Blockchain Use case — Real Estate
by Kevin Dadrevala Cryptic ocean
Blockchain Use case — Real Estate 1
How Blockchain Works and Use of Blockchain in the Real Estate Industry
A blockchain is a digital ledger of interconnected transactions that provides a safe alternative to mainstream modes of digital transactions. Before any transaction is stored on the blockchain ledger it is verified by a set of protocols. Only after verification will a transaction be added to a blockchain. Once a transaction is verified and stored, it cannot be altered, only viewed. Additionally, every record on the blockchain is encrypted which provides an added layer of security for its users. While no user of a specified blockchain can alter its transactions, every user has a copy of all the transactions on the chain. Over the past few years, the use of blockchain has gained prominence in various industries. These include banking, insurance, education and healthcare. Real estate is another industry where the use of blockchain is gaining traction. Before exploring how blockchain is changing the real estate industry, let’s understand how blockchains work. As the name suggests, a blockchain is made up of a series of connected blocks. With each new transaction, a new block is added to the sequence.
Each block is made up of various parts as described below — Data — Depends on the type of data the blockchain stores. For example, in a typical bitcoin transaction, the data contains information about the sender, receiver, and the number of bitcoins to be sent. Hash — It is a math function that converts the data into an encrypted sequence made up of numbers and letters. The hash plays an essential role in a blockchain.
Each block has a unique hash sequence by which it is identified. Additionally, a block connects to its subsequent block via the hash sequence. If in any case the information of a block is changed after it is has been added, its hash sequence will be recalculated.
This acts as an important security feature for blockchains. Ideally, once a block is added to the blockchain its information cannot be altered. However, in case a hacker tries to change the information in a block for any reason, it’s hash sequence will automatically change. To cover up their act the hacker will need to change the sequence of all the subsequent blocks in the chain. Let’s assume there are a thousand blocks, the effort and processing power needed to make all the edits will be immense. This itself will cause an individual to refrain from undertaking such an action. Keep in mind, different cryptocurrencies use different hash algorithms. For example, Bitcoin uses SHA256, while its counterpart Ethereum uses ETHASH. Hash of the previous block — Each block also contains the hash of the preceding block. It effectively creates a chain between all the blocks. If any of the blocks in the sequence is modified, all of them get modified to re-create the chain. The increasing popularity of blockchains is due to its two main features — first, its data being immutable i.e inability to alter data once stored in the database. And second, the distribution of data among all users over a peer-to-peer network. Each user has a copy of the data for reference and reduces the risk of fraud or disputes.
Now that you have an understanding of the structure of a block, let’s look at the process of a basic blockchain transaction — You select to buy a product from a vendor who accepts cryptocurrency and proceed to checkout. Your transaction will enter a queue on the blockchain network with other unverified transactions. Before your transaction is accepted and added to the blockchain, it needs to be verified. The verification will be done via a network of computers. The computers verify details about the transaction such as its time, amount, and information about the involved parties. Upon approval, this information will be stored in a block which will then be given a hash value. Additionally, the hash value of the previous b lock will also be added to the block. Lastly, this block will be added to the blockchain sequence. Now that we know how blockchain functions, let’s explore its uses in the real estate industry. Traditionally, buying real estate has been a tedious and time-consuming task. Along with the financial cost to buy property, a buyer has to interact with various intermediaries such as lawyers, brokers, bankers, etc. Each of these intermediaries need to be paid commissions and the omen is on the buyer to fulfill all the requirements. Blockchains remove the need for intermediaries such as lawyers, brokers, bankers, etc by utilizing smart contracts. A smart contract is a program stored inside a blockchain that is programmed to have a particular set of self-enforceable rules or conditions. When the specified condition is met, the program is automatically enforced. The classic example of a common type of smart contract is that of a vending machine. Though this is not the same as a blockchain smart contract, it functions on the same principle. A customer selects the product they want from the vending machine which in turn asks for a set amount of money. On inserting the money, the machine acts as a smart contract to verify if you meet the requirement. If the money you inserted is enough, the machine dispenses the product. Conversely, if the amount falls short, the transaction is cancelled and your money is returned. The concept of smart contracts can also be applied to real estate. Instead of going through the traditional mode of buying real estate, buyers and sellers can connect with each other over a blockchain platform. This can be in the form of a website. A per-requisite to this is the need to codify information regarding housing regulation, finances, and other lease obligations into the blockchain. However, this work will be done by the organizations that create the blockchain platform. From the perspective of the buyer, the process will be simple and streamlined. Buying real estate through blockchain would work like this — A seller can provide information regarding their property’s location, desired price, and other relevant details onto the blockchain system. Utilizing this information, the smart contract program will create a contract through which the sale of the property can be facilitated. All a prospective buyer needs to do is meet with the seller and agree on a price and terms. Once it is agreed, the buyer can remit the amount to the seller and digitally sign the contract. As the contract will be stored on the blockchain, it can neither be tampered with nor changed and both parties will have a copy of it at all times.
