In brief

  • DeFi lending protocol Aave is getting into mortgages.
  • It's teamed up with RealT.
  • But what happens if it all goes wrong?

Decentralized lending protocol Aave is getting into the business of tokenizing the most expensive purchase of most people’s lives: home mortgages.

Specifically, Aave announced yesterday that it’s working with RealT, a company devoted to the tokenization of real estate, to let people stake their tokenized real estate as collateral to take out loans.

It’s the latest in the “money lego” trend of decentralized finance, which involves sticking different DeFi protocols together to create something new. But what should not be lost in the excitement is an understanding of the risks: a buggy smart contract or hack could cost someone their home. 

How tokenized mortgages work

Tokenizing real estate is nothing new. Instead of buying a whole house, which is very expensive, users can buy shares in houses. Tokenized houses “can be traded in Uniswap and anyone can buy even a piece of a property,” Stani Kulechov, founder of Aave, told Decrypt.

Houses for everyone! 

Florida-based RealT has taken things one step further. In addition to letting people buy tokenized shares in houses, it wants to let people use Aave’s decentralized lending protocol, which currently supports a lending market worth $1.7 billion, to stake these real estate tokens as collateral for loans. 

“The beauty of the system,” Kulechov said, is that these RealT tokens can be used as collateral to take out loans of stablecoins—cryptocurrencies pegged to a fiat currency, like the US dollar. 

So, if you want to pay for a bag of chips, you could stake your RealT tokens—which represent your equity in a house—as collateral on a loan for the dollar you need. Then, when your next paycheck comes in, you can repay that dollar and retrieve your equity in the house. 

Think about it: You’ve just paid off your entire mortgage, white picket fence and all. Then...what? You won’t make any money from that house until you sell it or rent it out. But if you tokenize a portion of it, then you can lend out shares of it on Aave to take out loans of USD stablecoins.

“This is an especially important utility when a property’s value starts to increase and the owner wants to use that increased equity without selling,” said Kulechov. 

Home equity lines of credit offer much the same with nary a blockchain in sight, but they do come with origination fees and interest. 

The difference here is that equity is fungible and can be traded on secondary markets. The value of these RealT tokens will be determined by Chainlink, the decentralized price oracle service, “a few times a year,” per a blog post. RealT users will learn of this in advance to help them make sure “their loans are sufficiently collateralized.”

There are a couple of caveats. First, because of Aave’s decentralized structure, there’s no word on when this will come out. “For the launch, there will be first a proposal in the Aave governance and once the community votes in favor, the implementation can start,” said Kulechov. Second, the lending market “will be limited to whitelisted Ethereum addresses by a KYC process with RealT.” 

Not your keys, not your house

There’s something about this that seems, well, nuts. Decentralized finance is an incredibly nascent industry. Aave, for instance, only launched at the start of the year. At the start of June, $1 billion was locked up in its smart contracts, per metrics site DeFi Pulse; now there’s $9 billion. 

In its thirst for innovation, the space is still rife with bugs and vulnerabilities. There are plenty of unresolved questions. What happens if you can't pay back a $5 DeFi loan—does someone sell your house? What about if someone hacks Aave or steals your private keys and lends out your house to get a flash loan? 

The stakes are high.

But crypto has always been ambitious. And this is just the beginning, according to Kulechov, who foresees crypto-mortgages.

“When you use your house as collateral, it’s virtually a mortgage,” he said. The next step is that “when someone wants to buy a house, the house is tokenized and someone can give a loan directly to that buyer.” 

Mortgages typically take decades to pay off. Who knows if Aave will be around next year. It's too early to tell if it's a solid foundation to build on.