We began our series on blockchain in December with a very brief explanation of blockchain and it’s foundations in crypto currency. In this article we will discuss the wider application of the technology in business by understanding how it can be applied to some specific use cases, including the transacting and managing of real estate.
As a bit of background, blockchain is a technology that records transactions. In its simplest form a block is a record of a new transaction. Once the bock is completed it is added to the chain: A blockchain.
The reason we use banks for transferring money between parties is that they keep the financial record of who has what in each account. They are the intermediaries that both parties on a transaction trust. This doesn’t just apply to money. For example governments keep track of titles for the ownership of land around the world. In this case they are the trusted intermediaries between two parties. Blockchain is a way of recording transactions (of anything) without the need for an intermediary like a bank or a government.
We constantly hear it said that crypto currencies will do away with the need for banks and other financial intermediaries. However that notion is simply not a reality, at least anytime soon. There are substantial technical, political and social obstacles to achieving this. The truth is there is too little knowledge and too much of the unknown to understand what the end game will be. What’s clear is there are lots of possible applications. A number of these are tied to crypto currencies, which have both positive (e.g. integrating payment without the need for executing contracts) and, potentially negative (e.g. extreme price volatility) implications.
For any product or technology to disrupt or replace what we are doing now, it needs to answer the fundamental question of “is it that much better than what I do now to be worth the pain of changing”? So what are the features of blockchain technology that give it such appeal?
Security – for transactions to be completed on blockchain, generally they require a combination of very high-level cryptography, solving complex mathematical equations that require very powerful computing and, consensus of network members. Add to this that the members of the network that complete the above work (miners) are incentivized to maintain the integrity of the network and that validated transactions cannot be amended, and it is becomes a pretty secure way to transact.
Speed and cost – the underlying concept of peer-to-peer transacting means the removal of a need for a ‘middle man’ in transactions. In theory this both speeds up the transaction and eliminates transaction fees associated with using an intermediary.
Transparency – while personal cryptographic keys protect a user’s identity, transactions are visible by the very nature of needing to be validated by consensus, and the accumulated data on the blockchain is held in an interlinked network of computers, owned and run by the users themselves.
The functionality and features of the technology give rise to it having a strong use case for any transaction requiring an exchange or transfer. Whilst the original concept was peer-to-peer money transfer, in theory, any asset or item that can be digitised can be exchanged, or stored, on blockchain technology. So while a property or car cannot be digitised, the proof of ownership (title deeds, registration certificates, contracts etc) certainly can be. The applications to the real estate market should now be becoming obvious.
If a contract can be digitised, it follows that it can be exchanged using blockchain. Whilst you have probably heard of Ethereum due to it being a popularly transacted crypto currency ‘Ether’, it’s primary purpose is to be a blockchain platform on which others can build applications. One of those applications is ‘smart contracts’, which allow digitised agreements to be automatically validated and signed. If you combine smart contracts with the ability to digitise identity, an incorruptible ledger of titles and the digital transfer of currency, suddenly blockchain technology looks like a pretty compelling integrated solution for selling or managing property.
Here’s a real example of how it could work in real estate. US based start-up ShelterZoom are engaging potential homebuyers at offer stage. ShelterZoom have an app built on blockchain technology that allows buyers to submit offers and negotiate price after hitting on an ‘Offer Now’ widget imbedded into sales or management listings. They are currently working on incorporating a crypto currency payment platform. Interestingly, one of their early adopter agencies in the US (Brosda & Bentley, Miami) recorded the first known crypto currency only property sale in December 2017, using Bitcoin.
US based Propy have a portal that promotes being able to ‘Buy & sell homes all over the world. Property Transactions Secured Through Blockchain’. Potential buyers can identify properties listed from anywhere in the world and subsequently negotiate a purchase and be taken right through to settlement online.
