Orange DAO Podcast: Lofty Founder Jerry Chu on Building with Web3

Our founder Jerry Chu recently appeared on Orange DAO's podcast Peeling Back Web3 to talk about Lofty’s early adopters, our decision to build on Algorand, and building on web3 vs web2.

Orange DAO is a crypto founder community that supports past, present, and future Y-Combinator founders in the web3 space. You can listen to the podcast here.

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Full Interview Transcript

James (Host)

Hi, thanks for joining us on this episode of Peeling Back Web3, a podcast by and for founders and builders who are on the fence, all dipping their toes into web3. I'm your host, James, and I'm in the same boat. We're a podcast produced by Orange DAO, a DAO of over 1,200 Y Combinator alumni. This episode is part of our Humans of Orange series where we get to know the people behind Orange DAO, follow the latest news of what's going on in the DAO and meet portfolio companies of our 18 million Orange Fund. Let's get into it.

In this episode, we speak to Jerry, co-founder of Lofty, an Orange DAO portfolio company. Lofty are the first web3 way for people to invest in real estate for as little as $50. We talk about Lofty's early adopters, their decision to build on Algorand and building a web3 company versus web two. I hope you enjoy.

Jerry, so great to have you on the podcast today.

Jerry (Lofty Founder)

Thank you, James. It's great to be here.

James

Maybe just to start it off, you could tell us a little bit more about who you are and how you fell down the web3 rabbit hole.

Jerry

Sure. My name is Jerry. I'm one of the co-founders at Lofty AI. We're a platform that allows people to invest very conveniently in real estate, single family rental properties, specifically for as low as $50. And our product is built on the blockchain. And it's the first web3 way for people to own real estate and to invest in it. We basically got into this space when analyzing our own problems. We had tried to invest in real estate. It's a great way to diversify your portfolio. And I don't know if you can resonate with this, but growing up, especially in university and school, you sometimes meet wealthier students and you ask, "Oh, what do your parents do?" I would say eight out of 10 times, it was "Oh, we're in real estate" or something like that. So real estate is one of the best asset classes for the creation and maintenance of wealth.

And we tried to get access to it ourselves and realized that it is really expensive. It's inaccessible. And its a very outdated, transactional process. So even some of my friends who made decent income and could afford it if they wanted to just didn't have the time. They had a full-time job. And you're talking only weekends where they would have to spend possibly upwards of 60 days on finding property and then ultimately closing on it. And then there's no liquidity really after you close. So we realized that there's all these problems that make real estate investing inaccessible to the vast majority of people. And we realized that if you put the ownership on the blockchain, you could actually solve for all of these problems at the same time. So with Lofty, now that the ownership tokens are in $50 increments, so literally anyone who's remotely serious about building a portfolio can. There's no more capital restriction.

The process is as simple as logging on a Coinbase or Robinhood. So you're not dealing with a 60 day transactional process anymore on your end. So that part is fixed. And these tokens are liquid. They can be freely traded amongst users and there's no more liquidity issue there either. And so really we ended up here because we had our own problem that we just kept bumping into. And then as we started talking to our friends, we realized a lot more people had the exact same set of problems. It was like, "Oh, would you love to invest in real estate?" "Yeah, I would, but I don't know how, and it's difficult." And so that just kept coming up. And then ultimately we dove into the rabbit hole and ended up here.

James

Makes a ton of sense. As a millennial, I want exposure to real estate. I want to build a real estate portfolio over time, but I certainly do not want to find myself in a single place and having to look after a house and everything in between. But one of the things that I find very interesting about Lofty, and I know you spent quite a bit of time thinking about is the token side and the fractional ownership. Could you tell us a little bit more about how the actual process works on the blockchain and what the Lofty token does to individual properties or how the economics work?

Jerry

That's a great question. So right now with the current laws and processes around real estate, you can't actually efficiently split ownership of a property directly through its deed, right? The reason for that is you can actually have multiple parties on the deed, but there is no specific ownership record in terms of how much ownership you have. So if you have two people on a deed, the government would assume you equally owned 50/50 each, even though that might not have been the arrangement. One person might have put up 80% of the funds and the other person says, "Okay, I put up 20% of the funds. I should get 20%." The government doesn't think that. You just automatically divide it in half. And then if you have four people, it'd be 25% each. So there's no efficient way to record ownership this way, unfortunately, and I hope one day this evolves and hopefully Lofty is actually able to help this process evolve.

