Credits: Cindy Tang x Unsplash

Over the past years, blockchain projects around real estate multiplied. A few months ago, I started compiling them into a comprehensive view based on their development stage, origin and potential long-term impact on traditional real estate players. I assume that blockchain is a complex technology and its evolution speeding up. To that extent, I’m trying to approach the topic blockchain for real estate without focusing on technology and its technical aspects and trying to give a business model vision, understandable by any stakeholder of the traditional real estate industry.

• The article covers different segments or real estate value chain: 3rd party services, investment, and management of real estate. It starts with distributed ledger technology to store land titles in mature and emerging markets, decentralized real estate markets and tokenization of tangible assets until Decentralized Autonomous Organization managing range of real estate assets. It highlights use cases with different level of complexity and market maturity, starting with more ready to market and ending up on prospective projects.
• Real estate is a complex industry, regulated and characterized by a lot of asymmetric information, prone to moral hazard and behavioral uncertainty. Blockchain technology can bring transparency to the industry, eliminating some of its intermediaries, importing new actors and redistributing forces.
• Overall, this article emphasizes the fact that society shifts towards more decentralization. Existing business models frameworks will be impacted and platforms currently running the centralized internet weakened. Traditional organizations should embrace technological progress and collaborate with complementary services providers using emerging technologies. Blockchain combined with overall technological progress should help the industry in facing current global challenges.

Real Estate sector has many atypical characteristics. It’s a very traditional sector, involving many different actors, who don’t necessarily trust each other. It’s heavily regulated (norms, energy & efficiency requirements, transactions supervision) and still partially state dependent. Finally, there is a lot of asymmetry of information between parties, which makes it quite opaque.

This asymmetry of information has an elevated cost (fraud, long research, and verification process), benefiting intermediaries. Many third parties are involved in real estate, from securing financial transactions to checking compliance with standards. The presence of intermediaries inevitably leads to higher fees for users. Many people see blockchain as a technology that can get rid of such intermediaries. In that sense, it could answer some of real estate’s struggles.

Distributed Ledger Technology for land titling

For an individual, the access to economic opportunity is closely related to its property rights status. Property is an asset which gives individuals access to further financing opportunity through banks or loans institutions. However, the World Bank estimates that 70% of the world’s population lack access to proper land titles.

Even if land disputes are most prevalent in poorer nations, they are a problem all over the world. With growing urbanization, climate change, and increased migration administration issues will become even more pronounced. Land rights are reflected in many of the UN Sustainable Development Goals. They are linked to poverty eradication, food security, and gender equality and women’s empowerment.

Storing land titles can be done through «Distributed Ledger Technology»: a way to reach a consensus of replicated, shared, and synchronized digital data spread across multiple sites, countries, or institutions without a central administrator or centralized data storage.

The benefits of DLT based recording over the existing client-server or even cloud-based systems, include:
— tamper proof certification
— nodes ensure immutability (equivalent to conducting tens of thousands of backups many times a minute)
— individuals and entities are incentivized economically in different locations throughout the world — nodes can be operated by parties with different or even conflicting interests. The network of nodes ensures no single party can influence the ledger.
— no entity can take control of the Distributed Ledger, it is resistant to attacks and corruption attempt.

Using a distributed ledger can reduce the cost of title research and due diligence of real estate assets, resulting in smaller fees paid by the end user.

Decentralized land titling in mature markets

As of today, European land titles registries are pretty efficient and don’t require a lot of research. There are still pilot projects going on in mature economies:

Estonia is one of the most advanced nations in terms of blockchain adoption. They are using blockchain for different purposes from storing health data to property title. The Estonian project “E-land” is a register secured by a blockchain. As of today, more than 1 million properties are registered. The register contains :
* Cadastre information — including address, area, the purpose of land
* Ownership relations
* Encumbrances, restrictions, rights of use, other notations
* Mortgage information
* Since the use of E-land, the time to do a transaction went from up to 3 months to less than 8 days.

In Sweden the Landmateriet project started in 2016, codriven by Chromaway — a blockchain startup — and Kairos future — a consultancy alongside the Landmateriet on top of one telco and two banks. The Proof of Concept is now completed.

