The Official Guide to Real Estate and the Blockchain

Blockchain has become a mainstream buzzword in 2017. Many industries, including real estate, are trying to figure out how to capitalize on distributed ledgers, decentralized networks, and digital currencies that blockchain enables. One of the first ways that the real estate industry has engaged with blockchain tech is via sellers and developers accepting crytpocurrencies, like Bitcoin, at settlement. Going forward, a number of groundbreaking new projects are connecting every aspect of the real estate to blockchain tech in deeper and more novel ways.

In 2013, there was one application of blockchain: Bitcoin. In 2017 there are many more, but three in particular are establishing themselves as the leading players. It’s important to distinguish the differences in these technologies to determine which part of the transaction stack they can be applied.

In this post, we will explore three blockchains that are transforming the transaction process. We will start with Bitcoin, which decreases frictions in the settlement layer. Next, we will analyze the benefits of Ethereum Smart Contracts. And last, we will take a look at Hyperledger’s permissioned ecosystem that works well for enterprise.

Bitcoin

In January 2009, the Bitcoin network launched under the pseudonymous Satoshi Nakamoto. Bitcoin created a new peer-to-peer virtual currency made possible by a blockchain. Created with incentive systems that run over a distributed network, Bitcoin offered enhanced security such that the finite supply could not be inflated or altered, and transactions were immutable and in public record.

What is a blockchain? In essence, a blockchain is a public database that permanently records digital transactions. This public database is not maintained or secured by a centralized authority, but by the network itself.

Since 2009, Bitcoin has blossomed from a nine page white paper to a market cap of $100 billion. The path has been volatile, however. Episodes like the Mt. Gox exchange hack and Silk Road seizures has, unfortunately, painted the currency as an illicit means to transact contraband. More recently, Bitcoin has been faced with several more challenges in the form of technology upgrades. Nonetheless, its overall trajectory as a store of value and proof of concept for blockchain technology has been increasing exponentially.

Over the course of the last four years, public perception has slowly shifted, and people have begun to embrace the currency. Merchants like Overstock, Virgin Galactic and Expedia now accept Bitcoin. The size and computing power of the Bitcoin mining network — which confirms and validates transactions, thus ensuring the function of the network — has risen exponentially. All these factors lead to the creation of the distributed, secure network we see today.

How can the real estate industry benefit? How can we utilize a currency that is secure, easily transferrable and has a finite supply?

Qualifying a buyer

Bitcoin acts as an excellent tool to qualify a new buyer quickly, securely and privately. Currently, brokers are faced with a conundrum when meeting a new client. In order to qualify the buyer, the broker must request proof of funds in the form of a bank statement to confirm the buyer can close. It’s an awkward way to start a new client/principal relationship. Bitcoin offers the solution. Bitcoin is easily transferrable, and creating a new virtual wallet takes seconds. A buyer wishing not to disclose sensitive bank statements can quickly and securely move funds into a new wallet qualifying himself for the transaction. The process take minutes and cost only a few dollars.

Settlement

The closing process typically takes hours, if not days. During a four-hour closing process, it can often take 1–2 hours just waiting for wire confirmations. If done in an international setting, these delays can increase to days — sometimes even weeks! Bitcoin provides a quick and efficient way to settle transactions without the unnecessary middleman of a bank. With Bitcoin, a purely peer-to-peer path allows the payments to be sent directly from the seller to the buyer without going through a financial institution. Whether domestic or international, the transition time and costs stay relatively the same. Large sums of money are easily transferrable from the buyer to the seller. Things get even more interesting when we add smart contracts to the layer (which we will look at below).

This is no longer a vision of how transactions will occur in the future. It is actually starting to already happen:

British entrepreneurs Michelle Mone and Doug Barrowman launched a bitcoin-priced real estate development in Dubai. The project is 2.4 million square feet. The initial tranche of 150 apartments will be sold in bitcoin in a world-first. Studio apartments will be sold initially at a starting price of 30 BTC — worth $133,918!

A house recently recently transacted in Texas.

…And developers like Ben Shaoul, president of Magnum Real Estate Group are accepting Bitcoin payments for new developments in New York City.

Bitcoin’s has the longest track record in the blockchain ecosystem and has proven safe to send large sums of money. Bitcoin is secure, stable and an efficient way to transact globally without many of the frictions associated with fiat currencies.

Ethereum

What is Ethereum? Ethereum is similar to Bitcoin, but builds upon the underlying ideas. Ethereum is a blockchain technology that enables developers to build and deploy decentralized applications atop the network.

Bitcoin and Ethereum were engineered to serve different use cases. Bitcoin offers one particular application, a peer to peer electronic currency: Bitcoin. The Ethereum blockchain focuses on running the programming code of decentralized applications, which means developers can build all sorts of apps — called dApps — with it.

How does this apply to the real estate industry?

The world is moving from the traditional closed storage systems, where data sits in silos, to a world of open, shared ecosystems. Think of the traditional model, in which data is disseminated from the few-to-the many business model. In this new era, data will be disseminated from the many-to-many. Real estate will be ground zero for this disruption. The days of giving listing data to central portal and having it sold back to us will soon be in the rearview.

Economic Incentives

Using the benefits of digital currencies, coupled with peer-to-peer data distribution protocols, we can create new types of data applications using economic incentives. Transaction participants can market property data in a global environment with complete control of their data. Imagine listing a property with no third-party advertisers. Buyers and tenants can maintain direct access to the property representative. In addition, the listor has access to new a whole new world of monetization.

