How Will Blockchain Change Real Estate?

WHAT IS BLOCKCHAIN?

Blockchain technology can be summarized as it consists of three main properties:

Decentralization: 

All the data that is stored inside a blockchain is not owned by one single entity.

Transparency: 

All the data that is stored inside the blockchain can be seen by everyone who is part of the network. Every single piece of data can be traced right to its very origin.

Immutable: 

All the data that is inside the blockchain cannot be tampered with because of cryptographic hash functions. 

Based on the above blockchain three main properties, it brings in several utilities into the real estate ecosystem, such as:

i) Smart Contracts

ii) Tokenization

i) SMART CONTRACTS

Smart contracts are automated contracts. They are self-executing with specific instructions written on its code which get executed when certain conditions are made. Smart contracts are a series of instructions, written using the programming language “solidity,” which works using the IFTTT logic aka the IF-THIS-THEN-THAT logic. If the first set of instructions are done then execute the next function and after that the next one and keep on repeating until you reach the end of the contract.

Remember that smart contracts are created on a blockchain, which makes the contracts immutable and transparent (unless privacy features are used). Let’s go through the major benefits that smart contracts can offer.

Benefits of smart contracts:

#1 Cut off all the middlemen- Imagine how much money you can save by cutting out all the brokers, banks, and lawyers. With them not collecting their standard 2-5% cuts, you will be saving up a small fortune.

#2 Speed up real estate transactions- Real estate transactions can take months on complete, and that is mainly because of the vast amount of bureaucracy, middlemen, and lack of transparency that you need to go through. 

#3 Various data can be saved as a hash file within the blockchain -If you are interested in knowing more about a particular property, you can exploit the blockchain’s transparency to trace all the information you need. Imagine how much time that will save as opposed to the more traditional middle-man approach.

#4 - Protect owners from property fraud. It is possible to link the digital ownership of your property, documents, and contracts directly to the blockchain. Once inside the blockchain, it is impossible for it to be tampered with or altered.

ii) TOKENIZATION

In simple terms, “Tokens” and “Coins” are similar in Crypto-currency as both are used to define a unit of blockchain value. However, the difference is that “Tokens” are built and hosted on existing blockchains, it is a digital representation of a real-world asset, value, or function. 

While “Coins” are more unique in digital currencies which are based on their own, standalone blockchains. And one of the most exciting use-cases of blockchain technology in today’s present is that it helps in the tokenization of real-world assets, especially in Real Estate. Tokenization will not only increase the liquidity of traditionally illiquid assets, but it will also make it possible to trade those assets without a third-party. 

Think about it, instead of buying a property, you are buying simple tokens from an exchange. Does this seem a little too far-fetched to you? Well, according to the World Economic Forum, in the next ten years, 10% of the world’s GDP will be stored in crypto assets. That’s $10 trillion worth of assets stored as tokens.

We can define “Tokens” under the three main categories:

Payment Coins:

These are the “cryptocurrencies” that we are all familiar with. Bitcoin, Litecoin, Ethereum, etc. can be used as currency both inside and outside their platform.

Utility Tokens:

Tokens which fulfill a particular utility or function in their platforms are called utility tokens. Utility tokens can give holders a right to use the network and/or take advantage of the network by voting within the ecosystem. 

Security Tokens: 

A token which derives its values from an external, tradeable asset is called a security token. These are subject to federal securities and regulations. This is the category which will be used to tokenize Real-Estate Industry.

FRACTIONAL OWNERSHIP VIA TOKENIZATION

One of the most interesting outcomes of tokenization is fractional ownership. This is especially intriguing when it comes to expensive assets like real-estate. Instead of one person owning one property, it can be possible for multiple people to buy tokens of the property and co-own the building.

Fractional ownership is a method in which several unrelated parties can share in, and mitigate the risk of, ownership of a high-value tangible asset, usually a jet, yacht or piece of resort real estate. It can be done for strictly monetary reasons, but typically there is some amount of personal access involved.

Advantages of tokenizing real estate are:

1. Fractional Ownership decreases barriers to entry by a staggering amount. 
2. Real estate doesn’t need to be the playground for the rich anymore. Instead of saving up and taking loans to buy one expensive asset, you can simply buy one-fifth of that asset. 
3. Smart contract will make sure that the joint owners adhere to honest conduct.
4. Tokenization increases liquidity by a considerable margin. Instead of waiting forever to sell your property, you can go to an exchange and liquidate your tokens.
5. It allows for greater portfolio diversification and risk reduction. Instead of locking up all your money in one single property, you can use the same money to buy fractions in multiple properties.

How Will Blockchain Change Real Estate?

The blockchain technology will allow for the democratization of real estate properties. It will open up the gates for potential investors from across the world to try their hand in real-estate investment. If executed properly, then this can be hugely beneficial for the crypto-space as well, because it will increase the real-life utility of tokens. 

The scary part is that we have just scratched the surface of what could be possible via the marriage of blockchain and real-estate. Hopefully, we will see more exciting use-cases soon. 

Do you know that we are already in the Future of Real Estate Business?...... 

Before long, across the globe, vacation rental houses, high demanded parking lot space, and even dream homes will be purchased on a blockchain. In fact, blockchain-based real estate is already gaining popularity as a way for buyers, sellers and investors to interact with each other and learn about properties.  

But why is blockchain making such an impact in the real estate industry globally? One of the main critical success factor from blockchain is Distributed Ledger Technology (DLT), and its ability to be fully transparent which helps to increase trust in the community of real estate buyers, sellers and investors. And in real-estate, while the present trust value is demonstrated imperatively through a website, or a reliable agent. Blockchain add value to real estate industry by expediting its contract processes, helps to save time and reduces costs especially for the buyers.


written by: Stervey Lim