So right now, the way you would do this is to actually spin up a third party entity. And when we first started, these who are member managed LLCs, and so this third party company would ultimately own the deed to the property once it's successfully purchased and closed on. And what you own with these tokens are essentially ownership of the entity. And so if you then indirectly, let's say you own 20% of the entity, and the entity has no business operations, other than the ownership of this one single asset, which is the underlying house or property, then indirectly, you own 20% of the house. And that's the way you're able to fractionalize assets and tokenize it. So that's what the tokens legally mean is you're an owner in that entity that then owns the property. Overall, that's how that works. So when we started, DAOs weren't a legal entity yet, but what's really interesting now is you can actually form DAOs in the state of Wyoming and the state of Florida, and I'm sure more states to follow.

And so we're looking very closely at this. And fairly soon we project before the end of the year, we will actually switch over and we'll start having these holding entities. Instead of being member managed LLCs, they would become DAOs, essentially, legal DAOs that are spun up. And that's the way our business model works. And that's the way our ownership model works as well, which is Lofty never manages the property. We're just a marketplace, a platform. We help connect buyers and sellers of real estate. And we allow a person to sell a property to many individuals as opposed to just one, but ultimately how management works is through our governance program. So owners, once you purchase a property and you purchase tokens, you co-manage it with the other owners through the voting system, and a legal DAO that's algorithmically managed is perfect for this as just a natural evolution of where this model's going to go next.

James

One of the other things that I found interesting, and an organization that we love at Orange DAO is Algorand and we recently did a token swap. So could you maybe tell us a little bit more about the design choice to build on top of Algorand and the technical side of Lofty as well?

Jerry

Sure. So we analyzed obviously various blockchains. There's layer two solutions available and definitely other blockchains with a higher market size with more adoption currently. But we ultimately settled on Algorand for a couple key reasons. The first is that as a Lofty user, we want to prevent rental arbitrage. So what does that mean? It means because the tokens are liquid, you could in theory, be an owner of a property for one day. And because of that, you should only receive the rent for that property on that one day. And what we didn't want was for rent, which is traditionally paid down on a monthly basis, for people to be able to arbitrage that as they did with dividends back in the 90s. People would buy into funds right before companies would pay out their dividends and then they would get all the dividends and they would sell all their ownership and basically just rinse and repeat and get free money that way.

And so we didn't want that to happen with Lofty token. So we actually pay out the rent on a daily basis. And what that means is for someone who only has a $50 token, the rental income for that single token could be a penny a day. And so to send out very small increments of money, you need a chain that has very low transaction fees at a very consistent basis. And Algorand was pretty much the only chain that could provide that. So every transaction is in terms of fees is a fraction of a penny. And so that actually makes a unit economics of sending out a single penny to someone through Algorand actually workout. So that's one key reason.

The other one is Algorand is basically never going to fork. And that's really powerful because when you're talking about using the blockchain for ownership, it becomes problematic if the chain ever forked, and you now have two sets of tokens and it's like, okay, which set actually proves the ownership? What's going on there? And so that gets complicated. That makes Algorand a great choice.

And then lastly, people severely underestimate. It's incredibly easy for developers to actually build on top of Algorand. They don't need to know any special or esoteric languages. You can just get good developers that have good experience, which is what we do. You just hire them. They don't really even need a lot of blockchain experience and just right away, they can... It's like using an API. They can just start building on Algorand. So that is incredibly powerful and is one of the reasons why Lofty has been able to move so quickly with feature launches and growing the company with so few people. That's made hiring easier. Otherwise, you would've to find all these specialized developers. Obviously, they're very expensive and it takes a lot of time. And so that's what made Algorand extremely attractive.

James

I really like how you articulated that there as well, because when you're building in web3, it's about ultimately finding a layer one or layer two chain that enables the end use case, and ultimately democratizing investment, actually anyone to be able to invest and get daily interest on that investment every day. It makes it very, very accessible. And I know this is something you're passionate about at Lofty. Could you tell us a little bit more about that and the idea behind enabling anyone to invest and how you think about that?

Jerry

Yeah, a hundred percent. So that is our exact goal because despite the fact that web3 has in terms of user adoption really exploded over the last few years, we're still in the very early stages of blockchain adoption. And I think one of the issues and problems with why blockchain hasn't become as mainstream is because people are too focused on the underlying technology itself. So my sort of example is always the internet is great technology, but very rarely when you're talking to just your everyday people, do they nerd out about the new wifi protocol or MG or whatever it is. People don't really care about that. What they care about are what they can do with faster internet or a new protocol. Before it was like, "Hey, you can now stream 4k Netflix while you're commuting to work on the subway."