The recording and storing of title and deed information is being attacked by a number of start-ups as the pain points are very real (cumbersome title transfer, slow price discovery, incomplete and insecure data etc) and the reward for solving these problems are substantial. US based Ubitquity offer a software platform for digital recording of financial, title and mortgage documents. They seem to be working on becoming a centralized digital repository for title deeds in the US, which is a very big problem because there are some 3,400 different municipalities with property title records and little consistency about how they have been kept. Velox.RE promote they have produced the ‘first ever legal blockchain deed software’ and recently completed a project where they successful completed a blockchain real estate conveyance. Swedish based Chromaway have a joint project with their national land registry to complete a blockchain property sale – estimates are that the project could save the taxpayer in the order of $150 million a year by eliminating paperwork, reducing fraud, and speeding up transactions.
Blockchain technology also lends itself very well to the burgeoning fractional real estate ownership market. LATOKEN is an asset investment marketplace, where the medium of exchange is crypto currency. One of the five asset classes in their marketplace is real estate.
So where does all this take us? Hopefully it is emerging that blockchain has ‘niche’ use cases at this stage, and that those companies building products using the technology are largely still early-stage. There is actually no such thing as the ‘blockchain real estate office’, rather it is a technology that has application to certain practices or processes in a real estate agency that lend themselves to its core functionality. As an example, Propy might appear as a blockchain portal that may remove the agent from the process. The detail reveals that at this point in time an agent will still list the property on the portal, will own the listing and the relationship with the vendor. Negotiations will happen ‘online’, with the engagement of the agent. Contracts will be executed digitally (at this point, NOT via a smart contract), but will be stored on the blockchain, alongside any other transaction documents such as settlement statements, and title deeds.
So what are the limitations of blockchain technology. First amongst these is probably scaling and capacity. As discussed, the ongoing maintenance of a blockchain requires very substantial computing power and energy. What does this mean? Well, if you are of the mindset that crypto currencies will soon replace our mainstream means of payments (e.g. banks, visa etc), at capacity presently Ethereum & Bitcoin can roughly process ~7 transactions per second, VISA roughly processes 2,000 transactions per second and their capacity is ~50,000. Accordingly, mainstream adoption of products with blockchain technology could be met with capacity constraints.
Whilst there are additional limitations and issues more specific to crypto currencies – which we will not address here – we will touch on one that has real implications for the real estate market. Put simply, relative to cash, crypto currencies are not very liquid. Combined with this – and as a partial consequence of – they are highly volatile. If we use Bitcoin as an example – which is easily the most liquid of all crypto currencies – if you attempt to sell down a decent holding in a market experiencing a ‘run’ you could probably suffer hundreds of dollars per coin losses by the time you have sold it all.
To illustrate the volatility, consider the crypto currency sale of a USD$6 million Miami mansion sold on the 1st February this year for ~455 bitcoin. Now we don’t know any more about the specifics of the transaction (such as if there were any additional protections in place such as hedges on bitcoin price movements) however it is touted as a bitcoin-to-bitcoin sale so we assume there wasn’t an immediate exchange to cash, which would also mean that the amount of bitcoin exchanged was roughly worth USD$4.14 million by the end of that week. We will discuss the liquidity and volatility of crypto currencies in the context of Initial Coin Offerings (ICO’s) in the next instalment of our blockchain series.
Whilst the technology is still being understood and there are definite constraints, the potential applications and benefits to business are substantial. Combine this with the focus and investment in the technology it will only be a matter of time before the present set of issues are overcome and we see the next wave of applications emerge.
There are many pain points for all parties, in managing, buying and selling property. A number of these including lack of transparency, copious amounts of paperwork, drawn out processes, third-party involvement, possible fraud, high transaction costs, inaccurate and slow public record keeping etc; can readily be solved with the application of blockchain technology products. As an agent, the key question shouldn’t be ‘will this happen’, it has to be ‘will I play a role in facilitating or will I watch from the sidelines as the game plays on without me?’