I suspect I wasn’t the only Nxter to be caught off guard by the articles from several weeks ago describing how a company called Dominium will build a platform on Ardor for investing in, listing, and managing real estate. Here was a project that was simultaneously extremely ambitious and quite close to launch, with the first features coming online by the end of 2018, and I had never even heard of it! So you can imagine my surprise when, a couple of days later, a member of the Dominium team reached out to me to see if I would be willing to write a review of the project for you.
After several emails, three phone calls, and a few days’ worth of research, I’m happy to share with you what I’ve learned about Dominium.
Before I begin, though, I need to make a couple of disclaimers. First, Dominium has not paid me to write this article, nor will they. I hope you will find it objective and unbiased. Second, I am absolutely not an expert in real estate investing or management, and while I have tried hard to learn about some of the problems that Dominium is attempting to address, I encourage you to do your own research and think critically about the information I’m presenting here.
With that out of the way, let’s talk about Dominium.
Dominium will be:
- a platform that allows companies to create real estate funds, bonds, and loan notes, with these assets represented by tokens on Ardor, in a way that complies with government regulations;
- a marketplace for investors to buy and sell those tokens in a compliant way;
- a set of tools to help fund managers, including templates for regulatory documents, a support ticket system, and marketing materials;
- a marketplace for users to list, purchase, and rent properties; and,
- a public database that records historical data related to properties, such as changes of ownership, payments by tenants, maintenance records, and the like.
The Dominium platform will have its own child chain on Ardor to enable these services. Users will pay transaction fees to Dominium using the child chain’s native token, DOM, which should not be confused with the tokens representing the securities and properties for sale on the platform.
At the risk of slightly oversimplifying, I’ll divide Dominium’s features into two main categories: those related to creating, managing, and trading real estate funds, and those related to managing individual properties.
A Platform for Investing in Real Estate
Traditional private real estate funds suffer from a few drawbacks: they are illiquid, typically requiring that investors tie up large sums of capital for years; they are often accessible only to institutional investors and high net worth ($1M+) individuals; and, while government regulations usually require fund managers to make certain disclosures about their funds and the assets they hold, these funds are not always as transparent as they could be.
Publicly traded real estate investment trusts (REITs) and similar instruments address some of these problems but also have their own complications: listing a fund on a large stock exchange is expensive and usually entails complying with a slew of extra regulatory requirements, and smaller funds that cannot benefit from economies of scale often charge correspondingly higher fees.
Dominium aims to address these problems by moving the creation, financing, management, and trading of real estate funds to the Ardor blockchain. Companies will be able to issue assets in Ardor’s Asset Exchange representing shares of their funds, and will sell them directly to investors to raise capital for purchasing properties (equity funds) or for making loans for the purchase or development of properties (debt funds). As these activities earn revenue, fund managers will be able to pay dividends to investors using Ardor’s dividend payment feature.
This approach has several advantages. Investors will be able to enter for as little as the price of a single share and will be able to exit whenever they wish. Fund managers will have access to a wide cross section of investors, including ordinary retail investors, on a single platform and without having to deal with brokers. Meanwhile the blockchain will automatically handle the logistics of tracking who owns shares of a fund and what dividend payments they are owed. It will also provide a liquid marketplace for investors to trade shares of funds peer-to-peer without fund managers having to incur the costs of listing on centralized exchanges.
This picture looks a lot like the fulfillment, at long last, of the Asset Exchange’s immense potential. And yet, if this were all there was to creating and trading funds on Dominium, the project would have failed before it even hit the mainnet.
I say this because governments heavily regulate securities of all kinds, and real estate funds launched on Dominium will certainly be no exception. Regulatory compliance is a difficult subject for many blockchain-based projects, but Dominium, using features of the Ardor platform built specifically for this purpose (more on that below), has been designed to accommodate the demands of securities laws.
First and foremost, the Dominium child chain will be a permissioned chain, meaning that accounts will not be able to transact on it without first registering on the platform. This allows Dominium to collect sufficient personal information to comply with know-your-customer (KYC) and anti-money laundering (AML) laws. Any user who wishes to be able to trade shares of real estate funds, for example, must provide his or her name, email address, phone number, and date of birth, plus a picture of a government-issued photo ID, a picture of the user holding the ID, a proof of the user’s current address, and a proof of the user’s tax ID number. On Dominium they classify this as Clearance Level 2 (see below for more details about clearance levels).
