruption in this case can be much higher than the loss from slashing but the theory here is that this gives the time necessary to bring forth offchain proceedings against the offending custodian.
If you want to impose really high costs, you can implant a vial of poison surgically in the custodian which explodes if the custodian does not act on the instructions. I am of course only joking here.
This does not solve for a state seizure event, however the solution to such a problem are beyond the remit of this article and can be addressed in a future one.
A tokenized ETF representing the SP500 can be highly liquid, however it is arguably not going to serve as a good currency. Stocks value gyrates heavily as well, arguably not as badly as crypto currencies but it has some of the same challenges as BTC as currency.
Real World Asset (RWA) Backed Tokens
A tokenized REIT can serve as an ideal currency. Buildings are hard to create, they require a certain amount of energy to go into their creation in the form of effort and dollars. No one typically creates them to waste resources, their creation is typically a productive event which creates value for the ecosystem in which they exist.
They are hard to create but it is easy to validate the existence of a building.
And it is possible to create more and more productive infrastructure such as buildings, warehouses, houses, power plants, roads etc in an almost unlimited manner. There is probably a theoretical maximum but we are in no danger of hitting that anytime soon and there is always the possibility to expand into the cislunar orbit over time.
Real World Asset value is not highly volatile. They will typically gently appreciate over time and any price change bar black swan events is limited to 5–15% per year. And a price change does not happen in real time, a RWA token wont deviate in price every 15 minutes. Valuations happen periodically, typically months apart which is then reflected in the price.
RWA are an excellent hedge against inflation. Actual transactions in the real world can be dollar denominated and an exchange rate between the tokens and the transaction amounts can be implemented in real time.
We can either use the tokens natively or use the elastic rebasing model to represent the tokens in the form of dollar denominated tokens. The number of Dollars in your wallet would increase over time based on the value of the asset.
You can have liquidity pools against other stable coins and in the event of a deviation things will typically get arbitraged away as traders smell an opportunity to acquire real world assets at a discount to their true value. The price of these tokens would regress towards mean given their asset backed nature.
Issues around security regulations exist. However these are solvable, in phases in particular. Such a token can be released to accredited investors only first and then steadily released to retail. However once liquidity is achieved such a token would acquire a momentum of its own. A property owner may approach the fund who would acquire the asset by issuing new tokens equivalent to the value of the new asset being acquired.
Such a RWA token can eventually be used as currency directly and widely and can potentially even be a candidate for the gas token in a RWA focused chain.
Real estate backed money has existed in the decades and centuries past. It is probably time it makes a comeback.
