The Feasibility of MBSs as Decentralized Autonomous Organizations

TL;DR

This paper investigates the potential of representing mortgage-backed securities as decentralized autonomous organizations using blockchain, smart contracts, and asset tokenization to enhance transparency, traceability, and real-time reporting.

Contribution

It introduces a novel framework for modeling MBS as DAOs with formal algorithmic designs, integrating mortgages, collateral, and guarantees on blockchain platforms.

Findings

MBS can be logically represented using ACTUS standards.

Blockchain implementation enables real-time ratings and transparency.

Formal designs of MBS-DAOs are feasible and promising.

Abstract

Can the general structure of a mortgage-backed security (MBS) contract be programmatically represented through the use of decentralized autonomous organizations (DAOs)? Such an approach could allow for the portfolio of loans to be managed by investors in a trustless and transparent way. The focus and scope of this paper is to explore the potential for applying the tools of modern fintech, such as asset tokenization, smart contracts, and DAOs, to reconstruct traditional structured products that have a greater degree of transparency and traceability. MBS investors face considerable value uncertainty as time increases between the actual occurrence (or non-occurrence) of cash flows and subsequent reporting. Given that an MBS is a financial contract, it should be expressible logically using the Algorithmic Contract Types Unified Standards (ACTUS). Since each underlying mortgage in an MBS derives its cash flows in a prescribed way over the life of the contract, implementation on a public blockchain could enable real-time ratings systems, improving market efficiency. We explore the potential for creating formal algorithmic designs of MBS-DAOs that incorporate individual mortgages, the underlying real estate assets (collateral), and any loan guarantees.