In the Netherlands, the municipality of Eindhoven is working on a blockchain land title project since 2016: Kadaster. Originally the land department registers ownership of real estate and also provides geo-information data. Sometimes the data is used in the wrong context, or an outdated set is accidentally used. The usage of blockchain would overcome these issues. The same ledger is planned to be used to register ships ownerships’.

Elea Labs

Founded : 2018
Founder: Alain Tanner, Lutz Thelen , Stephan Häusler
Location: Bar, Zug, Switzerland
Funding: private placements before an eventual ICO

The Elea Labs founders have more than 10 years of experience in the real estate industry. As a major pain point of the industry, they underline data ownership conflicts and sharing reluctances from traditional actors. Moreover, on a global scale, data and accountancy standards heterogeneity increases the complexity to gather relevant data.

Since 2012, they’re working on software to manage real estate assets portfolios, primarily dedicated to real estate portfolio managers’. They started adopting blockchain in 2017. The company is based in Zug, Switzerland and operate within German, Austrian and Swiss markets, where they are legally compliant.

They are building an open source software model the DNA of an asset by encompassing a set of data (floorplans & surface, location, contracts for 3rd services, historic, components, accounting table, external data)

The software has three main functions:
- Real time updates on assets costs
- Communication with tenants
- Valuation of the property

The challenge for the team is the user-friendliness of software, providing the fact they’re dealing with non-tech communities. They are already working with property management companies and homeowners’ organizations. Concerning their funding, they are conducting private placements now. Later on, they will do a public ICO. The application is free to use in a basic version and premium features include analytics.

Unifying data standards is a headache for a lot of industries. Real estate is particularly prone to this one because data is coming from many different sources with heterogeneous standards.

Land titles in emerging markets
In countries where land titles are partially faulted, using a blockchain ledger makes total sense, particularly when the project is endorsed by local authorities.

In Kenya, The Government’s Distributed Ledgers and Artificial Intelligence teams are working on a blockchain database aimed at weeding out fake title deeds from the land registry. Known as the single source of truth (SSOT), the database will be the primary reference for all land transactions. ICT Cabinet Secretary Joe Mucheru said SSOT would ride on blockchain technology, so if land changes hands, that change of ownership is underwritten by all the institutions in the system.

According to a Goldman Sachs study from 2015, Ghana farming land registry is around 90% not accurate. As of today, Ghana’s land titling system is paper based and located in different offices. This system turns into a headache when financial institutions have to underwrite mortgages due to scarce and inaccurate data.

BENBEN

Date of foundation: 2015
Founder: Emmanuel Noah
Location: Accra, Greater Accra
Funding: currently raising a seed round of 750K USD of traditional equity funding

The Benben project went live in 2015 after the Bill & Melinda Gates foundation gave a grant to its founder, Emmanuel Noah, to look for a blockchain related solution that could reduce fees on property payments. In 2016, Benben did its first pilot within Barclay's accelerator program in Cape Town, using a blockchain for data record and verification. Barclays is particularly interested to collaborate with Benben because they need to access easily property related data.

Benben software is a one-stop-shop digital land transaction service for financial institutions, property owners and property developers. The software enables:
- Quickly querying property information
- Accessing analytics for thematic information on a neighborhood or region
- Lodging land transactions with government land service agencies

Developers and banks are charged with a license fee. Benben is also working closely with the governmental entity in charge of land titling. Benben is currently raising a seed round of 750K EUR through traditional equity funding.

Unleashing the power of smart contracts

Blockchain offers a way to combine the act of conveyance and the act of providing notice (recordation) of the conveyance into one event. The mechanism is known under the term Smart contract. Smart contracts enable a decentralized execution of contracts, beforehand encoded in the blockchain. Translating this to the real estate industry, smart contracts can be used to encode a property purchase contract, which will issue automatically a new proof of ownership when the transaction is completed.

In November 2017, Propy assisted TechCrunch founder Michael Arrington to do a transaction for a flat in Kiev. The transaction was fully executed through smart contracts on Ethereum (the volume of the transaction was $60’000)

In India, Chami Akmeemana, CEO of Blockchain Learning Group and Blacksales solutions recently released an article Working with Ethereum blockchain, focusing on Smart Contracts. The blockchain-enhanced system registers the sale deed in the presence of both buyer and seller. It then proceeds their sign-offs and pushes the transaction to the approval stage. Once the transaction is approved, the transfer of ownership is automatically completed. The system will also be able to handle land titles with multiple owners.

