Encouraging retail DeFi investment in blockchain thru real estate investment

Firstly, this is not financial advice. Do you own research. I am excited about blockchain and its emerging applications as an innovation maximalist, and am sharing this as I really like the Lofty.ai product and wrote about this recently. This is more of an update with some of the more recent additions to their platform which I see lining up the pieces for the Algorand ecosystem to encourage broader usage by traditional retail investors in more than just a traditional investments packaged to work with tokenised assets.

The bear market conditions in crypto-trading may be putting off those keen on investing in crypto-currency who are understandably scared by the volatility, but not removed their desire to invest. Without opportunities to “ape” safely, other options for a retail investor’s capital that offers more than a savings deposit are now on the table.

Owning your own home has always been something most of us have as a common dream. Real estate investment, either thru owning your own home, or by acquiring investment properties that generate regular rental income, has often been looked on favourably as a “safe” bet for long term wealth accumulation. Lofty.AI’s product innovates on this by:

  • Using a (legally backed and compliant) fractional ownership system for real estate using the Algorand blockchain to represent properties as tokenised assets, with each token representing a fraction equivalent to $50 USD of the property value at the time of initial sale.
  • Using a powerful AI engine for recommending “best-bet” areas where property prices should go up in value over time above the market average, and focusing buying and tokenising properties here with experienced real estate agency team members on board to further sanity check these choices.
  • An on-ramp to investing thru credit/debit card purchases or bank transfers with minimal knowledge of blockchain other than setting up an Algorand web wallet which is used as the non-custodial holder of the ownership tokens
  • Making it accessible to non-US based as well as US-based customers, allowing global participation in US real estate investments and staying compliant with all US KYC and AML regulations here.
  • Allowing re-investment of rental yields as part or total payment towards tokens in new properties offered for sale on the Lofty website.

More recently, I saw two new features were added to the Lofty account interface:

  • The withdrawal of rental revenue directly to the Algorand blockchain as ALGO tokens. I tried and tested this and it worked as expected.
  • The withdrawal of rental revenue directly to the Algorand blockchain as ALGO/USDC LPs (liquidity pairs). I tried this, but it failed to withdraw, so it’s probably still being debugged as a feature in development, but should soon come.

By being able to withdraw rental income as ALGO tokens (or soon ALGO-USDC Liquidity Pairs), Lofty investors (at least those outside the US at this time), now have a path to embracing and benefiting from far more DeFi opportunities other than just owning and gaining income from a tokenised asset.

How so?

The first is the most obvious one of transaction costs, since redemption of rental yields back to fiat currency always comes with some noticeable transaction cost to get funds back to a home bank account. This essentially leads to “idle” funds as one waits for an accumulation of income to be built up that makes the cost of this transaction minimal compared to the value redeemed. For someone with just a few tokens, generating probably $1-2 a day, this can take some time. With a far lower cost than the bank transfer fees to transfer into a home bank account (less than 1 cent USD), and much faster finality time of seconds, being able to access and use funds in minutes rather than days is quite an advantage already.

Of note though is that in this withdrawal method, the funds transferred are ALGOs, the native asset of the Algorand blockchain, not US dollars. Algorand is a cryptocurrency and freely traded and as such its price can be volatile. If you prefer to revert to a stable US dollar value for your rental yield, the first step here is to convert the ALGOs delivered back to something like USDC, which is a US Dollar stablecoin pegged to the price of the US Dollar thru fully backed collateral. To do this easiest, you can use Tinyman, which is an automated market maker (AMM) exchange/ decentralised exchange (DEX) where you can swap the ALGOs back to USDC.

In continuing the action of replicating the fiat-world behavior to the blockchain and simply copying the actions of putting away your rental yield into a savings account like you would with a regular bank, projects like AlgoFi allow you to deposit ALGOS or USDC received as your rental income and receive interest on it. Like a regular bank, AlgoFi is loaning these deposits out to other users for use in their own investments and charging interest to do so, and in turn, providing a portion of interest paid back to you as the depositor as a shared reward.

By maintaining a deposit, the doorway is now open for an investor to also borrow from the AlgoFi platform, using their deposit as collateral. Why anyone would want to do so leads to discussions around deeper investment strategies like taking long and short positions, but the idea is the barrier to start has now been reduced to a matter of doing the research and a couple of clicks within the platform. You can do some more research on how AlgoFi works and I always believe in reading their docs as I especially always look for an audit report(s) with any blockchain based project.

Taking a step back, and looking at withdrawing ALGO/USDC as rental yield from Lofty, this option, once activated, allows investors to immediately step into the world of liquidity provider tokens which is another way to derive passive income from rental income yields, as by providing such tokens in platforms like Tinyman, you earn a portion of the trading fees from other users who are looking to swap tokens between these two in the pair (either ALGO for USDC, or USDC for ALGO). A look at Tinyman’s Analytics does show the kind of revenue and APR these LPs can generate, but these are also volatile. It is still pretty early in the Algorand ecosystem, so your decision on if to redeem to the USDC-ALGO LP should be based in your research and thesis on if this is expected to go up or is presently sufficient a portion of income generation for your investment.

I believe these would be the start of the journey for many, as by simply using other tooling like AlgoFi and Tinyman investors start a path of “participant practical” research into these systems by actually being users, and can go further in learning more about Tinyman if they wish to explore more on LPs, or other borrow and deposit types and reward opportunities on AlgoFi.

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