Guaranteeing rent payments on a blockchain
Disclaimer: I am not a real estate expert, the following just comes from personal experience and I realize it might potentially gloss over some regulatory constraints.
Have you ever had difficulties renting a place? Or maybe you know someone who has. Landlords usually ask prospective tenants to provide proof of recurring income, which is easy if you're an employee with a solid contract. However, it can get more difficult for someone who's self-employed, on a temp contract, or even just moved from abroad.
Some companies offer to automate the screening process with a neat web interface and API connections to banks and databases, only to fall short if an applicant who's just moved from abroad is not yet registered in any of them. The complexities, don't end there. Countries that rely on a credit score system consider you inexistant in their system's eyes until you start building up your score, regardless of you physically being on their soil.
In cities like Paris, the market for apartment rentals has been incredibly favorable to landlords - although the COVID pandemic might have helped relieve some of that pressure.
As a result of this imbalance between supply and demand, which in this case we call a seller's market, landlords might receive hundreds of applicants within hours of posting a listing. They can afford to be picky. You may have provided all the proofs and guarantees that you would be a model tenant, your application is just one among many, as good as yours, if not better, in the pile. And if you're a freelancer, without stable earnings then good luck! Companies have increasingly been embracing contractors over the years; landlords seem to be lagging behind. This is a real problem for people without a full-time, long-term work contract and results in weeks-long hassle, fraught with rejections.
Apart from damages, landlords' biggest fear is a tenant that doesn't pay rent. As a cover, it's not uncommon to get an insurance policy against it. So prospective tenants sometimes get a rejection that actually and indirectly comes from the insurance company.
Using something like Airbnb is one solution, but it's often more expensive. And it might feel homey, but not like your home. That's why it works well but only as a temporary solution.
Another solution is to use a guarantor, who's liable for the rent in case you can't pay, and pray you make it out of the pile of applicants this way.
But what if you can't provide worthy guarantors?
What's mind boggling, by the way, is that guarantors might not be able to actually pay themselves if need be. They might have their own debts or mortgage to pay first, but we don't check that, do we?!
So another solution, which I recognize only few could afford, would be to lock up a number of months worth of rent which would essentially replace the insurance company. That's already common practice in several countries and is known as a security deposit. Though it usually protects the landlord against damages, the amount here would be large enough to protect against default by the tenant as well.
Wouldn't it be reassuring to know that a sum is locked up and would be automatically transferred to a landlord in case of a missed rent payment?
That money has to be locked up and can't be trusted in hands of either the landlord or the tenant: the other would object. So one way to solve this trust issue is to put that money in escrow. Doing so, however, can incur some fees.
That's where a blockchain like Ethereum can shine, acting as an escrow account without a third-party. The security deposit would be managed by a smart contract with rules agreed upon between landlord and tenant. With rent being paid through this smart contract, it becomes not only very easy to verify if it was paid on time, it also becomes automatically actionable, i.e the money locked is released to the landlord if rent is due and wasn't paid. In case that undesirable event happens, it can be considered that rent was paid from the security deposit. Another - harsher - variant would be to consider that rent is still due for that "missed month" although the tenant lost some of that deposit.
Thanks to the composable nature of DeFi that "rent guarantee" could even earn interest while being locked up! Because it can represent quite a large sum, it might as well be put to work.
The earned interest on it can also be programmatically split between landlord and tenant. This would bear some similarities to Jeonse, a type of lease common in South Korea which was born out of an environment with high interest rates, just like in DeFi today!
Many designs in terms of micro-economics are possible. For example, it could be programmed that tenants lose the earned interest if they don't pay on time, as an additional incentive to do so.
If we want to take things even further, it might make sense to use money streams, introduced by protocols such as Sablier or Superfluid, which allow money to be streamed from an account to another just like a video stream!
If you think about it, isn't paying rent once a month kind of arbitrary? Why not every 2 weeks? Or once a week? Renting a space is agreed for a period of time, which is continuous; why not pay continuously then?! I haven't explored the pros and cons of doing just that but it is just as arbitrary, if not a more natural way of paying rent.
Whereas with traditional banking it would be absurd to wire a small fraction of your monthly rent every minute, now it's at least technically feasible on a blockchain.
With a friend a mine we even started a basic implementation of what I just described. I've been wanting to write a technical tutorial about smart contract development, so it will be published here, taking that application as an example. Subscribe to my newsletter if you want to get notified when it comes out!