The purpose of collecting this information is to firmly tie each user’s real-world identity to an account authorized to transact on the Dominium child chain (though, of course, this information will not be made publicly visible on the blockchain). Fund creators thereby know exactly who is purchasing their shares, and they can demonstrate to regulators that they have taken proper precautions to prevent money laundering and the financing of crime.
Importantly, compliance with KYC and AML regulations necessitates a degree of centralization. Not only must the identities of all participants be verifiable—a problem which is quite difficult to solve in a decentralized way—but it must be possible to forbid certain users from accessing the platform, and it must be possible to revoke other users’ access if they are later determined to be involved in criminal activity. Perhaps it will one day be possible to satisfy these criteria in a decentralized way, but for now, they require a central authority who verifies users’ identities and determines who is eligible to participate.
You might be wondering, then, why Dominium is interested in using a blockchain in the first place. Many blockchain enthusiasts, myself included, tend to take a hard line on decentralization, and compromising even a little bit on this criterion in order to achieve some other goal (e.g., scaling) immediately raises our suspicions that a centralized database might be a better tool for the job. More on this question below, but for now, suffice it to say that regulatory compliance is a real issue, that Dominium is taking it seriously, and that the result will necessarily include at least some elements of centralization. This is reality, and blockchain diehards will need to accept it or else renounce our ambitions to create new financial instruments.
One other aspect of Dominium’s approach to regulatory compliance that is worth mentioning is the company’s plans for creating standardized templates for certain legal documents. Specific requirements vary by jurisdiction, but generally fund creators must produce at least a prospectus, which often contains a rather small amount of important, fund-specific information interspersed with a generous helping of legal boilerplate. Dominium will hire a law firm in each jurisdiction where funds can be created to prepare standard templates for the prospectus and other legal documents that fund creators can use to comply with local securities laws. This is one of the primary ways that Dominium aims to streamline the fund creation process and to keep fees low.
A Platform for Managing Individual Properties
Quite apart from activities related to creating and trading real estate funds, the other focus of the Dominium platform is on listing, purchasing, renting, and managing individual properties. Owners, managers, tenants, maintenance workers, real estate agents, and other parties will be able to record information about properties on the blockchain, creating an immutable historical record that could be useful in a number of different contexts.
To make this idea more concrete, consider a few examples. Tenants and managers could record rent payments and receipt of those payments. A tenant might open a maintenance ticket with the manager (Dominium will include a support ticket system), who might hire a contractor to make a repair, and all parties might acknowledge that the work was done satisfactorily. The owner or manager might record receipts of tax and insurance payments. Prospective buyers might register their bids for a property that is listed for sale. And so on.
Want to see whether tenants pay rent on time before buying a rental property? Check the blockchain. Want to know whether the current owner actually paid for a new roof last year? Check the blockchain. Want to know whether there really are three other buyers who have entered bids on this property, and what those bids are, without having to take your realtor’s word for it? Check the blockchain. You get the idea.
In the near term, of course, government registries will still maintain the legally significant records of ownership of properties. To sell a property on Dominium would therefore require two separate interactions between buyer and seller: a transaction recording the sale on the blockchain and a traditional transfer of the title as recorded in a land registry. But looking ahead a few decades, it is exciting to speculate about whether governments might begin to acknowledge tokenized titles to real-world assets as authoritative records of ownership. And meanwhile, a great deal can still be recorded on a blockchain, including the information described above that can make real estate dealings more transparent.
Why Use a Blockchain?
But surely some of these benefits can be achieved with a fully centralized database as well. And as I mentioned earlier, the platform is already partially centralized in order to comply with KYC and AML laws. So why use a blockchain at all?
One way to answer this question is to consider what the platform would look like as a fully centralized service. Dominium would effectively be a broker for the real estate funds that companies create on the platform, and would have to establish its own exchange for investors to trade those funds. It would also have to take deposits from investors and secure those deposits without making withdrawals too inconvenient. And of course, it would have to accept the massive legal liability of operating these services and comply with a host of additional regulations placed on brokers and exchanges.
Needless to say, Dominium has no interest in being a brokerage or an exchange, and I’m sure they will be quite happy to avoid that kind of liability. Instead, peer-to-peer transactions in Ardor’s decentralized Asset Exchange will perhaps more closely resemble over-the-counter trading, except with greater transparency and potentially greater liquidity.
