How to (one day) Make Your Mortgage Pay Off Itself Using DeFi
Disclaimer: I’ll be talking about individual crypto projects in this series but this is for informational purposes only and not a solicitation to buy or sell any cryptoassets.
Do your own due diligence.
So I came up with this crazy idea after listening to an episode of Modern Finance, in which Kevin Rose interviews the co-founder and CEO of LoanSnap, a company trying to modernize the mortgage buying process. You can listen to it here:
Part of their plan is to tokenize mortgages on their new $BACON Coin protocol. They do this by creating the first “Stable+ Coin” named bHome. These bHome “stable+ coins” are different from typical stablecoins, because they are backed by $USDC, home liens and mortgages all at the same time.
For now, the entire process is going to be facilitated by LoanSnap. So LoanSnap gives you a home loan, and uses the loan value and interest payments to help back their stablecoin if you choose to include it in the protocol. They explain the process in their white paper:
You decide you would like to get some cash out of your home and sign up for a Smart Loan.
You enter your name and address.
An approved Servicer such as LoanSnap calculates how much your home is worth and finds any existing loans on your home.
LoanSnap shows the value in your home and lets you decide how much you want to borrow.
As quickly as one or two days later, you sign the Smart Loan agreement.
LoanSnap mints an NFT, called an Egg, and sends it to you.
You put your Egg in a Pan in return for USDC and in the future other cryptocurrencies.
You make payments back to the Bacon Protocol which will initially be handled by the company servicing your loan. You can pay as little as just the interest due or as much as you want with no penalties.
So what’s in it for you? Well, as you can see, you receive an “Egg” which an NFT representing your home equity. According to them, you can then take that NFT and use it as collateral for other DeFi crypto markets. Instead of taking your “Egg” and staking it in a “Pan” (smart contract) to borrow dollars, you can take it and use it elsewhere. You would need equity in the home for now in order to do this (such as from a down payment or existing home ownership), but maybe in the future you will be able to take the mortgage itself elsewhere too.
So you have this NFT worth a percentage of your home value, and you can actually take it and use it in DeFi applications, but how would it pay off itself?
That’s where our second protocol comes in: Alchemix.
Alchemix created a way for loans to repay themselves using DeFi. You deposit collateral, take out a loan, and then Alchemix will use yield-farming strategies with your money in order to pay back the loan for you.
The protocol is developing new ways to deposit different types of collateral in exchange for spare credit from other users:
Imagine holding a basket of on-chain assets (from ERC20 tokens to NFTs) that you’d rather not sell but instead would like to use as collateral for a loan. This dapp will allow Alchemix users with spare credit to lend it to other users based on what they are willing to stake as collateral. It will open up markets for any on-chain asset, helping to unlock utility and liquidity for assets that might not otherwise have market access to DeFi protocols. Think of it as an on-chain pawn shop.
An on-chain pawn shop is not exactly what we’re looking for. But maybe someday you will be able to directly deposit an NFT for stablecoins, which will be able to use the Alchemix self-repaying functionality. Or, take out a dollar stablecoin loan from $BACON, and just pay it back immediately with the loan from Alchemix. Then your still stuck with this home equity NFT… sorry, this is still a work-in-progress idea here.
There are other cool features of Alchemix as well, such as the fact there are no forced liquidations in Alchemix. If your collateralization ratio falls below the threshold, the project sees it as taking out an advance on the earnings you would otherwise earn from yield farming. In other words, the loans operate as a unit of time, and users borrow from their future selves. 🤯
As yield returns are not stable, the actual period it takes to pay off any given loan will fluctuate with time. It should also be noted that Alchemix assumes that a yield can be generated by the collateralized assets, meaning that loans would no longer pay themselves off without any yield. Should users ever want to access the underlying collateral, they can withdraw their assets at any time by settling the vaults early.
So as long as there is still yield to be had in the DeFi space, your loan will be repaid. If the value of your home continues to go down, it may just take longer to repay. But if the value goes up? That just means you can take out more dollars based on the amount of collateral you have.
Again, I don’t know if this would actually work as these protocols currently operate, but here’s how I see this going so far:
Get a Smart Loan Agreement with LoanSnap.
Take out an NFT from the $BACON protocol which represents a percentage of the value of your home. Put it in a “pan” for USDC. (Maybe in the future, you could just take the NFT and use it directly).
