What is blockchain’s impact on Real Estate?

Over the past few years, blockchain has seen increased applications not only in the financial world, but within other major global industries, too. However, the property market is an area which, as yet, has seen little impact from the growth of blockchain. Analysts believe that this might change over the coming years, however. 

 

We’ve put together some key insights as to how blockchain might affect the world of property. First, though, it’s worth exploring exactly what blockchain is.

What is Blockchain?

  • A blockchain revolves around something called a “digitally distributed ledger”. This is a piece of technology – not dissimilar to a database – on which transactions can be recorded in an entirely immutable manner. That’s to say, it can’t be altered or tampered with in any way after the fact. 
  • The eponymous ‘chain’ refers to a growing sequence of blocks of data; the contents of each block vary depending on the specific blockchain in question. As an example, however, a block might be filled with records of a specific kind of financial transaction.
  • A block is only added to the chain if it has been validated by a network of ‘nodes’ (essentially a big group of computers connected to one another) which operate according to a set of known algorithms.
  •  A blockchain’s design ensures both transparency and instant traceability, thus drastically reducing the risk of financial crimes such as fraud. It can record all kinds of transactions, both tangible assets (such as property) as well as intangible assets, including IP.

How Can Real Estate Benefit From Blockchain?

1. Removing the Need For Intermediaries…

An area in which blockchain might change the property industry is in the removal of the need for intermediaries. In spite of its $228 trillion size as an asset class, the property industry is still hamstrung by dated, paper-based processes, as well as the involvement of third-parties who often slow transactions down. Blockchain could potentially be used as a means of both documenting and facilitating listings and sales, as well as handling legal documentation. This will save brokers, property owners and real estate executives both time and money.

2. Will Blockchain Eliminate Title Insurance?

It is unlikely that blockchain will entirely eliminate title insurance. What it may do, however, is optimise and improve the way in which the current title insurance sector operates. Adopting blockchain technology (in the form of a blockchain land registry database, for instance) will help save the title insurance industry money lost to fraud – estimated by Goldman Sachs, in 2016, to be somewhere between US$2 and $4 billion. Documentation and record-keeping will also be improved, with the risk of tampering completely removed. The need for widespread legislative change is currently preventing blockchain from substantively changing the title insurance industry, however.

3. Blockchain is Helping Decentralise the property Sector…

A decentralised system – one which hinges around blockchain, for instance – will help prevent future housing bubble crises such as that seen in 2008. Fraud and other financial crimes are far more difficult to carry out against a blockchain-based ecosystem, thus rendering the whole real estate sector more secure and reputable as a result. Fintech journalists such as Paul Vigna and Michael Casey have long argued that the 2008 housing crisis stemmed from a lack of transparency, and that more inherently transparent technologies (like blockchain) could prevent similar situations from arising in the future.

4. The Introduction of Smart Contracts

A smart contract refers to an automated transaction protocol that’s triggered when certain predetermined conditions are met. Though first proposed all the way back in 1994, smart contracts have really taken off with the growth of blockchain technologies. The below is an example of how smart contracts might be applied to the real estate industry:

When parties enter into a smart contract, they’re agreeing to fulfil said contract as soon as those conditions are met. This isn’t dissimilar to the way in which a traditional contract operates, except it’s automated (and therefore quicker, easier and more reliable for both parties).

With a smart contract, as soon as a mortgage has been paid out by the previous owner – therefore freeing up the new buyer to complete the sale – then the transaction will be completed. The smart contract removes the need for any notaries or laborious paperwork because it’s entirely automated.

A process that, previously, may well have taken days could potentially take place instantaneously. The introduction of smart contracts has the potential, therefore, to significantly increase real estate’s liquidity.

5. From Archaic to Agile…

A lack of liquidity is commonly seen as one of real estate’s failing as an asset class. Blockchain technologies could change that, however. Real estate “tokenization” – that is, converting an asset into a ‘token’ that can be moved, bought, sold, etc. – is enabling property to be made tradeable on the marketplace; something which, historically, has been out-of-reach for this non-fungible asset class.

The automation provided by this tokenization is also helping reduce average investment size, in turn widening the pool of potential investors. Although still only a relatively nascent area of investment, there’s no doubt that blockchain is only going to continue to grow. According to Statista, in fact, the blockchain market is predicted to reach $163 billion by 2027, more than one hundred times what it was worth back in 2018.

Will Blockchain Eliminate Real Estate Agents?

No! Rather, a widespread adoption of blockchain technology would free up real estate agents and brokers from the paperwork and documentation currently occupying large swathes of their time. This would enable them to focus on: sales, sourcing new properties and making sure that both buyer and seller are happy with the way transactions unfold.

Does Blockchain Have Limitations?

Blockchain hasn’t seen widespread applications within real estate yet, and whilst it may well go on to positively impact the sector in the future, that’s not to say it doesn’t also have its limitations, too. For instance, whilst a decentralised system is generally more secure, it’s still not immune to being hacked or compromised. Likewise, the dense technical jargon surrounding much of the discourse around blockchain makes it more inaccessible, even to professionals.

What’s the Difference Between Blockchain and Cryptocurrency?

People often use the two terms interchangeably, but they’re not the same thing. Blockchain is the underlying technology upon which cryptocurrencies are built. In other words, you can have blockchain without cryptocurrencies, but you can’t have cryptocurrencies without blockchain.

Is There a Cryptocurrency For Property?

There isn’t currently a cryptocurrency explicitly designed for the real estate sector. In many ways, however, there doesn’t need to be. Of the thousands of cryptocurrencies currently active, Bitcoin, Ethereum, XRP, Tether and Solana could all theoretically be used to purchase real estate.

Final Thoughts…

Blockchain certainly has the potential to change real estate for the better; from improved liquidity through to greater trust and transparency, there’s a lot of good that can come from its introduction. That said, there’s still a way to go before it takes hold the way many market experts believe it will. Most key to that arguably is a more general, widespread understanding of what blockchain actually is. For more real estate and property insights, take a look at our upcoming events, such as BWT UK which cover blockchain and other built-world technology challenges.