The potential of executing real estate transactions through smart contracts is closely related to the number of transactions that can be proceeded on different blockchains. At the moment Ethereum is processing on average 22’000 transactions per hour, which means an average of 6 per second. In comparison, SWIFT is processing 174 transactions per second.

• Land title systems using distributed ledger technology are particularly relevant when the existing system is underperforming or prone to corruption. Decentralization of record storing increase the system’s robustness.
• Transparency is eliminating asymmetric information, though privacy is maintained. With precoded smart contracts, transactions can be automated, reducing even further frictions.
• Decentralized land titles systems are already in use around the world, initiated wetherby startup, not for profit organization or governmental parties.

Real estate assets are tangible and unlike financial assets, they need to be actively managed. The price of real estate is subject to economic trends, locations, regulations and has no fixed maturity. The cost of entry in a real estate investment is significant and transactions costs are usually high. As a result, the liquidity of real estate assets is today is pretty low.

The 2008 subprime crisis outlined the incapacity of traditional finance to give access to real estate in a responsible way. Back in the days, financial actors were outrageously overselling loans to insolvent households. After Lehman Brothers bankruptcy, real estate interest rates soared at the same pace of houses foreclosures.

Thus, new players emerged, with new models, leveraging new technology. Lending activities started on a peer to peer mode. Peer to peer intermediaries provide platforms matching individual borrowers and lenders. The platform brings value by assessing the creditworthiness of profiles and by processing all payments.

Lending Club is a peer to peer Lending platform founded in 2006. The company was approved by SEC in August 2008, one month before Lehman Brothers went bankrupt. Its success increased quickly in the aftermath of the financial crisis. As of today, loans are offered to individuals ranging from $1000 to $35000 and to businesses ranging from $15 000 to $350 000. Interests rates range from 5% to 30%, depending on the borrower, the loan category and creditworthiness. Lending club takes fees both from lenders and borrowers (1% to 5%).

Decentralized lending paved the way for further real estate crowdfunding. In the US, crowdfunding is regulated since 2012 JOBS Acts. This regulation enabled private real estate investments, offering stable income linked to a secure and tangible asset class.

There are two crowdfunding models for real estate:

• companies can raise up to $50 millions from anyone. Investors are providing capital before the investments are done
• companies give access to specific assets for investment and the relevant information (underwriting, business plan). To do so, investors must be accredited, which means having a minimum annual income of $200’000. The minimum entrance ticket to invest is higher in the US than in Europe.

In 2013, Realty Shares was founded in San Francisco. It’s a real estate investment platform which gives investors direct access to commercial real estate investment opportunities. As of today, Realty Shares raised more than $100 million.

No matter how innovative they are, these models have drawbacks:

• they rely on a central party which takes fees to provide the digital platform
• they require a high minimum entrance fee
• there is the possibility to invest without minimum entrance fee in a pool with less information on underlying assets

Blockchain can be used to build up an automated and decentralized real estate marketplace, in which real estate tangible assets are materialized by crypto assets. Transactions can be entirely automated, with payment occurring when the property change ownership happens. From now on, lending, investing and renting can be done in a decentralized way.

Decentralized real estate marketplaces

Using blockchain allows traceability of transactions, immutability and easy access to proof of ownership. The main advantage of using a decentralized ledger relies on the lower transaction fees and the speed of the process. Real estate industry standard fee is close to 5%. Technological progress could bring it down of few percents.

Moreover, by using dedicated cryptocurrency to run the system, a new «economy» is built. The value of the underlying cryptocurrency is related to the network’s number of users and the number of transactions done on a daily basis. On a long-term perspective, the symbolic value of the token economy and the overall value of crypto-currency should increase.

Propy

Founded: May 2015
Founder: Natalia Karayaneva
Location: Menlo Park, California
Funding: $15,5 million raised through ICO

Propy is a Silicon Valley company, founded in 2015. Propy’s token (PRO) sale in 2017 attracted 6000 participants. It raised more than $15 million. Today, Propy employs over 50 people around the globe.

Propy has three online components:
1. Listings platform
2. Blockchain transaction platform
3. Blockchain registry for land records

Listings
Propy facilitates a connection between the seller, buyer, realtor, title agent, and/or notary. This enables the seamless purchase of real estate online. The Propy listings platform features properties from all over the world. Including the US, UAE, Russia, and the UK. People can use US dollars, Bitcoin, Ether, or Ripple to buy these properties.

