In the real estate sector, blockchain allows for innovation and improvement through the use of tokenization, decentralized transactions, smart contracts, and blockchain registries.
Asset Tokenization
A tokenization process involves dividing a physical asset into digital ones on the blockchain. As a result, these digital tokens are used as ownership shares. They actually function similarly to NFT-tokens, with the difference that in the case if real estate the tokens are fungible, and they are actually tied to the asset’s value.
For instance, let’s assume a €1M office building exists in Berlin. With asset tokenization, its owners can convert their ownership into a million tokens – each representing a piece of the office building. Let’s say the owners need to quickly sell one room. They can create tokens on a distributed ledger and then sell a token representing that room. If the buyer purchases a token, they will take ownership of it and will be able to furtherly sell it, give for rent, etc. The method of selling real estate in such a way has no territorial boundaries, eliminates middlemen, and speeds up the process of transferring property rights.
Decentralized Transactions
There is no broker, bank, or organization that controls or authorizes blockchain decentralized transactions. During a transaction, control of it is shared between all blockchain peers – aka users – who are present at the time.
Say you paid several bitcoins for a new apartment in Manhattan. You would send the request to the network for approval as a block. Once this block is broadcast to every party on the network and the system made sure there is nothing wrong, it is approved by everyone. After that, the owner of your dream apartment can earn their money and transfer ownership to you.
Blockchain technology in commercial real estate transactions removes middlemen from the process. So, the entire network serves as your middle man – but without the need to create documents, meet up, and discuss fees.
Smart Contracts
Essentially, smart contracts are a set of “if/when…then…” statements implemented within the blockchain code. In a smart contract, all actions are automatically performed by a network of computers if certain conditions are met – thus, it only works if two parties follow through on their agreements.
In real estate, smart contracts play a critical role because they automatically authenticate buyer and seller identities and check if both of them meet the requirements of the contract.
With the help of smart contracts, real estate industry players can improve the process of transferring real estate ownership by setting up predefined conditions and automating rental payments at the predefined timing. Further, if either party fails to meet the contract conditions – the smart contract will stop working, and it may even be possible for the money to be refunded to the buyer, reducing the buyer’s financial risk.
Blockchain Registries
Land registries were traditionally gathered together on paper, and that is very subject to human error, loss, falsification, or damage. Thankfully, nowadays land ownership records can be created on blockchains in a permanent, unhackable format. Therefore, any change of status with a property – selling, passing on to an heir, confiscating – can be added to the blockchain and tracked in one place.
A person who, let’s say, wants to commit fraud and attempt to issue rights on a property that no longer belongs to them would be unable to change records on the blockchain because they will need to change every single block of info on every single info carrier with this info. Therefore, blockchain registry is way more difficult to hack and falsify its records.