Then people get really, "Oh, that's really cool. I couldn't do that before." So I do think in the web3 space, there's a bit too much focus on the blockchain itself as, oh, isn't this great? It's on the blockchain. Your average person, for one, doesn't understand and two, doesn't really care too much about that. What ultimately I think is important for adoption is to create apps that solve people's problems and these apps leverage blockchain just to make it so that these problems can be solved or they can be solved in a better way. And ultimately that whether it's cost savings, lowering user frictions, things like that, those tangible benefits are then passed on to consumers. And that's how you get more web3 adoption because then people will just use something and say, "Wow, this is great. This is way better than currently what I have." And then they might not know that it even uses blockchain or new technology underneath.

And that's how you get the mass market into the ecosystem. And so that's the realization we had at Lofty. And so everything we do is centered around blockchain, but we try not to overly push that. People want to own and invest in real estate and for their personal financial planning for diversification. That's the problem we're trying to solve. And we want people to be able to do that conveniently in a secure way with very low frictions and very low fees. And blockchain happens to enable that. So everything we do, product design, our marketing, how we talk about our product basically is focused around that. Hey, the people who come to us might not be crypto natives, and it's our job to be this bridge and onboard them into the ecosystem. And so we take that responsibility very seriously.

James

And actually as I started to explore the Lofty ecosystem, that's one of the things that I was pleasantly surprised by. I might have guessed they would be web free native doubling down on Lofty and using this to diversify their crypto portfolio. And what I found was a whole host of characters and people sharing content on YouTube and in different places about how they're just using Lofty as a different way to invest in real estate that they were doing already, or for the first time. Can you tell us a little bit more about that early adoption and the adoption now and your launch on product time?

Jerry

Yeah, definitely. When we first launched, obviously our products spoke to a lot of web3 native people who told us that they were basically waiting for something like this because they were also fed up a little bit with everything's just launching around the blockchain technology. Isn't it great? It's on the blockchain. They're like, oh, we wanted something that was tangible actually using the blockchain to solve a real problem. And so when we launched people felt, "Hey, this is something that I feel is actually doing that." So we had a lot of early adopters who were crypto natives, but as we started growing more and more, and we constantly talked to our users through our community channels, but we sometimes even just emailed them to get them to jump on a call with us for feedback on product and things like this. And we quickly found out that a lot of people (way more than we suspected) were actually not even crypto natives in the sense that, yeah, they've never even maybe bought Bitcoin before.

They literally have never touched any crypto or blockchain product in their life before. And they told us, "Hey, I do actually own certain cryptocurrencies. And I have started using certain DeFi products, but it's because of Lofty. I came here not having any exposure and then got onboarded with you guys and learned how to use a wallet, learned about Algorand and how if I paid with algos, I would save a lot more money on transaction fees versus using a credit card. And if I used ACH, that would take me three to five business days for it to settle for me to receive my tokens. And if I pay with crypto, settle almost immediately and I would get it right away." And so they start realizing the benefit by actually using the product. And they're like, okay, maybe they keep hearing crypto and blockchain's a scam.

They're like, okay, maybe it is not a scam. Maybe there's a good tangible use of that. And then from there, they get deeper and deeper into the ecosystem. So that's how our consumers have been split up. Very early on a lot of crypto native people. But as we grow more and more is actually web two people who never had any exposure to crypto or web3. And then with the Product Hunt launch, you'll see it's in similar veins yesterday. We launched and we were super happy that a lot of our existing users came out to support us. That's always good to see in that they're finding actual value. So your users are basically your best marketers. They're always like... We have users who tell us "Oh, every time I talk to someone new, I tell them about Lofty."

It was good seeing the community value around that. But again, our theme is always to basically just help people invest in real estate. This is just an easier way to do it. You don't need to worry about the blockchain. You don't need to worry about any cryptocurrency stuff. We abstract pretty much all of that away for you. You receive all the benefits of the speed and that's what we're building and the efficiencies and the lower fees, but we handle all that for you. You just don't need to worry.

James

Yeah. And I totally believe that it's these real well use cases solving real problems for real people is what's going to actually grow the web3 pie and actually unlock its efficiencies as well. But we covered the buy side. What about the sell side? What about people actually putting their real world assets and trusting Lofty to sell them for them? Or you sell them in fractional? The ways, how has that side of things been?