Transactions
The underlying blockchain transaction platform is designed to comply with the applicable jurisdiction. No matter where they are based, buyers and sellers have appropriate legal protection. The use of blockchain technology then ensures the traceability and accountability of both funds and document transfers.

Propy’s transaction platform facilitates remote home-buying. Documents are verified and signed online. The transfer of legal rights is recorded on-chain but also submitted to land registry offices for recording.

“The process of buying real estate today is not transparent and not secure — even in the US,” says Propy’s founder, Natalia Karayaneva. “The bidding mechanism of blindly providing offers is manipulative. This is why it’s important to not only automate payment and title deed recordings but to also automate the auction and offer mechanisms.”

Land Registry
Propy is collaborating with state and local governments regarding their property title registries. Currently, programs are running with governments in the United States and Ukraine. Propy has already designed and is testing a blockchain land registry in the US State of Vermont. It will operate alongside an existing local government’s Land Records Management System (LRMS). They operate a pilot program in Ukraine which aims to transfer the existing property register to the blockchain.The main challenge for Propy in 2018 is being able to adapt and integrate these services.

Similarly to traditional marketplaces, a decentralized marketplace is usable only if there is a sufficient quantity of assets and users to match offer and demand and create liquidity. From both regulatory and users perspectives, it will need time to gain traction.

Tokenizing real estate

Real estate is a heavy investment to carry on. Many people can’t actually afford to invest in property. Decentralized funding could democratize property investment and make it more accessible. Blockchain can enable crowdfunding and invest in a decentralized way, using tokens as proof of ownership. This method is called «tokenization» of real estate.

NB: this is very different from doing an Initial Coin Offering, which is a way of decentralized funding. Here we’re representing physical assets by cryptographic assets.

Real estate investment market suffers from a lack of liquidity i.e. the turnover of real estate assets is very low due to a high barrier to entry and a complex process. Crypto assets are fungible and easily tradable on a secondary market. They are also tradable and usable on a global scale. In the end, the liquidity of real estate assets should increase.

Brickblock

Founded: 2016
Founder: Martin Mischke, Jakob Drzazga
Location: Gibraltar
Funding: $7,7 Mio through ICO + $5 Mio of traditional equity

Brickblock is founded in 2017, legally based in Gibraltar. The founders, Martin Mischke, Jakob Drzazga, and the major part of their team, around 20, is based in Berlin, though the product can be used by global clients. It is designed to be a turnkey solution for clients.

Brickblock is a platform automated with smart contracts able to recreate a real estate physical asset or an Exchange Traded Funds. Investments in Real Estate assets are distributed to investors under the form of securities. These securities are tradable on Brickblock dedicated exchange and secondary market. By using smart contracts, there is no need for a middleman to process transactions. Investors on Real Estate assets are getting returns in the form of ETH, enabling small investments in real estate assets. Real estate developers and asset managers are able to complete their financing at a quicker rate by the eased and increased exposure to global investors.

Brickblock did a traditional equity funding round combined with a public tokens sale. They ran two phases of an initial coin offering from last semester of 2017 until the middle of May 2017, raising $7,7 Mio. In May 2018, Finch Capital announced a traditional equity investment A round of €5 Mio into Brickblock.

As long as it is backed by a real-life asset, the system uses three different tokens to avoid volatility
- Brickblock tokens (crowd-distributed through ICO and to founders, now listed)
- Asset-backed tokens representing the economic representation of the asset
- Access tokens needed to list a fund or an asset ie to access to Brickblock system. Access tokens are acting as the service fee.

The full platform is expected to have the first real estate assets by Q4 2018, and are developing a secondary market exchange for asset-backed tokens. Brickblock partnered with traditional real estate actors, such as RFM Construtora and TRX investments and in discussing with parties from the UK and Germany. Already with these partnerships, Brickblock has over €1 billion assets and Real Estate funds ready to utilize their platform.

In the latest news, Brickblock’s full smart contract ecosystem was successfully audited by ConsenSys Diligence. Last week, Peakside Capital & Brickblock announced a partnership. Peakside Capital is set to be the first institutional real estate fund management firm to employ the technology.