Just one example: You’re a producer in your region and generate high volumes of web traffic to your listing pages. You can sell ad slots and collect the revenue. These transactions can be done through automated smart contracts giving the listor new income channels.

Syndication

Data syndication is a long time problem in the real estate industry. Portals, firms, brokers and lenders store data in silos and these systems do not communicate or interoperate. Using Ethereum and new data distribution protocols like IPFS, we can begin to aggregate and syndicate real estate information through token based incentive programs, while implementing a universal property identification and geospatial referencing to accurately identify property.

Universal Property Identification System

A major obstacle in global real estate is accurately identifying and tracking property. The current system uses a property addresses, which are entered into several non-communicative databases manually, often with typos and misinformation. In 2017, it’s hard to believe the oldest industry in the world has not created a universally accepted ID system. Real estate, by definition, doesn’t move. It is not hard to track!

The internet has been around a relatively short time and does a great job with identity. Domain Name Services (DNS) do an excellent job masking IP addresses. When you visit google.com, google.com is actually pointing to Google’s IP address (ie 139.130.4.5). As humans, it is easier to read phonics over numerics. With Ethereum, we can create the DNS for property records. A property, via a transaction, can be given a numeric hash. The property’s address will point to the associated hash. The hash, once entered on the blockchain, can be easily searchable. The identifier will be used to track ownership and provide a secure feature in the transaction process.

Identifiers can be taken a step further using smart contracts to create vertical coordinates. If we want to identify a building today, we look at the x, y coordinate on a map. However, if I want to document space on the eighth floor, I don’t have a universally accepted coordinate to track it (the unit on the eighth floor has its own tax ID number). Using Ethereum, we can create this new vertices called z. There are projects like FOAM actively pursuing this endeavor.

Data

Ethereum lays the foundation for tokenization. Tokenization provides the tools to create new incentive programs for collecting and syndicating real estate data.

First, we can create shared data ecosystems that give firms, brokers and landlords alike the ability to own, maintain and share real estate information safely and securely. Using the blockchain, we can create global listing portals. Next, we can incentivize other participants to contribute local data such as tax, demographic, construction, school, neighborhood and other types of trends that can be sold in an open marketplace.

Transactions

Ask a real estate person what kills most deals. Nine times out of ten you’ll get “time” as a response. Time is a bi-product of poor communication. Real estate transactions are complex, with piles of paperwork being passed back and forth. The path of these deliverables often takes circuitous routes. Documents typically range from credit reports, bank statements, insurance estoppels, personal identification, inspection reports, and many other types of sensitive information. Documents often take several email hops between requestor and requestee before reaching their final destination. It is difficult for transaction participants to accurately track inbound/outbound collection. In addition, disclosing participants information, and careless mistakes made by transaction participants, creates potentially serious data breaches.

Ethereum and IPFS provide the tools where participants can upload transaction documents via a smart contract. The documents can be encrypted with a fixed time and duration. The contract produces a private key to the disclosing participant and can be distributed to only those participants that need access. Transaction participants can accurately track which documents have been collected and what data still needs attention. The process will create a transparent layer that securely distributes and tracks sensitive information. In addition to securing the data, the contracts can act as escrow agents for deposits, payments and allowances.

Hyperledger

Hyperledger is like Ethereum, but for private environments.

The Hyperledger Project is an open source project, and part of the Linux Foundation. Hyperledger, specifically Fabric, is a permissioned ledger where participants are identified and authenticated, unlike Bitcoin or Ethereum. Hyperledger uses smart contracts similar to Ethereum. However, Fabric is designed for enterprise and private networks where the user identity is known.

Hyperledger offers enterprise real estate firms the ability to identify, track and share transaction data internally. Large real estate firms conduct thousands of real estate transactions a year. It can be an administrative nightmare to track and share rentrolls, tax, proposals, bids on an internal spreadsheet. An example would be large firms seeking to track all of their real estate transactions in house. Using Fabric would offer such companies an internal database that accurately records transactions, links to building data, provide them the ability to efficiently provide tax audit data and improve company analytics. Large firms can also use Hyperledger to share internal data with external vendors such as investors, lenders, regulators and inspectors.

There are more and more blockchains being developed every year. In the future, there will be thousands of blockchains that solve very specific problems within each industry. As we highlighted with data, we want to avoid silos. Currently, there are projects being developed to create communication channels between blockchains. This would give firms the ability to utilize public chains for data exchanging, proposals and escrow services and permissioned chains for settlement and administration. Two particular projects working on chain interoperability are Polkadot and Cosmos.

In Conclusion

Even in the early stages of the blockchain revolution, the potential of the technology is quickly transitioning to execution. Real estate professionals, who know all too well the problems with a centralized workflow and infrastructure, have much to gain from early adoption of new innovations. There are many blockchain-based real estate platforms worth researching including REIDAO, FOAM (creating a geospatial protocol not specific to real estate but with many applicable real estate use cases), Ubitquity, and more by the day.

Now that you know the basics of how blockchain could change the real estate industry, you can make informed decisions about how to to engage your own work in this remarkable and paradigm-shifting technological and social advent.

Stephen King

Co-Founder & CEO @ REX