Jerry

Yeah, that's a great question. We operate as a traditional sort of two-sided marketplace and a lot of marketplaces have a cold start, the chicken and the egg problem type of situation. But typically you'll notice that all the successful marketplaces have figured out who their real customers are. Usually, despite it looking that way, when you have a marketplace, you're not serving actually both sides of the market. Your real customer's usually only one side of the market. So at Lofty, we're very intentional in that our actual customers are the buyers like people buying the tokens, people who want to invest in real estate. We make money from the sellers as well, but the way we're building our product is in a way where we have the highest demand. We've made this the easiest, best way for people who want to own real estate and invest in real estate. So we hope to attract all that demand and liquidity to our platform.

And ultimately as a seller, they care even less about web3 than even the buyers. And so if you put yourself in the position of a seller, regardless of what you know about technology, you really only care about two things. Can you sell the property at the price that you want, and as quickly as possible? That's literally the two things. And so we realize if you focus on the buyers on the actual investors who want to buy the properties and you get them obsessed with your product and your platform, and there's enough of them, therefore providing a huge amount of liquidity that can absorb a lot of transactional volume, then the sellers are going to just come to you, regardless of if you're using web3 for your technology or not.

They'll just be like, "Oh, Lofty is a place where I can list my property and I sell it pretty much at the price that I want and I get an all cash offer and I can close in the week. Oh, that's great. And I barely pay any fees. I don't have to hire an agent. This is way better than what I've been doing." And so that's the value proposition for the sellers. They're coming here because we essentially have all the buyers and that's really our trick and hack around our marketplace model.

James

Yeah. I love that. But during our YC batch, we had Justin Kan coming to talk about Twitch and a key insight with basically gamers want to game all day and make money doing it. And actually that unlock created great content, which brought people on. And it sounds like in a similar way, people want fractional ownership or to invest in real estate as quickly as possible and make money at the same time and in whatever sizes they want. And if you do that and the supply will come. Yeah. It's all super exciting on the Lofty side. Where do you see this all going kind of, Jerry? Is it other asset classes? Is it global? How are you thinking about the future of Lofty?

Jerry

Yeah, again, great question. So right now we already allow international users. So you don't have to be a US resident to purchase properties through Lofty. So we're already international in that sense. In fact, 30% of our users are outside of the US, but the majority do come from Canada and the UK,  usually English speaking countries with similar sort of ownership laws around real estate. We do want to expand globally at some point in the future. But right now the US market is more than large enough for us to grow and expand into. And we are doing a lot of stuff that's new in terms of the ownership and how these things would pan out over time. Do local legal systems recognize ownership and things like that. So we understand the laws the best here in the US. And we're confident that the process we have right now protects our consumers and everything is all tied up in a nice bow and ready to go, but we don't have the confidence that we can go to the UK and tokenize properties there.

And that ownership would be respected by its local laws and so forth. So we're not worried too much about that right now, but what we have built in terms of the technology layer is that its asset agnostic, meaning that we could theoretically in the future tokenize any real world asset, like a private jet. And a group of people could buy a jet and lease it to Net Jets. You could, in fact, people don't realize, but a lot of airlines don't own their own jets. They lease it from other companies. You could have Dallas spun up that owns like a Boeing 747, which then leases it to a national airline or something like that. So on the technology basis, we can tokenize pretty much any assets. And so we build our platform very intentionally there, but right now the biggest problem we do see is the real estate sector.

More and more we're living in a world where unfortunately you have to own assets to grow your personal wealth, because it's just a situation where wage growth isn't accelerating at a pace that's fast enough to cash up with inflation and the cost of real world assets like owning a house and things like that. And so more and more, you have people who have assets like stocks and real estate and things like that without doing any additional work, they just do better. They just see their wealth on paper explode over time. And that's why you keep hearing, oh, the wealthier get wealthier. And the poor stay poor. And this is why, because a lot of the best assets like fine wine, fine art, things that do really well and are often non-correlated to shocks in the traditional financial systems like stocks and things like that are not accessible for people who probably need it the most and real estate we think is the largest asset that falls into that category.

And it is a real problem. We're not here to solve home ownership. We don't really know how to do that, but what we can solve is the ability for anyone of any economic level, to be able to start indexing and building a portfolio. So you can just get your foot on the ladder. And this will require a lot of patience. And look, realistically, if you only own one token for the next 10 years, it's not going to do much for you. But what we have seen the magic is that if people are patient, it really does snowball. We've had users who found us a year ago and they bought one token. And then every once in a while they buy another one and now they have a pretty sizable portfolio. And the beneficial thing is we allow people to reinvest their rental income back into more tokens.