The business model is multi-faceted: the protocol provider takes fees to provide tokenization services. At the same time, it uses a specific token, whose value should increase at the same pace as the value created on the platform. Blockchain “businesses” are highly scalable because almost fully automated. They are more efficient and less costly to maintain than traditional models because of their decentralized nature.

On the other side, the regulatory certainty is pretty low. The degree of regulation friendliness varies according to countries and regions. The technology is still in its early days and regulatory authorities are having hard times to cope up with the concept.

Last but not least, the biggest challenge of token-based systems is to be user-friendly enough for someone who’s not part of any tech community. For now, understanding the technology per se and in practice is limited. If cryptocurrencies start getting to market, tokenized systems would be still in the shadow.

• As of today, buying a real estate asset can be a burden. Decentralized marketplaces resolve one side of the equation by reducing overall fees and offering a global solution
• Investing is even more complicated, requiring a high entrance fee and today’s systems are quite opaque. Tokenization ie representing real estate assets by tradable crypto assets enables smaller investments and give higher market liquidity.
• There are a lot of emerging organizations: I classified roughly 100 projects before writing this article. I bet most of them will die and only a few will succeed.

Real estate management consists mostly of working out the “business model” of tangible assets. In order to do so, real estate managers have a wide range of activities that need to be taken into account:

• Defining a leasing strategy
• Optimizing tenants mix
• Hold — sell analysis
• Negotiation & documentation of lease contracts
• Selection & management of local service providers…

A lot of different actors are involved in the process: tenants, renters, a large range of services providers from cleaning to cooling systems’ maintenance… One of the biggest pain points for real estate asset managers is the siloed data between different actors and the time spent in doing due diligence and manual researches.

Open source blockchain protocols will bring new types of decentralized services on top. Blockchain opens a new way towards unsiloing data, helping, therefore, asset managers. Also, it opens a path towards considering data as profit-generating and modifying revenue and costs structure.

Emerging protocols

Open source protocols are completely decentralized and made to be accessible by anyone. As protocols, they enable building on top decentralized applications, which are more user-oriented. Many protocols came up in the blockchain sphere and not all of them are relevant for real estate sector. Thus, we’ll focus here on two data focused protocols with potential impact on real estate.

As of today, there are no data standards for location. Geospatial applications, such as Pokemon Go, rely on centralized systems for now. However, centralization is bringing along several drawbacks: Pokemon-Go game is easily manipulable. Fake locations can be inserted in the map, leading to frauds and even players’ physical aggression.

FOAM

Founded: 2015
Location: New York, United States
Founders: Katya Zavyalova, Kristoffer Josefsson, Ryan John King
Financing: $16 Mio

FOAM is a not-for-profit organization founded in 2015 in New York. FOAM creates an open source decentralized protocol allowing an interoperable location standard and geospatial applications. FOAM positions as a middle layer between Ethereum blockchain and developers’ building decentralized applications that require a “Proof of Location”.

FOAM has three components:
- Crypto Spatial Coordinate: an equivalent of the GPS coordinate
- Spatial Index and visualizer: an open source protocol for dapp developers, built on Open Street Map
- Proof of Location: static (rewarding system enabling map curation) and dynamic (bilateral communication instead of a one side GPS signal, a Low Power Ride Area Network based on LORa and consensus). In this mode, both agents send location “claims”.

Verification is done by “zone hackers” ie owners of LORa nodes. Their contribution to the map curation is incentivized by a crypto reward, coming in FOAM tokens. These tokens are used to do deposits, to send location claims and also to reward curators and zone hackers. The use of blockchain technology allows a decentralized, open, and trustless system.

Its decentralized nature makes it more robust and resistant to fraud than a centralized system. Dynamic proof of location is a huge innovation that could give valuable insights on things that move around or in a building, with exactitude. Though, reaching a critical mass of nodes in the network is crucial to enable the dynamic standard proof of location.

Another issue is that Real Estate stakeholders own data related to physical assets, but:

• there is no data standard, neither global nor regional
• there are privacy concerns on how to share data
• data is seen as the new oil ie data owners want to keep it

These three factors disincentivize data sharing amid the real estate industry’s actors. Meanwhile, nascent startups are building complex artificial Intelligence powered models with a very limited amount of data, sometimes of bad quality. Building Information Modeling enables predicting behaviors and lifetime of buildings based on environmental, building related, construction and maintenance data. Though, without data, the accuracy and usability of Artificial Intelligence are limited. As of today, Building Information Modelling is underused due to no incentivization to share their data.

