The way of the hotel industry to Web3 (Part 2 — Rise and manage a hotel property with DeFi and NFT)
Hotel groups that have to manage their real estate or real estate companies that provide real estate to hotel companies have a high demand to automate financial and administrative processes around real estate, with the aim, of saving personnel costs and generating optimal revenue. Digital Ledger Technology (DLT), also known as Blockchain technology, can make a significant contribution to this. Financing, operation, and sale of the property can all be smoothly mapped out with the help of smart contracts, which are stored on the blockchain and can represent the set of rules for all processes involving the property.
Furthermore, third-party costs for lawyers, brokers, financial institutions, and asset managers can be significantly lowered, if the real estate is built with blockchain technology from the start. Additionally, transaction costs and times are severely decreased, and sufficient liquidity is always ensured when used wisely.
In my second article on the use of blockchain technology in the hotel industry, today I focus on a hotel’s real estate and show how NFT and DeFi can be used to blockchain a real estate project from financing to managing. In doing so, I deliberately refrain from technical details to keep it understandable.
In preparation for this article, I refer to my post “Hotel room as NFTs” where I revisit the current technical infrastructure issues in the hotel industry. And for those who still doubt the future viability of blockchain technology, I recommend reading my article “Blockchain is not equal to Bitcoin”.
Decentralized Finance (DeFi): DeFi refers to financial services of any kinds that are provided directly between two parties (individuals/institutions) without the involvement of intermediaries such as banks or public authorities. As a rule, these transactions are carried out via Web3 applications on the Internet.
Let’s dive into.
Starting position
The CEO of a well-known real estate company, let’s call him Bob, has purchased a piece of land to build a hotel property with a building extension. Bob has heard quite a bit about Blockchain, NFT and DeFi and decides to start a pilot project to get himself and his company ready for the new technology.
He anticipates the following benefits
- Better access to investors worldwide
- Attractive liquidity model
- Low legal and notary fees
- Reduction of administrative costs
- Automatic handling of administrative processes
- Rental income in the form of a stablecoins or hard cryptocurrency such as Bitcoin or Ethereum
- Attractive interest rates when taking out mortgages or using Web3 lending platforms
Because Bob intends to rent out a portion of the property to a hotel operator and sell the remainder as condominiums, the property is tokenized as a fractional Non-Fungible Token (F-NFT). Individual NFT fractions of the property can be divided by investment amount, square meters, or clearly defined areas such as apartments and offices. As a result, Bob decides to divide the property into value NFTs for investors and the annex into area NFTs for buyers. Both forms of NFTs are Security Tokens (STs), which reflect (partial) ownership of the property in the blockchain’s smart contract. All investors and holders of the associated NFTs have proportional voting rights and share the appreciation value. Tokenization allows each holder to lend or sell their interest by depositing the NFT Security Token in the DeFi financial market. Bob establishes the Security Token $BOBS as the ownership designation for the property.
Safety precautions & regulation
To ensure the highest level of security, Bob works with a vetted organization that has a regulated digital asset custody license and screens deposits for Know-Your-Customer/Business (KYC/KYB), Anti-Money Laundering (AML), and Counter-Terrorism Financing (CTF). There, the property’s fractional security tokens are safely stored. Bob gets constant access to his tokens and assets through a crypto wallet linked to the custodian.
Financing a hotel property via DeFi
Bob intends to fund the new property’s construction with investors via a Security Token Offering (STO). He has two options for how to accomplish this. Either he launches the STO on his own using a closed platform like LenderKit, where only investors known to him are asked to participate, or he chooses an existing crowdfunding platform that specializes in the professional management of real estate STOs. It chooses the second option because it is targeting worldwide investors. When deciding on a portal, he also ensures that the service provider follows KYC/KYB, AML, and CTF regulations.
Potential investors can see the appropriate documentation via the platform of their choice and, if interested, invest a particular or fixed amount in one of Bob’s fixed token currencies such as Stablecoins, Ethereum, or Bitcoin. In exchange, they receive a share of the real estate in the form of the security token $BOBS, which is deposited in the investor’s wallet. All contractual features of the transaction are managed by a smart contract, with the regulatory framework being the same for all investors. The smart contract can establish holding periods and blacklistings in addition to the standard contractual real estate laws. All of this occurs without the involvement of lawyers or notaries (country-specific legal regulations are here not taken into account). The smart contract validates all contractual parameters of the contract for each attempted transaction of the security token. If, for example, the contract specifies a holding time of at least one year and the investor tries to sell his stake in the form of the token $BOBS below this barrier, the smart contract automatically prevents the transaction without further human interaction.
Bob connects the Smart Contract to a DeFi-Oracle in order to clearly present the property’s continual value development to its investors. The DeFi-Oracle automatically allocates the current value development to the invested $BOBS tokens based on a number of typical market real estate, geographic, and economic characteristics. As a result, investors get a constant picture of the current worth of their investment and can make optimal decisions in a short period of time. With these steps, real estate, which is typically referred to as an illiquid investment, is now transformed into a liquid investment that can be exchanged on the market promptly and around the clock.
