Recent advancement in the world of blockchain has led to the development of smart contracts and tokenization of assets. Utilizing blockchain technology for the transaction and ownership of real property could be a colossal change to the conventional methods in the real estate industry.
Blockchain is a type of database that utilizes a distributed ledger system technology in which “blocks” of data are “chained” together, creating a decentralized network. These “blocks of data”, or transactional records, are brought onto the chain via a unique cryptographic signature that verifies the authenticity of said data. A unique characteristic of blockchain technology is that these blocks of data are not governed by any central authority (see Blockchain Explanation).
Because of the structure of the blockchain, data stored in this method is decentralized, tamper-proof, and fraud-proof. A traditional database, such as an SQL database, stores data into computer servers that are owned or operated by an administrator with complete control over all the data. Consider Venmo as an example – when you send money to someone on Venmo, that transaction goes to a computer server that is owned and governed by a centralized party to secure the transaction. A blockchain transaction has no need for a third-party centralized authority to complete the transaction, and no fraudulent behavior would occur because the transaction is open, viewed, and secured via the blockchain network.
How does blockchain relate to Real Estate transactions? To secure a transaction and transfer real property from a seller to a buyer, a purchase and sale agreement in the form of a legal contract must be executed. Both parties must meet the terms and conditions of the contract in order for the transaction to occur.
A recent technological advancement in the world of blockchain is the development of “smart contracts”. Smart contracts are essentially a programmed protocol that executes a transaction into the blockchain when certain conditions are met. Think of it as the terms and conditions of a conventional contract being codified and then executed when the parties’ terms are met, then stored in the blockchain (see IBM Smart Contract Definition).
Why switch from the conventional method of buying and selling real estate? Traditional contracts require a significant amount of time and money as various parties over the ambiguous nature of the terms and conditions. Real estate transactions can be full of risk and both parties want their terms met first, requiring the use of third parties to secure the transaction.
Smart contracts can help alleviate and even eliminate many of these inefficiencies by assembling legal language into code, consolidating all the transactional functions, removing the associated intermediary costs (brokers, lawyers, notaries, etc.), and storing the records in one secure and transparent blockchain database. Blockchain makes this all possible because the transaction cannot be changed and is transparent and tamper-proof for the parties involved.
Another development emerging from blockchain is called “tokenization”. Tokenization is the process of taking an asset and converting it into a token that can then be stored on the blockchain. A token behaves as a virtual record representing an asset that can then be placed into the blockchain, allowing all the functionality mentioned prior. In the instance of tokenized real estate, these aforementioned blockchain transactional records could be a portion of a deed that is then represented by a token and stored as a record onto the blockchain (see Tokenization of Real Estate). Now that the real estate is represented by a digital asset, all blockchain functionality can be fully utilized.
Tokenization also allows real estate and other assets that are traditionally not easily divisible, such as art, to be fractionally owned. This process allows previously non-fungible items to be split-up and divided into smaller amounts, giving people the opportunity to own tokens representing the share of a real estate asset.
Automating and digitizing real estate transactions with blockchain is still an early development undergoing innovation. Where does the public sector fit into this updated transaction process, and how do you track the spatial nature of land ownership (critical to local government record keeping and knowing the actual piece of land you are purchasing)? Making a real estate transaction official also requires recording the appropriate documentation with the governmental administration responsible. Recording the title of the property with the county government, for instance, is needed to verify the purchase of the property in a court of law. Fully integrating blockchain technology requires also looping in the public sector to the transaction process (see GeoBlockchain Paper & Video).
While blockchain technology is relatively new, there are emerging applications of both smart contracts and tokenization in the real estate industry. One example of real estate blockchain utilization is the platform “PropertyClub”. PropertyClub is an online real estate platform that uses blockchain technology to allow users to buy, rent, invest, market, and search for properties digitally.
The platform deploys smart contracts which exchange either Bitcoin or its own unique cryptocurrency (PropertyClub Cloin) to execute real estate transactions digitally, creating a blockchain-backed marketplace. PropertyClub utilizes blockchain in a multitude of ways, including verification of listings, tokenization of real estate, and approving mortgages. The platform eliminates the need for middle-men, removes fake listings like those often found on other platforms, and offers incentivized rewards in the form of cryptocurrency and USD (Information on PropertyClub).
Blockchain adoption will intensify as many real estate owners and investors become more comfortable within the space. Accepting cryptocurrency as payment for properties is one way real estate investors are doing so. Recently, Magnum Real Estate Group listed three condominiums at 385 First Avenue for sale only accepting Bitcoin as payment, and they expect 5-10% of their future transactions to be conducted using cryptocurrency.
Blockchain in its current state certainly has its limitations, especially for implementation in real estate. While blockchain smart contracts are an innovative idea, real estate transactions are a complicated contractual process. Codifying these contracts for the entirety of a real estate transaction would be a heavy load, especially considering construction contracts that need validation of the fulfilment of all the preconditions. Automating these processes would be an intense software development project that would currently not justify the cost and scope of the undertaking. Given blockchain’s current state, most real estate investors are going to be hesitant to fully trust technology to securely complete their transactions.
And while smart contracts have the most hang-ups for adoption, other areas of blockchain technology are not without fault. With tokenization, many assets will need to be priced in cryptocurrency such as Ethereum or Bitcoin. Even though these two cryptocurrencies are the most widely used, they are still very volatile. How would one underwrite a tokenized asset using such a volatile currency? And even if these issues are resolved, involving the public sector into the transaction process is still a consideration. Government regulation will also play a considerable role going forward, not just for adoption to real estate, but for the universe of blockchain and cryptocurrency as a whole.
However, the real estate industry will soon be forced to evolve with the rapid pace of innovation. Many of the normal processes in real estate seem almost archaic in nature compared to those in other industries. New advancements in the industry will use smart contracts and tokenizations for real estate transactions because of the competitive advantage that the technology can provide. Smart contracts will reduce reliance on brokers and lawyers while also maintaining a transparent and secure process. Tokenization will create fractional ownership and an efficient decentralized marketplace. Still, there are certain limitations and issues that will need to be addressed, and any adoption will certainly be gradual. When blockchain is implemented, case law and government regulation will be an important factor on how this technology can be used (see Harvard Law – Smart Contracts). In the future, transacting and owning real estate will become a simpler and more secure process as blockchain technology and real estate intertwine.
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