Utilizing blockchain platforms is beneficial to both the seller and the buyer. Blockchain platforms provide the following advantages to the real estate industry — Decentralized Database — Presently, various property listing websites act as an intermediary between a seller and a buyer. These websites need to be paid a subscription fee for using their service. Additionally, this system requires communication between the seller and the website and also the buyer and the website. As a result, the chances of misinformation is high. Utilizing a blockchain platform, this information can be stored on a completely decentralized database where brokers, sellers, and potential buyers have access to the shared data. And as after storage, the data cannot be altered, it provides for higher accuracy and control. Data Integrity — Currently listings are published on an intermediary website and the broker or seller might not have complete control over their data and be susceptible to alteration. In the case of a blockchain platform, once the seller uploads their data it becomes immutable. Even the organization which created the platform will not have the ability to change it. It is common for such an organization to retain certain admin permissions to be able to alter data. But that will require passing through multiple layers of security. Overall, as a broker or seller, you will not have to worry about your data being stolen or tampered with over a blockchain platform. Evaluations & Verification — Presently creating and storing real estate documents in physical form is the norm. Not only is this process time consuming, but it is also susceptible to tampering and damage. Utilizing a blockchain platform, this process can be completely digitized. The information uploaded will be encrypted and immutable. Speed of Transaction — Transactions which earlier took days to process are now possible in a matter of minutes. Additionally, in case the buyer fails to provide the required remuneration, the system by utilizing the condition of the smart contract, automatically rejects the transaction and returns the amount to the buyer. Sweden is emerging as a pioneer in integrating blockchain technology into the real estate industry. Since 2016, the Swedish land registry authority Lantmäteriet has been working to digitalize property listings onto a blockchain platform created by a startup named ChromaWay. By using the blockchain platform, Sweden expects to save taxpayers over $100 million a year, which it usually spends in creating and maintaining physical records. Additionally, the registry is opting to use the blockchain platform to prevent fraud through the concept of ‘digital trust.’ As all the records are digitalized and stored on a peer-to-peer network, banks, brokers, sellers, and all other stakeholders have access to the data. Furthermore, each party digitally signs the data which cannot be tampered with. It provides an effective and secure solution to problems that traditional real estate processes face. Another country embracing blockchain technology in its real estate sector is India. The state of Andhra Pradesh is in the process of constructing a new city called Amaravati. The construction of the city will be on farmland previously owned by various individual farmers. Utilizing blockchain, the government of Andhra Pradesh aims to streamline the process of property registration and sale of property in the new city.
The state government is adopting the following procedure to acquire land from farmers — The farmers undertake agreements with the state government which involves receiving residential/ commercial plots in the to be built city in exchange for their farmland. The farmers register themselves with the housing registrar by providing information such as — land documents and certificates, and other required personal information. The registrar creates their profiles on the blockchain database utilized by the Andhra Pradesh Capital Region Development Authority (CRDA). The digitalization of records helps overcome a major problem in India’s real estate sector — maintaining property records. According to Mckinsey, a consulting firm, India loses about 1.3% of its GDP due to inefficiencies in their current real estate system. This includes damage and tampering of records, the creation of duplicates, and rampant corruption in the government. As storage of blockchain records is on a decentralized, immutable system, it eliminates these barriers. The appointment of new plots is also done with accuracy and reliability using the blockchain platform. The owner’s personal details such as — their name, contact information, along with the geographical location of the plot are linked to the property. Again, as these records are immutable, it protects against fraud and property disputes. Additionally, storage of data on the blockchain platform, allows farmers access to their data anytime using the CRDA set up website. Earlier, they would require to visit government offices and overcome various bureaucratic barriers to access or request information about their property. Blockchain technology has also given rise to the practice of tokenization of real estate. Tokenization allows an individual to own a fractionalized stake in real estate through a blockchain-based security token. Tokenization offers new avenues for investors and property owners to own and sell real estate. A property owner can choose to list their property on a blockchain platform and sell a particular percentage of the equity to the public. Prospective investors can then by a share in that equity through a blockchain-based security token. The transaction will be through the blockchain platform. For as long as we know, real estate has been considered an illiquid asset. By definition, the liquidity of an asset is determined based on how quickly it can be converted into cash. As we have mentioned before, traditional real estate transactions are time-consuming. Additionally, the requirement to invest large sums of money served as a barrier to entry into the market. With the introduction of tokenization, both these limitations can be overcome. For example, if a property owner chooses to tokenize their apartment complex, they will put a certain amount of their equity for sale on the blockchain platform. You can decide to invest $1000 to buy tokens. Based on the agreement, you could be eligible for a certain percentage of dividends. You will not own a whole apartment in the complex, just a percentage of the equity. In a nutshell, blockchain can make the real estate industry efficient by streamlining the process of buying, selling, or investing in property. Additionally, by encrypting data and sharing it over a peer-to-peer network it makes transactions secure and reviewable by all relevant parties. Through tokenization it is creating new streams of revenue and investment for individualsDadrevala 5 while overcoming traditional barriers of entry. Blockchain is slowly gaining prominence in the real estate industry and has a major role to play in its future.
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References
https://www.cbinsights.com/research/blockchain-real-estate-disruption/ https://www2.deloitte.com/us/en/pages/financial-services/articles/blockchain-in- commercial-real-estate.html https://cointelegraph.com/news/swedish-government-land-registry-soon-to-conduct-first- blockchain-property-transaction https://qz.com/india/1325423/indias-andhra-state-is-using-blockchain-to-build-capital- amaravati/ https://www.investopedia.com/terms/b/blockchain.asp https://www.youtube.com/watch?v=UCPJhWxD01w https://www.youtube.com/watch?v=SSo_EIwHSd4&t=100s