Exchange the USDC for DAI (a different stablecoin accepted by Alchemix).
Take the DAI to Alchemix, where you can exchange it for stablecoins such as $USDC. That loan, backed by the home NFT, will pay off itself eventually.
Take the stablecoins you took out from Alchemix, and pay off the original loan from $BACON.
Your home loan will pay off itself using Alchemix’s yield farming strategies, and you don’t have to do anything else. Well done!
WHAT COULD GO WRONG?!
Well first off, Alchemix only lets you take out a loan worth 50% of your collateral, so if your home NFT “Egg” is worth $10,000, you can only take out a loan of $5000 to pay back the original loan amount from $BACON. You would still have to pay off half the loan yourself, and let Alchemix pay off the other half. Not bad, but not what we were hoping for here. Only makes things a little more complicated, and you’re still going to need to make some monthly payments.
There are other stipulations too, like the fact you can only make an “Egg” worth 75% of the home value using $BACON for now. And like I mentioned, the Egg only represents your current ownership stake in the home, making this strategy more of a self-paying HELOC than a self-paying mortgage at this time.
Another thing to keep in mind is that exchanging one stablecoin for another will most likely incur fees, so you will lose some money along the way trying to implement this strategy. At least, until both protocols can accept USDC, DAI, or some other common cryptocurrency.
Then there are the much bigger risks:
Protocol Risk: These protocols are still super young, and may have a lot of bugs to work out. Alchemix themselves had a bug where they pulled a “reverse rugpull” on themselves in June, 2021. Basically, they created a bug that gave out free money to users. Users could deposit ETH, get alETH (an ETH equivalent), and then take the ETH they deposited right back out. Just goes to show you, there are always protocol risks with newer, untested protocols.
Yield-Farming Risk: Alchemix currently uses Yearn Protocol for yield farming. This particular protocol was hacked (sorry, “exploited”) for $11.1 million worth of DAI in February, 2021. A flash loan from the Aave protocol was used to manipulate the price of a stablecoin liquidity pool, which Yearn was relying on for price feed data. Things like this happen often in the young DeFi space, but if it happens to your mortgage and you lose the lien on your home, that’s a whole ‘nother level of risk.
Oracle Risk: From the $BACON whitepaper:
“When a homeowner wishes to remove the lien from their property, they simply send a free and clear Egg back to the Originator. This is done by paying back the full amount borrowed. The issuing contract will signal the Originator to remove the lien from the public record. Oracles will be setup to watch the county lien records and report them to the blockchain to increase trust.”
The Originators are “regulated and licensed organizations that are elected by the community to provide this service,” so one wouldn’t think they would be compromised, but a decentralized, autonomous Oracle probably could. It’s happened before. If these Oracles are compromised, manipulated, or send the wrong information at any time, then that could mean the liens themselves may be compromised.Housing Price/ Interest Rate Risk: While it’s true that you wouldn’t be liquidated using Alchemix, that doesn’t mean your 30 year mortgage can’t turn into a 200 year mortgage if housing prices fall drastically or yielding DeFi strategies start to dry up. Remember, when interest rates don’t matter time becomes the most important variable to pay off the loan.
“I just had a baby and need to move to the suburbs” Risk: As with any home, there is always the risk you will need to move before the loan is paid off. What happens when you do this and then need to take out the home lien NFT to give to the buyer? I think having some centralized party like LoanSnap in the middle would still be necessary to facilitate all this. They would need to take the money from the buyer (who must also be okay with using DeFi), pay off the Alchemix loan, take the NFT back out, then give it to the new buyer and ask what they want to do with it, if anything.
Thoughts:
Obviously, this is still a work-in-progress with many risks. But you have to admire the fact that this infrastructure is already in place:
We have NFT’s that can represent equity in a home.
You can take that NFT and use it with other DeFi protocols.
We have loans that can pay off themselves over time, where there is no risk of liquidation.
It’s easy to see a path from here where we can all one day enjoy living in a home where it’s (at least partially) paying itself off with other yield-generating assets. Where a home can actually act more like a real piggy bank, where you can easily take out more cash from your home as it grows it value.
The future is looking more weird, amazing, risky, quirky, and exciting by the day. Can’t wait to see what the shady super coders come up with next.
Thanks for reading!