Blockchain Smart Contracts for Fractional Home Equity Risk Sharing
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Solution Overview
Problem
Current methods for mitigating home buyer risk lead to higher interest rates for those in the highest risk class, disproportionately burdening homeowners with the least ability to pay, increasing the likelihood of default.
Innovation Solution
Adjusting the amount of equity homeowners hold in their homes through Minimum Retained Equity (MRE) calculations, using blockchain-based smart contracts to facilitate fractional ownership and risk sharing across a network, and implementing a risk pool to manage default risks.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If traditional risk mitigation methods are used to protect against home buyer default, then lender security is improved, but interest rates increase for high-risk borrowers, worsening their financial burden and increasing default likelihood
Solution Approach 1:
The patent segments the borrower's equity into fractional tokens that can be held and traded by multiple investors. This segmentation allows the risk to be distributed across many parties rather than concentrated with a single lender, enabling high-risk borrowers to obtain financing without bearing the full cost of risk mitigation through inflated interest rates.
Solution Approach 2:
The patent creates a universal risk-sharing platform where equity tokens can be held by any number of investors, transforming the traditional one-to-one lender-borrower relationship into a many-to-one structure. This multi-functionality allows the same equity to serve as collateral for multiple investors simultaneously, improving lender security without increasing borrower burden.
2Reliability
If equity requirements are increased to reduce lender risk, then default protection is improved, but accessibility to home ownership deteriorates for borrowers with limited equity
Solution Approach 1:
By segmenting equity into tradable tokens, the system allows borrowers to meet lower equity requirements while still providing adequate protection. The segmented equity can be distributed to multiple investors, collectively providing the necessary risk protection without requiring any single investor to demand high equity thresholds, thus improving accessibility.
Solution Approach 2:
The patent introduces an intermediary tokenization platform that facilitates the transfer and distribution of equity among multiple parties. This intermediary structure enables borrowers with limited equity to access home ownership by allowing their equity to be fractionally owned by multiple investors, thereby maintaining default protection while improving accessibility.
3Power
If interest rates are adjusted to compensate for borrower risk, then lender return is improved, but equity stratification worsens, burdening those who can least afford it
Solution Approach 1:
The patent segments equity into standardized tokens that can be distributed to multiple investors at uniform terms. This segmentation eliminates the need to adjust interest rates based on individual borrower risk profiles, as the risk is distributed across the token holder base. Consequently, lender returns are maintained through token appreciation and dividends rather than elevated interest rates, improving equity distribution equityity.
Solution Approach 2:
The patent changes the parameter of risk compensation from interest rate adjustments to token valuation and dividend distributions. Instead of modifying the cost of borrowing based on risk, the system modifies the return parameters for investors through market-driven token prices and proportional dividends, thereby maintaining fairness in equity distribution while preserving lender returns.
Data Source
AI summary
Methods and systems for performing a real property transaction are disclosed. A plurality of tokens can be issued using blockchain. A first network function request related to the real property transaction can be transmitted to a decentralized network. An algorithm can be used to determine which of the plurality of tokens are included in the real property transaction.