Detailing Case Study #1
Can crypto mining replace government subsidies effectively?
In our last substack we introduced the two case studies that Theopetra will test to prove that we can meaningfully and sustainably address the chronic real estate problems facing America:
Case Study #1: Solve for Affordable Housing / Rental Crisis; and
Case Study #2: Solve for Housing Inventory Crisis While Providing Safer Debt for Institutions.
Today, we will unpack Case Study #1 and lay out how REAT plans to test and prove scalable affordable housing.
Overview: The Problem That REAT is Addressing with This Case Study
In our first substack, we highlighted how government actions have little to no effect on the widespread problem at hand. The two primary actions that we covered were government subsidies and rent control. It’s essential to note here that any and every government action ultimately requires increased taxes to fund those actions. Governments typically have only two levers to pull to introduce change or provide subsidies. Any deficit resulting from providing subsidies, benefits, or assistance must be made up somewhere, and that somewhere is from higher taxes on individuals or from money printing that drives inflation. Bear this in mind as we explain why the current scenario is broken.
There are three key players in the current real estate world:
Of these, the Government is the only player that, in theory, can help address a nationwide problem. Landlords and Tenants are not a central authority, are highly fragmented, and are often comprised of your local mom & pop individuals who are paying taxes and trying to make it with limited income. And don’t forget that this is all against the backdrop of fighting inflation and reduced pay (adjusted for inflation).
So, what happens when the government steps in to help? In the very short term, tenants get some relief, either a direct payment or a reduction in costs. However, the money for that “relief” has to come from somewhere. Remember how every government action ultimately causes them to use the only levers they have? Taxes get raised, money gets printed, and prices for everything rise. This hurts both the landlords and tenants.
The difference is that landlords are asset owners and tend to absorb higher taxes relatively more favorably compared to tenants because of tax write-offs, depreciation, and appreciation of their assets. Tenants, on the other hand, ultimately lose the most as there is no recourse to higher taxes. All the additional taxes (including the effects of inflation) that go out of their pockets ultimately give them little to no returns. This contributes to the widening wealth gap in America as the rich get richer while the less fortunate are left to fend for themselves.
What we’ve seen time and again is that when the government tries to help, they actually end up hurting both the landlords and the tenants. A new approach is needed, and we believe that the solution we will be testing in Case Study 1 can help alleviate these pains.
The Approach: Replacing Government Subsidies and Debt with Miners
Case Study #1 is intended to demonstrate that REAT can replace the role that government subsidies play above with miners. This has several advantages and ultimately creates a flywheel effect of a self-sustaining ecosystem where the miners supplement the landlords and tenants while enabling further accumulation of affordable housing.
Crypto miners are incentivized to use their own capital and take on a certain amount of risk. The mining process does not rely on taxing landlords or tenants (or any other party for that matter) and is truly self-sustaining from a capital perspective.
If we lost you with those two paragraphs, a little bit of technical background on miners and Proof of Transfer (PoX) in Stacks can be found here (it’s only 10 pages, don’t be afraid!).
What Will REAT Do?
We will use Proof of Transfer (PoX) in Stacks for mining. PoX on Stacks is a mining approach that allows for a Proof of Work chain (in Stack’s case, Bitcoin) to be leveraged and extended in new ways.
PoX on Stacks builds on the Bitcoin blockchain, allowing developers to leverage the benefits of the most secure and most widely used blockchain while delivering new capabilities such as token creation, smart contracts, and funding mechanisms, among others. It allows for new features and capabilities by leveraging existing blockchains and already-mined tokens (Bitcoin in this case), thus reducing the need for a resource-heavy process. For PoX on Stacks, miners will not require high-end hardware or high up-front costs. This significantly reduces entry barriers for miners.
Back to our case study.
How Does it Work?
With Bitcoin, miners burn a resource – electricity/energy – to be rewarded with BTC tokens. By contrast, miners in our scenario will “burn” or send/transfer Stacks ($STX) and may receive an asset in return.
The miner, for all practical purposes, replaces the government in our scenario. And rather than imposing taxes on other parties, miners will supplement the landlords and tenants with their own capital, in effect creating a closed-loop ecosystem that feeds itself. While miners contribute to landlords, tenants will not be left behind. It will create a win-win-win scenario.
Let’s run through a high-level example. Under our scenario, the tenant receives stabilized rent that won’t increase by more than 1% per year. This directly benefits them financially but also allows them to plan ahead knowing (not just hoping) that their housing costs will remain largely fixed. This is a great outcome for the tenant, but how can the landlord (REAT) afford to keep rents stable?
REAT is able to keep rents stable because it will receive rewards from the miners of the REAT token (discussed in detail below). These rewards replace the compensation that they would have received in the old system by raising rents on their tenants. Ancillary benefits to the landlord are that tenant turnover will be reduced and tenants will be able to more reliably pay their rent since it is fixed and predictable.
You may be asking what incentivizes the miner to join this ecosystem. The short answer is that the token they are mining will provide with rental cash flows upon stacking. This allows revenue to be uncorrelated with the broader crypto and equity markets.
If we take the idea even further and convert landlords into miners, we’ve got a truly self-sustaining model where more capital will be infused into the system, and at the same time will promote the creation of additional capital that will ultimately spur more real estate accumulation.
A New World Order
The new real estate ecosystem will have the following three parties:
The REAT landlord (also a miner)
This scenario will not only ensure that the miner-landlord (REAT) and tenants are reaping the benefits of the system but will also help mitigate the wealth gap problem, as the tenants will no longer have to pay increased rents year-over-year relative to inflation. This is possible because of the capital efficiency of mining—plus the fact that the landlord in our scenario will be a non-profit.
The token will be $REAT. The REAT entity, separate from Theopetra, will file as a non-profit, focusing on stabilizing rents and helping local communities. Additionally, miner risk is reduced because the landlord is also a miner and feeds the rest of the ecosystem.
This model allows Theopetra to create a system where miners benefit while having reduced risk, tenants benefit from having a non-profit landlord, and the landlord benefits from asset ownership as well as mining.
You may be familiar with the Amazon Flywheel -- it articulates a virtuous cycle highlighting the company’s ethos and has played a critical role in its success. Central to the Amazon flywheel is the relentless focus on customer experience. This focus keeps feeding the cycle and generating more traffic and better outcomes for Amazon.
Similarly, for Theopetra the ecosystem highlighted above composed of the miners, landlords, and tenants will create a flywheel effect. The focal point will be real estate accumulation. Over time, this flywheel effect will ensure that the community keeps scaling.
In testing our thesis on affordable housing, Theopetra will try to prove that by replacing the government’s role with miners (and having landlords mine as well), we can create a flywheel effect that benefits all parties involved, ultimately leading to affordable housing for all.
Case Study #1: Affordable housing and rental crisis solution focused on creating an ecosystem of contributors and participants that supplement each other.
Government subsidies will be replaced by miners, which require no printing of money. PoX on Stacks will be key to success as miners transfer $STX for a chance at $REAT
The landlord will be a non-profit entity and will also be a miner, creating a “benevolent landlord”
REAT’s flywheel effect will have real estate accumulation as the focal point, which will ensure the affordable housing model keeps scaling in the future