From this perspective, blockchain technology can incentivize data owners to share it by implementing a transactional layer. First of all, decentralization offers the possibility of guaranteeing data privacy by controlling access over a decentralized network. The second is the crypto-reward ie economical incentivization to share data.

Ocean Protocol

Founded: 2017
Location: Singapore
Founders: Bruce Pon, Chirdeep Singh Chhabra, Daryl Arnold, Dimitri de Jonghe, Donald Gossen, Trent McConaghy
Financing: $44,2 Mio (mix of traditional equity funding and Initial Coin Offering fundraising)

Ocean Protocol is a not-for-profit foundation based in Singapore, building a decentralized protocol enabling sharing and monetization of data. The original motivations behind Ocean Protocol Motivation are privacy issues around data and also its heaviness.

The protocol is open source and accessible by anyone. Specific data marketplaces can be built on top of Ocean Protocol. Alongside the protocol, DEX is the reference decentralized marketplace built on Ocean Protocol. DEX is also open source and its code can be reused for other marketplaces. A multitude of data marketplaces can be plugged on top of the open source protocol.

Ocean Protocol Value Proposition is to enable data marketplaces advent by:
1) creating a global common format for data
2) giving token rewards, users have a monetary incentive to share their data and curate marketplaces

In early 2018, Ocean Protocol raised $22 million with a token sale. For this token sale, investors had a vesting period of 6 months, starting from Network Launch Token Distribution date, which will occur in Q1 2019. The vesting period tends to discourage investors only searching for (ultra) short-term profits.

Since the token pre-launch, Ocean has been focused on bringing together a top-notch team and building the Protocol, for which the V0.1 Testnet (Plankton) was released in mid-August. The next version of the Testnet (Trilobite) will be released in November 2018, with the Network Launch version (Tethys) scheduled for the end of Q1 2019. Ocean is also heavily focused on building a healthy and sustainable community and will be shortly announcing a comprehensive ambassador program as well as a bounty program.

In the long run, real estate professionals should be able to share the data they have access to and monetize it. Considering the growing number of connected device and data collecting sources, revenues and costs related to a building should be impacted.

Nevertheless, the success of these protocols is correlated with several aspects:

• The user-friendliness and usability of the protocol, from a developer and/or business stakeholder perspective
• The quantity and quality of applications built on top of these protocols.

They will thrive once they reached a critical mass of users. One of their biggest challenges will be to convert traditional industries’ stakeholders — such as real estate — to adopt these new tools.

Decentralized service providers

Managing real estate assets involves relying on suppliers and service providers. On top of these protocols, decentralized applications are built, bringing in new type of suppliers. These decentralized application providers can be more efficient and cost-effective than the ones used currently ones. The following section is not meant to be exhaustive, rather highlight some of these new services’ providers.

Decentralized communication providers: Replacing smart locks systems with decentralized systems brings more security as long as there is no central part which can act as a point of failure. At the same time control of accesses can be managed in a decentralized manner. Last but not least, these systems don’t rely on the internet to work. Decentralized communication schemes are especially relevant within the construction, maintenance, and supply chain areas. Yptokey and Slock-it are two companies based in Germany, providing this service.

• Examples: Yptokey, Slock it

Decentralized exchange of energy: As of today, the proportion of renewable energy in Europe on the total energy consumed represents 17% and should reach 20% in 2020. Over the last years, a growing number of “prosumers” are producing energy through photovoltaic panels, biomasses or wind turbines and consuming it simultaneously. Communities of prosumers can be connected via a smart grid. On top of that, blockchain will bring a transaction layer, processing transactions when energy is traded. Brooklyn Microgrid is the first prototype implemented successfully by LO3 Energy in the US. The purpose is to build a decentralized community, producing and trading “green” energy. Microgrids are energy distribution networks enabling surplus producers to supply directly their neighbors. The community consumes locally produced energy, reducing losses due to transport and storage. In Europe, LO3 Energy is implementing a Proof of Concept in partnership with a German utility: a microgrid project in Allgau. As of today, 5 participants are connected to the grid and able to exchange energy.

