Blockchain in Real Estate & Its Impact on Power & Socioeconomics
Blockchain is a term most of us have at least heard of and tend to use interchangeably with its most common application: Cryptocurrency.
But blockchain is much more than Bitcoin, and its potential to shift the world into a new era of transparency, access, and equality is beyond exciting. While we are many years away from seeing complete adoption, we are at a stage where leaders across many industries, including finance, and now real estate, are beginning to tap into the technology and vision. More startups utilizing blockchain are emerging, and I believe many of these products are going to stick due to their potential to transform the way we live and the power structures that exist within society.
What is Blockchain?
Because there’s such confusion around the technology itself, which is complex and often doesn’t get discussed for that reason, I think there’s a lack of understanding—outside of those who study the technology—about how it can benefit the public. Fortunately, it’s unnecessary to fully understand the tech aspect of blockchain in order to visualize how it can be applied.
Protocols & Nodes for The Rest of Us
Blockchain is essentially a system of information clusters that are dispersed through a wide network. The information clusters are called nodes, which are individual ledgers of all the transactions that take place throughout the entire network. This means that every node carries a copy of the same information, allowing for complete transparency.
The technology operates off of protocols, or a set of rules that determine how and when the information is distributed. Essentially, there are predetermined parameters for how a transaction will take place, eliminating the need for human oversight, intervention, and potential fraud or manipulation.
Decentralization of Power in Finance
What this means is that within a blockchain system, there’s no need for a centralized ledger to record transactions, which would traditionally be a bank. Because everyone within the network has access to their own automatically generated ledger, no third party is required to create a record on anyone else’s behalf.
The most clear advantage of a setup like this is the ability to securely conduct important transactions, such a home purchase, without a bank’s involvement. Using blockchain in real estate, for example, allows us to put power back in the hands of individuals regarding the biggest purchase they will make in their lifetime.
Blockchain in Real Estate: Applications
I do believe that blockchain technology will innovate the way we operate across all industries, but as a real estate investor, I’m most interested in the implications of using blockchain in real estate transactions. From signing contracts to distributing titles, and of course, the sending and receiving of funds, blockchain can streamline the way the entire industry operates, which, until the past few years, has seen very little innovation.
While it’s not 100% perfect in execution just yet—you can read more about the less glamorous realities of blockchain here—there are several areas of real estate that are seeing important progress.
Title
The current process of recording and obtaining a title is difficult, time consuming, and requires lots of moving parts that cause delays. Using blockchain in real estate to automatically generate a title record when a transaction occurs eliminates the back and forth, providing the property owner with an instant receipt of ownership.
Smart Contracts
One of the most interesting aspects of using blockchain in real estate is the use of smart contracts. Instead of clunky paperwork, smart contracts use protocols to automatically execute a series of steps. This could mean holding funds in a blockchain “escrow” and sending funds upon contract completion or certain conditions being met.
There’s no need for any one party to hold money on behalf of another, or for any party to wait for extra steps to be completed—smart contracts can hold and release funds based on contract conditions agreed upon by both parties in advance. I recently invested in Digibuild, a company using blockchain technology to solve the construction industry’s problems with fraud and disputes arising from distrust and disjointed parties. By storing a once paper trail digitally on the blockchain, almost all of these issues become nonexistent.
Crowdfunding
While crowdfunding has existed for some time, the adoption of blockchain in real estate has increased its accessibility through tokenization—turning an asset into a digital token that can be stored, traded, or shared on the blockchain.
In simple terms, it is assigning a digital value and identity to fractions of a real-life asset. Using blockchain technology, parts of a real estate investment (multifamily unit, land lot, etc) can be converted to tokens and traded between a buyer and seller almost instantly at low costs.
Companies such as Honeybricks and Akru—both Proptech companies I recently invested in—are revolutionizing real estate investing through tokenization. Akru, for example, allows investors to purchase a piece of high value commercial property for as little as $1,000.
HELOCs
Home equity lines of credit (HELOCs) are lifelines for people who need access to capital, but the current process for tapping into your home equity is not easy. Banks become uneasy to lend during uncertain market shifts, and strict qualification measures are put in place for borrowers. Introducing blockchain technology to this product can help liquidate home equity quickly and without barriers through companies such as QuantumRE, one of my recent startup investments.
Raising Social & Economic Status
Using blockchain in real estate transactions might appear as though it has little impact on the average person other than streamlining the experience of purchasing a property, and for those who put their trust in banks to facilitate the process, it may not have any tangible benefits. But for people in third world countries with limited access to banks, the adoption of blockchain in real estate is critical for reaping the full benefits of land and home ownership.
In remote communities around the world, land owners without easy access to banks and local financial products struggle to leverage their greatest asset to fuel their climb up the socioeconomic ladder. However, most families do own smartphones and have internet access, with which they can tokenize their property through decentralized platforms and use the capital to increase their standard of living.
If there’s any use case for blockchain in real estate that’s truly powerful, it may be outside of the United States and other developed countries where it can change the entire outlook of a family’s life.
Adoption & What to Look Out For
Adoption of blockchain technology won’t happen overnight, but it is coming, and it will have an impact on the way we live—from conducting business to consuming everyday products. If you’re interested in learning more about the impact of blockchain on the real estate industry, check out this podcast episode where I interview Bar Mor on the topic.
For those interested in the future of blockchain in real estate, check out my latest investments in companies applying decentralized finance to the real estate industry—Robinland and QuantumRE.