Moreover, while Dominium will necessarily have the ability to restrict access to the platform to meet KYC and AML requirements, this process will be more transparent than in a fully centralized service. In particular, if Dominium were to revoke a user’s permission to use the blockchain, there would at least be indisputable proof of this action in the transaction history, which is, after all, public record.
It seems to me that investors, for their part, also benefit from this structure. Rather than having to trust a brand new brokerage—which might be legitimate or which might be a boiler room operation, for all they know—investors will be able to see for themselves important details about all the funds available for purchase and to verify from the blockchain that they are indeed getting genuine shares. As each account’s holdings are recorded on a public ledger, investors will also have access to information they don’t typically get with funds traded on centralized exchanges, including the distribution of shares across accounts and the other holdings and transaction histories of those accounts.
But will the funds themselves be more efficient by virtue of launching and trading on a blockchain? This is a far more complex question than I can competently answer with my very limited knowledge of investing, but I can at least speculate about potential cost savings and you can tell me where I’ve gone wrong in the comments section. 🙂
One task that all investment funds must face is keeping track of who holds their shares, not just for regulatory compliance but also to know who to pay dividends to and in what amounts. I imagine this can be a costly process for smaller funds with a large number of shareholders, but the blockchain (and Ardor in particular) makes this kind of bookkeeping trivial. Also, as I mentioned before, listing a fund on a centralized exchange is an expensive undertaking, whereas a blockchain-based decentralized exchange could still provide liquidity while saving this expense.
As for listing, purchasing, renting, and managing individual properties on Dominium, in my view the case for using a blockchain seems to rest almost entirely on how much management information users commit to the blockchain. There are already plenty of centralized real estate listing websites, and they seem to work rather well as marketplaces for connecting buyers and sellers. In contrast, the notion of storing historical information about a property in a decentralized way sounds like something new.
But does such a service really need to be decentralized? Couldn’t somebody build a “Carfax for real estate” without all of the limitations of using a blockchain? I think the answer is probably yes, but I can still see an advantage to the decentralized version, namely that no one entity will be able to selectively modify or delete historical data.
While that might sound a little paranoid, I do think there’s some precedent for concern. Look at the allegations of extortion that businesses have made against Yelp, for example. They claim that Yelp selectively filters out positive reviews of their businesses, leaving a disproportionate number of negative ones, unless businesses pay a hefty advertising fee, which makes the negative reviews disappear. Regardless of whether this is technically extortion (it appears that it isn’t, by the way) and whether Yelp is actually guilty (which they deny), it at least seems plausible that a centralized ratings service could pressure users this way. A decentralized alternative, in contrast—and especially one that establishes users’ real-world identities before allowing them to contribute information, as Dominium does—might provide a safeguard against this kind of abuse.
Finally—and this is perhaps the most exciting possibility, in my opinion—if Dominium’s users eventually record ownership and management information for enough individual properties that those properties make up a substantial fraction of the holdings of the funds listed on Dominium, then investors will have an unprecedented (as far as I know) degree of transparency about the quality of the properties those funds own.
Why Use Ardor?
I suppose the folks at Dominium could have chosen Ethereum over Ardor, but then they would have had to build a number of features themselves, including most notably a permissions layer for all transaction types and a mechanism to restrict trading of certain funds to specific subsets of accounts. On Ardor, these features are built in: permissioned child chains, coming Q3 of this year, will automatically restrict access to authorized accounts, while the Asset Control and Vote by Account Property features enable a finer degree of control over which accounts will be able to exchange certain tokens.
This latter point is especially important for Dominium, which will grant different permissions to users based on how much personal information they provide, where they live, and whether they qualify to invest in unregulated funds. Specifically, Clearance Level 1 users will provide basic identity information and will be able to buy and sell DOM utility tokens and list, purchase, or rent properties; Clearance Level 2 users will provide full KYC information and will be eligible to purchase shares of regulated real estate funds from jurisdictions where they can lawfully invest; and Clearance Level 3 users will attest that they are qualified investors (generally either high net worth individuals or professional investors) and will be eligible to invest in both regulated and unregulated funds.
Implementing these tiers is straightforward on Ardor: Clearance Level 1 is established by authorizing an account to transact on the permissioned Dominium chain, while Clearance Levels 2 and 3 are enforced using asset controls to restrict the trading of regulated and unregulated funds, respectively, to accounts that Dominium has marked as eligible. Further constraints on investors’ eligibility to purchase funds in specific countries, for example, translate rather cleanly to additional account properties establishing the countries an investor is allowed to invest in and additional asset controls to enforce those policies.