• Example: LO3 Energy

Decentralized reputation networks: the Chinese government has elaborated a social-rating system for its citizens. Social ratings are used to give access to a broad range of services, such as financial, transportation or housing. However, the whole system is relying on the Chinese government, inducing high risks of biases. attributing full power to the Chinese government, the risk of huge biases is huge. Our current reputation systems, such as Airbnb scoring, are actually easily corruptible and not reliable enough to peg services. Moreover, they’re not interoperable from a service to another ie an Airbnb rating cannot be used as a proof of trust for a car-sharing service.

Here again, decentralization is enforcing the overall reliability of a reputational system because users keep control of their data and cannot insert faulted data. Also, it enables interoperability between different reputation systems.

At the end of the day, on top of having a robust reputation system to choose your occupants or landlord, there is a possibility of alleging all kind of services — mortgage, loans — based on reputational scoring.

• Examples: Ontology, The reputation network

Some of these applications are already operational and industrial (Slock-it), others Proof of Concept stage (LO3 Energy) and others still in the conception phase (Ontology, Reputation network).

Decentralized Autonomous Organisations

The same way Wikipedia disrupted knowledge industry, the open source brought a new dimension to software development. However, due to their decentralized nature, open source projects lack governance structure and predictability. If blockchain as a distributed ledger technology is a technological innovation, a Decentralized Autonomous Organization is an organizational innovation inducing a total paradigm shift. Decentralized Autonomous Organisations bring a new model of open source decentralized management, running thanks to consensus mechanisms encoded in the blockchain.

“Instead of a hierarchical structure managed by a set of humans interacting in person and controlling property via the legal system, a decentralized organization involves a set of humans interacting with each other according to a protocol specified in the code, and enforced on the blockchain. “
Vitalik Buterin, co-founder of Ethereum

A Decentralized Autonomous Organization doesn’t rely on any central party. The organization runs through rules encoded as computer programs called smart contracts. A DAO has a new approach towards ownership, governance, and control to various stakeholders. In theory, the security, transparency, and fluidity brought in by the technology makes the organization resistant to opportunism and eliminates information asymmetry. Also, they don’t require much human coordination to operate and therefore requires a small number of employees.

Practically speaking, the autonomous organization can be fragilized by malicious individuals. Back in 2016, the first DAO project, aimed at being a decentralized venture capital fund gathered $150 million in Ethereum, form 11 000 investors. This settled the record of the biggest crowdfunding campaign of history. Few months after, the DAO was hacked and robbed through a code failure.

For the real estate industry, a decentralized autonomous organization could theoretically be able to manage a range of real estate tangible assets. Members of the DAO own tokens, which act as proof of ownership. They are able to take part in decisions (assets, tenants, suppliers)… by staking these tokens. In the long run, members of the DAO receive a return on investment based on the portfolio performances. These return on investment are released automatically to token holders.

A first Real estate x DAO project emerged in Singapore in 2016. As of today, the company is focusing on a first project: community investment for holiday properties villas.

REI DAO — CrowdVilla

Founded in July 2016
Located in Singapore
Funding: $25 Mio
Founders: NEO Kok Beng, Darvin Kurniawan, David Chandra, Hendrik Tanjaya Tan

REI DAO started in 2016, with the aim of being a decentralized autonomous organization managing real estate assets on a decentralized basis. As of today, the company REI DAO is focusing on Crowdvilla project. Crowdvilla is held under a not-for-profit organization based and regulated in Singapore.

Crowd Villa is a community-based sharing model for holiday villas. Crowd Villa tokens sale (CRV), which started in August 2018, gathered $25 Mio. Token holders, investors who hold tokens from the sale, can use them to buy nights at holiday properties. Holiday villas can also be sold to corporates or to the broad public.

Two different tokens are used to run the system:
1/ the CRV token given out of the token sale, representing stake in the community
2/ the CROWD, a utility token used to book nights in the different holidays properties.

CRV tokens are generating CROWD (Crowdpoint) tokens periodically. On the MVP of the booking platform, 1 night in a holidays property worths 1CROWD.

The alpha version of Crowdvilla booking platform is expected for the second semester of 2019. Crowdvilla is planning to do community shared holidays villas in Japan, China, Hong Kong, South Korea, Australia, United States, France, Spain, Switzerland, United Kingdom, Thailand.

As testimonies the pivot from the initial REI DAO project, real estate may not be ready yet to accept the idea of a fully decentralized organization. DAO. So far, there is no regulation for Decentralized Autonomous Organisations, since there is no central party able to endorse risks and liabilities for the whole organization.