It should be underlined that Bob is always the property’s owner and the primary point of contact with creditors.
Mortgaging the invest
Owners and investors can sell their $BOBS Security Token to third parties at any moment, depending on the conditions negotiated in the smart contract, or lend the asset at the current value decided by Oracle on a compatible borrowing or mortaging platform. If an investor need short-term liquidity, he can deposit his $BOBS token as collateral and obtain a corresponding countervalue (now commonly up to 50% of the current value) in Stablecoins, Ethereum, or Bitcoin. As a result, the investor can
- deal directly,
- paperlessly and
- without the need for additional coordination with middlemen such as financial institutions or notaries,
with his assets on the market without having to sell the partial property.
Management & Rent
Bob is aware that the new property comes with a slew of operating expenses. These include property taxes, energy, water, insurance, cleaning, repairs, garbage disposal, and management and rent accounting expenditures. Bob would like to establish a token-based paradigm here as well, with individual procedures handled automatically using smart contracts on the blockchain. For this purpose, Bob is constructing a fractional NFT in the form of a Utility Token and naming it $BOBU. Utility Tokens are used to regulate the extent of services and products between partners without any property rights being associated with it.
All tenants who must pay rental and/or incidental rental costs are given the equivalent Utility Token $BOBU, which is retained in the tenant’s wallet for the duration of the contract. The token governs the right to use the rental property as well as the duty to pay continuing charges for its use. All this is managed via the property’s smart contract on Bob’s chosen real estate management platform. The smart contract regularly checks to see if both parties are in contractual equilibrium and takes transparent action if they are not (e.g. lack of liquidity on the part of the tenant at the time of payment).
Bob has also decided to optimize the computation of the respective ancillary rental prices, which so far has always led to much discussion with tenants. The property’s utility infrastructure, including
- energy,
- water and
- trash disposal
will be outfitted with cutting-edge IoT sensors. Oracles are also utilized in this case, which read the data and regularly convey the tenant’s current incidental rental expense status via the $BOBU token. The smart contract only collects the service charges that have actually been incurred from the tenant at the end of the month, after adding up all fixed service prices.
The smart contract automatically collects rent and utility payments from the tenant at predetermined intervals and in the agreed-upon cryptocurrency, and credits them to Bob’s wallet.
Lending, Staking & Passive Income
Regular rent and tenant utility payments sent into Bob’s Wallet are used to cover general receivables incurred in the course of operating the property. Bob is aware that interest rates on DeFi Lending platforms are often greater than those on traditional financial institutions. Therefor he automatically lends his monthly crypto surplus to a reputable DeFi lending platform. There works bob as a liquidity provider, creating liquidity on the platform with his balance so that other platform members can borrow cryptos with deposited collateral without selling it. In exchange, Bob receives up to 6% APR from the platform and has the option to withdraw the money at any moment. If the surplus is used for DeFi staking operations, returns of up to 17% APR and more can be obtained.
And finally
The next job is already on the horizon, but Bob is well prepared. The hotel group that has rented the biggest portion of the real estate wishes to bring its hotel to the Metaverse in order to provide virtual seminars and congresses. It’s simple for Bob because the fractional NFT saved in the tenant’s wallet allows him to build up his own projects on the token with no more action from the landlord.
But more about that in the next part of this series.
Conclusion
The majority of what is described here is currently available and may be utilized in processes. Token-based real estate portals or real estate management systems, on the other hand, are only slowly making their way into the Web3 world, albeit with a current focus on the US market. The current market value of the tokenized real estate market is roughly $200 million. Given that the global real estate market’s cash value stock is expected to be $217 trillion, a tokenization rate of just 0.5% would generate a trillion-dollar business. Furthermore, while only around 7% of all real estate is currently available to public investors, 80% of respondents would be willing to participate if there was a supply.
Not only will DeFi, NFT, and blockchain technology change the real estate sector. Smart contracts will help to enhance trust between individuals in the future. Tokenizing a property on a blockchain encourages all associated persons and services in the token economy to engage with each other effectively, easily, and, most importantly, trustfully. Information will flow more quickly and transparently, allowing for faster and better judgments. But, like with anything, there is a drawback. The blockchain market has already paid a lot in lesson money, with $75 billion in damages from theft, hacking, and badly built apps. As a result, it is even more critical that global regulation be established and the quality of solutions be improved. Let’s work on it.
This article was written as part of the Frankfurt School Blockchain Center’s Scholar Program “DeFi Talents 2022/2023”. Thank you for allowing me to be a part of this fantastic team of talents, mentors and organizers.
Remarks
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About the author
Ralf Emanuel is a passionate entrepreneur. He founded two companies in the IT industry after managing large-scale IT projects since 1995. After developing and operating several critical enterprise applications in the tourism and finance sectors, he now specializes in IT consulting, focusing on digital transformation, cybersecurity, and blockchain while advising companies on their strategic direction.
