Blockchain can be defined as a public ledger of transactions that have been performed over a period of time, consistently growing as finished “blocks” are added as fresh recordings. Once a block is written it cannot be removed or changed, ever. The addition of blocks is done in a linear chronological order. Every computer connected to the network performs the task of authenticating and transmitting transactions gets a copy of the Blockchain. A single Blockchain has the entire history of all the addresses and balances from the first block to the one which has been recently completed.
Usually, when people are speaking of Blockchain they are usually referring to Cryptocurrency. An example of Cryptocurrency is Bitcoin, which is the most popular. At the time of writing this article, Bitcoin is 4 times the value of gold. Another example of Cryptocurrency is the second most popular, called Ethereum, which is a 1oth the value of gold at the time of writing this article.
How Will Blockchain Transform the Face of Real Estate?
As an incipient technology, Blockchain is expected to bring about considerable change in the process of buying and selling real estate by eliminating the inefficiencies of the real estate transaction such as hidden costs and over extensive charges. Since Blockchain is not owned by a single corporation there are no charges to record transactions. It is public in nature and is open, ensuring the integrity of all ownership and transactions. This means almost no intermediaries, lesser time to accomplish a transaction and low costs incurred.
We take a look at four ways blockchain is going to transform real estate:
- Reduction in Intermediaries
- Prevention of Fraud
- Digital Currency
- Smart Contracts
- Reduction in Intermediaries
Globally as a collective, there are at least six parties involved in the dealings of a real estate transaction – brokers, escrow companies/agent, government’s (databases of properties), notary publics, title companies (Insurance and property databank) and appraisers and property inspectors. These professionals all exist to provide information which the general public cannot access without them and their relevant required license or skills to handle the network that is property. Blockchain is open for everyone and accessing the information is not restricted, as such visibility is expected to be placed over this process.
For instance, if a title company and a relevant Government agency had to authenticate and record a specific property, the process could be completely automated with a Blockchain smart contract. The title to a property is largely paper driven and in order to transfer property, one would have to fill the necessary details on the deed and sign to own or transfer. After which a notary would authenticate it and is then given to the recorder’s office which is kept securely in a file, scanned or recorded digitally (depending on region & country). All in all, the process is expensive, labor intensive and requires a lot of rigor and skill.
Blockchain would be an ideal solution to this process, either to provide a valuable backup or completely replace one day. The Blockchain technology would use a smart contract, like a Cryptocurrency, to create a digital title and a secure token that can be easily transferred from one entity to another, even securely as an email. Many of us recall the days before email, sending a letter required envelopes, stamps, post-offices, workers and ways to transport these letters etc. Email has all but eliminated much of this and information can now reach its destination within seconds. As people begin verifying property records and digitally transfer a title the above sex step process could well soon steamline itself, becoming more efficiently and transparent.
- Prevention of Fraud:
Fraud in real estate is mostly practiced by forged documents using false bank statements, deeds, etc. Blockchain offers 100% security as an honest resource – the exact and true details of where sender and recipient of funds were recorded and where saved copies of digital ownership certificates for properties can be found. It is almost impossible to reproduce digital ownership certificates. These smart contracts would also be linked to a single property in the system, making advertising or selling a property which one doesn’t own, simply impossible.
- Digital Currency:
Blockchain can also act as an alternative currency, which could actually one day replace conventional currency. Everything here is digital. Cryptocurrency is not a paper-based currency which is later denoted by software, in fact, each Bitcoin (or Cryptocurrency) is software created right from their initiation. Cryptocurrency can even be programmed to distribute itself and provide escrow to secure transactions.
An interesting example is the rental market. When a tenant moves into a home and pays the relevant security deposit to an agency or landlord, the deposit should be kept in trust or an escrow account (depending on the country & region). Once the contract ends, the agency or landlord then release the deposit to the former tenant. At times these situations end unpleasantly and sometimes in court, either due to the tenant damaging the property or the agency/landlord failing to return the deposit. Using the multi-signature feature of a Crypto currency like Bitcoin, it can be used to create a programmable escrow (a smart contract) and the tenant and property-owner/agency generate a multi-signature transaction. Both have a [digital] key each and the third key is given to a third-party, funds are locked and require each other’s consent to release.
On expiry of the contract the tenant approves the transaction and if the landlord or agency finds damage on property he/she sends proof to the third party who decides and hears out both parties and uses the private key to send the deposit to the righteous. The third party here is the arbitrator. The deposit is instant – there is no waiting, no fraud, and limited disputes.
- Smart Contracts:
A smart contract eliminates the need for verification of an agreement in a traditional sense. A software procedure systematizes and self-executes an action when certain conditions are met.
As per Digital Currency above, two parties enter into a contract and one party, say X, pays a certain amount to transfer the title of the property to owner, Y. If in this circumstance owner Y, refuses to convert the title after accepting the funds, traditionally they have to take the matter to the court where an arbitrator decides the outcome.
A smart contract would state that X pays Y the agreed amount for the property in a virtual currency (like Bitcoin) on the Blockchain. X transfers the virtual currency to Y and the funds are automatically sent to the owner and thus, the title is transferred to X. The transfer is completed and X’s ownership can be authenticated through a record (a block) which is available publically on the Blockchain. As soon as the transfer is complete the results are made public which can be verified in external records. Risk of fraud is completely eliminated! There is no special action required to induce the transfer after payment, as this is complete as the coin that symbolizes the title to the property is transferred immediately and the transfer is published automatically to the third parties via the Blockchain.
Of course, this is only the tip of the Blockchain iceberg. The technology is set to completely revolutionize the real estate industry. If you are not yet up to speed on this technology, there are plenty of forums, groups and articles around to help you remain updated. An Australia company called Listr, is set to be the first real estate marketing solution that is completely backed by the Blockchain. We are eager to follow their success and will report back on their progress.