A Brief Overview of Blockchain
Blockchain has proved to be a technology of trust. The very structure of it assures security and prevents fraud attempts. The thing is that blockchain is a decentralized database that transmits identical copies of each transaction across a network. Essentially, it consists of blocks of information chained together. Every new block contains data from the previous one, and the data from that block is then used to create the next one, and so on. If you want to hack this system, you will need to get into every single block on every single carrier where the information is stored, which is… well, try it out and let us know how it turned out!
Due to its flexibility and security, blockchain technology is used for money exchange, or rather a digital form of it known as cryptocurrency. However, as blockchain’s benefits became more evident, different industries began adopting it to solve their problems and accelerate their industry’s processes. As a result, blockchain technology is now widely used in finance, insurance, healthcare, retail, supply chain, and real estate.
In today’s article, we’ll discuss blockchain real estate use cases and how it enables this industry to address its issues.
Getting a Sense of the Real Estate Industry
Despite the crisis, the real estate market reached its pre-pandemics size – 9.5 billion dollars. Still, experts predict a gradual increase – to 10 billion dollars in 2022, 10.7 – in 2023, and 11.3 – in 2024. Eventually, the growth of the real estate industry will lead to the customer demand for improved security, better accessibility, more straightforward and digitalized transactions, and faster real estate processes. Lastly, the real estate players will be motivated to automate what is currently manual, digitalize what is now on paper, and reach out to the previously inaccessible audience.
Amongst the problems that the real estate industry players strive to solve are:
- Intricate real estate agreements and contracts
- Time-consuming title searches
- Inefficient title insurance
- Real estate fraud and scams
- Much documentation
- The need for middlemen
That’s where blockchain technology can prove helpful. The chart below shows what users value most from having a blockchain digital identity. Some of these may serve as blockchain real estate benefits – e.g., spotting frauds, signing contracts, accessing records, and performing know-your-customer (or landlord!) checks.
Incorporating Blockchain Technology for Real Estate
In the real estate sector, blockchain allows for innovation and improvement through the use of tokenization, decentralized transactions, smart contracts, and blockchain registries.
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.
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.
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.
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.
Challenges of Real Estate that Blockchain Solves
All of the above blockchain-based tools and technologies help the real estate industry achieve the following goals:
Preventing fraud and financial risks
Blockchain technology verifies transactions through mathematical equations and a general consensus of the network, which reduces the excessive reliance on either party and prevents the conflict of interest. For instance, smart contracts hold each party responsible for fulfilling their end of the bargain. Money gets returned to the rightful owner if a party deviates from the outline of the agreement.
Bypassing the middlemen
With blockchain, there is no longer any need for lawyers, brokers, and agents since it can take over their most basic responsibilities. Moreover, smart contracts can be used for all types of real estate transactions, including buying/selling properties, leasing and property management, and vendor agreements.
Accelerating real estate deals
Blockchain smart contracts and decentralized transactions reduce the time for buying, selling, and leasing property. What takes 30 days in the offline real estate world may take hours on the blockchain. All the verification there occurs automatically.
Changing the title and land registration systems
The transfer of title and land registries can be more open and transparent with the use of blockchain. The record-keeping process on the blockchain can eliminate title defects, reduce the need for additional insurance, and hence – reduce hidden costs. Also, with blockchain, it is possible to organize and update records more efficiently since there is way less bureaucracy and paperwork included.
Security is the hallmark of blockchain – a technology worthy of consideration for sensitive matters such as transactions, ownership rights, and record keeping. With tokenization, smart contracts, and a decentralized structure, this tech will help overcome the challenges of any industry that needs to rely on transparency and trustworthiness.
If you want to start a new blockchain real estate project, contact us! We have a strong and skillful team of blockchain developers who have already developed hundreds of smart contracts and helped one of our clients revolutionize NFT.
We would be glad to jump into your project and improve it, too!