So that's what this person's doing. They're not taking extra income out of their paychecks or saving account to build their Lofty portfolio in real estate. They are just using their portfolio to bootstrap more additional ownership and adding onto that. And their goal is to say, "This could be my retirement portfolio, or this could pay for my down payment." They're younger, "This could pay for my down payment like 10, 15 years." And we even have people who are building portfolios for their children and to pass this on 20, 30 years later. And that ultimately is the problem we're trying to solve to give people the flexibility and the ability to actually index into real estate conveniently.

James

Jerry, I could really ask you questions on this all day from developing individual financial freedom to actually digital communities from coming into the real world and building their own kind of network stake to just democratizing all of these things in the first place. One of the things that I'm also excited about is you're a Orange Fund portfolio company and also a member of Orange DAO. Could you tell us a little bit more about that? How Orange Fund has been part of your journey and your experience being part of the DAO?

Jerry

Yeah, a hundred percent. Orange Fund and the DAO has a very strong exposure to YC alumni. We went through Y Combinator in 2019. We were in the summer '19 batch and we actually had one of the main partners reach out directly. And it was like, "Hey, we saw what you're building. We're pretty interested." And it was such a... Look if you've been pitching VCs for as long as I have, you have the spectrum of good experiences and bad experiences. And I can wholeheartedly say it's probably one of the best pitching experiences. And I've noticed that trend where if a fund has a lot of former founders or current founders in it, they tend to understand founders better because they've experienced things directly. So all the annoying things that some VCs and funds do, they don't do that.

And so obviously it becomes a better experience that way, but truly every VC tries to say, "Oh, how can we be helpful?" And 90% of the time that's hot air. They can. And they don't really do anything, even if you ask them. But when you have a fund that has such a strong reach in the sort of founder ecosystem and network, it is truly helpful. There's a lot of intangible things that goes beyond money. Hey, we're running into this problem. Does anyone know how to solve it? Oh yeah, that happened to us three years ago while we were building this. Well, I don't know directly, but you should go talk to that person.

And that network is so invaluable. And I do the fact that there's an actual product around the fund itself where you can conveniently log in and directly ask for help. Yeah. Again, I've seen VC funds try this, but usually it doesn't pan out because a lot of them aren't product people. But when you have a fund, that's essentially run by founders, obviously their product's going to kill. It's definitely one of the easier ones to use so far.

James

Yeah. It's really great to hear. And as we just wrap up, Jerry, any last words to the community or asks or thoughts?

Jerry

Yeah. One thing I did want to specify because real estate for better or worse is a real emotional thing for a lot of folks. Sometimes when we mention fractional investing people go, "Oh, this is terrible. We are pricing out local residents" or things like that. And I did want to address that in that we're not like a giant private equity fund, like Blackstone that just buys up properties and manages ourselves. We're just a marketplace. And the people who are actually buying these properties are your everyday people. We have users who are single moms and using this to build themselves a portfolio. And we notice that because these are real people, many of whom are renters themselves. They actually act in a very different way than the horror stories you can see or you hear in the news typically. And so we've had so many governance votes around various properties to date and consistently the pattern has been that usually if a tenant falls on hard times, they'll tell you like, "Hey, I can't pay rent this month or the next month because I'm switching jobs".

And so I have to wait until my new job starts where I then start making income again." Instead of evicting the tenant directly, the ownership pretty much a hundred percent today has voted to offer payment plans and to really treat tenants in a more humane way. And so that's something I think a lot of people don't understand when they hear about our product is they just automatically assume it's just another mechanism for large institutional investors or funds to take more single family inventory off of the market. But that couldn't be further from the truth. And if they could see users who literally only even care about the appreciation from the property ownership, so they just donate all their rental income to affordable housing, mercy housing. You can do that within our platform. And plenty of people do that. So really when you have everyday people who are actually the owners and this sort of decentralized governance and ownership, you do see that they act in accordance like an everyday person, a normal person would.

And so the way I think about this is just that, are you an optimistic or a cynical person? If you're a cynical person and you think people in general are just bad collectively, then you will probably assume they would do bad things. But if you're an optimist like me and my belief is that obviously there are bad people in the world, but on average, the vast majority of time, the average person is good and they'll act good and act in a responsible way. And so far we are happy to report that does appear to be the case.

James

Yeah. I share that optimism and you've got me definitely excited to check out Lofty to make my first kind of couple of investments and participate in that community governance as well. So thank you so much for coming here today, Jerry.

Jerry

Thank you so much for having me, James. It was a pleasure.

James

Likewise. Thanks for joining us on today's episode of Humans of Orange. If you like the episode, please subscribe on Spotify or Apple podcast and share with your friends and to learn more about Orange DAO and the companies we fund, follow at Orange DAO XYZ on Twitter. And that's also the best way to reach us.