On a different note, keep in mind that Dominium’s child chain will be permissioned in the sense that only authorized accounts will be able to transact on it, but it will be public in the sense that anybody will be able to examine and verify the transaction history. This hybrid design combining permissioned transactions with public validation is more controlled than a fully public blockchain, where KYC and AML compliance would be much more difficult, and more transparent than a fully permissioned blockchain. As far as I know, this combination of traits is unique to Ardor.
Beyond issues related to permissioned access and regulatory compliance, other reasons that Dominium chose Ardor include its novel approach to combating blockchain bloat, its wide array of built-in features, and the stability and resilience of its codebase, most of which has been in production since 2013 as part of Nxt. Since I’ve written at length about these aspects of Ardor elsewhere, I won’t repeat myself here.
I would like to point out, though, that Ardor’s built-in features make it much easier to deploy a platform like Dominium securely than would be the case on a smart contract platform like Ethereum. The functionality that Dominium requires is not trivial, and coding it from scratch as a set of custom smart contracts, some of which could be fairly complex, would incur the risk that one of those contracts contains a subtle flaw that could be exploited to cause catastrophic failure. With Ardor, in contrast, predefined building blocks for on-blockchain tasks have been thoroughly peer-reviewed and battle-tested, while all custom code runs off-blockchain, where it is easier to patch as flaws are discovered.
A Word About the ITO
One additional aspect of the Dominium platform that differentiates it from other blockchain projects is its plans for its initial token offering (ITO). Dominium will invest most (>80%) of the money it raises from its ITO in real estate, and it will use the dividends from these investments primarily to fund the development of the platform. In addition, though, it will use a portion of these returns to buy back DOM tokens and burn them, thereby decreasing the total supply of DOM. As people use the platform Dominium will also collect transaction fees denominated in DOM tokens, and again it will burn them to make DOM more scarce.
In my humble opinion, Dominium’s decision to invest the proceeds from its ITO in stable, real-world assets instead of leaving those funds in hyper-volatile cryptocurrencies shows that the Dominium team is serious about the long-term development of this project. It is a refreshing change and surely lends credibility to the team.
On the other hand, I don’t think the ITO will be completely without controversy. Dominium’s legal team insists that DOM is a utility token and not a security. As it will be the sole currency for paying fees for all business conducted on the platform, there can be no doubt that DOM is a utility token. But I suspect that regulators might decide that it could also be a security, owing to Dominium’s plan to buy back tokens using the earnings of its real estate holdings. In the U.S., anyway, an investment contract is defined as “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others,” and all investment contracts are securities. It is at least a legal gray area, and perhaps it will take some time for governments to clarify how tokens like DOM are to be understood.
Then again, if regulators do indeed decide that DOM qualifies as a security, Dominium will be in an excellent position compared to other ITOs as a result of the KYC controls it has implemented. To participate in the ITO, users will need to register at Clearance Level 1, so Dominium will already have satisfied some of the KYC requirements. I don’t think that a ruling that their ITO token is a security would pose the same kind of existential threat to Dominium that it would pose to the vast majority of other ITOs.
There is much more to say about Dominium, but this article is getting quite long, and I have already trod well past the limits of my knowledge of real estate investing and securities law, so I will conclude here.
Reflecting on the structure and features of the Dominium platform, and especially on the measures that Dominium has taken to comply with government regulations, I’ve changed my opinion on permissioned blockchains with a centralized authentication service. As I wrote elsewhere, I had previously been quite skeptical of blockchains controlled in some significant way by a single entity. A private database, in my estimation, was almost always a better solution.
Dominium has shown me that I was wrong. It is possible for the power to control access to a blockchain to be quite centralized, but for other aspects of the business conducted on the blockchain to be decentralized in a meaningful way. Government regulations, legal liabilities, and other real-world concerns add to the analysis some nuances that I had failed to appreciate until I started researching Dominium. I’m glad I did so.
On that note, I’d like to sincerely thank the folks at Dominium who have taken time out of their busy schedules to answer my sometimes naive questions about real estate investing, property management, and other aspects of their platform. I truly wish them the best of luck with their launch, and I’m very excited to see what the future holds!