The idea of an autonomous, transparent and fair organization, completely fraud resistant is appealing, especially when activities are subject to moral hazard and behavioral uncertainty. Conversely to hierarchical organizations, the marginal cost of organizing for a DAO is near 0, giving them them huge growth potential. Some projects are dedicatedly working on governance for DAO (Aragon, Colony, Covee). While the number of new business created globally is on the decrease, the second half of 2018 was a peak period in terms of emerging tokenized models.

• Decentralized protocols are bringing new solutions to real estate data management. Using these protocols will reduce asymmetric information and also enable interoperability. These protocols main challenge is to onboard developers to build on top applications.
• On top of these protocols, decentralized service providers will offer alternative decentralized services to manage real estate assets, such as decentralized communication, supply chain tracking… The maturity of these applications depends on the complexity and decentralization level.
• Endly, Decentralized Autonomous Organisations will outperform traditional organizations regarding scalability, behavioral incentivization, and tailor-made governance models. They may question the legitimacy of traditional hierarchies. Though, their market readiness is still unforeseeable, especially due to the current regulatory gap.

Real estate is a complex industry, regulated and characterized by a lot of middlemen. Blockchain technology has the potential to bring more transparency to the real estate industry and eliminating some of its intermediaries and redistributing forces. Meanwhile, the blockchain industry is growing fast. In 2017, the global blockchain market worths $708 million. The value is expected to reach $60,7 billion by 2024.

Even if the financial sector is the most explored field, the amount of projects at the crossroads of blockchain and real estate shows how valuable the technology could be to the industry. The intersection between Blockchain and real estate is explored mostly by new actors but also incumbents and governmental parties.

Newcomers can be clustered into different categories:

• Protocol providers (such as Ocean Protocol, FOAM) are setting new standards to the blockchain industry. The main challenge to overcome, they need on top services built by external parties. A wave of partnerships and mergers between different protocols with similar scope is highly probable in order to help to reach a sufficient mass.
• Decentralized services providers will build applications aimed at end users on top of blockchain protocols. Intrinsically decentralized, these services should bring more transparency and market fluidity while maintaining privacy:
• Some rely on Distributed Ledger Technology to provide decentralized data management services (Benben, Elea Labs)
• Some are using their own crypto assets, creating a so-called “tokenomy” which is acting as an interface with fiat economies. These models are naturally exponential because the marginal cost of providing an extra service nears 0. Also, by using their own currency, its value is supposed to increase when the overall value of the network increases. These models will be challenged by regulatory parties whether their token should be classified as securities, commodities… as well as users’ misunderstanding (usability issues, token abstraction). (Propy, Brickblock)
• Decentralized Autonomous Organisations is a paradigm shift for organizational management. Their consensus-based notion of growth challenges the traditional notion of growth lead by efficiency, scale economies, and centralized power and control. Decentralized organizations may be better adapted to the post-industrial era, in which assembling specialized knowledge could help facing global challenges. These new form of organizations will face unadapted regulation, originally made for centralized organizations, and misconceptions from the public. (REI DAO)

We’re still in the early days of blockchain technology and even if progress are fast, there won’t be decentralized organizations tomorrow. Back in the days, the internet spread out the confusion. Years after, it shook business models within every single industry, redistributing information and forces.

Overall, blockchain technology catalyzes the societal shift towards decentralization. Existing business models frameworks will be impacted and transformed. Platforms currently running the centralized internet, already under scrutiny, will be even more fragilized. Regulation is not ready to cope up with these new concepts immediately. Nevertheless, there are already countries leveraging blockchain to attract new businesses, providing regulatory frameworks and sandboxes.

Going further in time, organizational models will be seen under a new prism of organizational management. Accordingly, traditional actors should understand their customers’ and users’ expectations in terms of privacy and transparency. They should be ready to use intensively technological progress and collaborate with complementary services providers using emerging technologies. Last but not least, they have to reconsider their inherent models and core beliefs.

To my mind, innovation is catalyzed by technological convergence rather than blockchain uniquely. Data collection (via IoT, drones, sensors) combined with blockchain acting as a trading economical layer, will bring much more raw data to nurture artificial intelligence, leading to further automation. Technological evolution will bring real estate to the upper step, offering solutions to current challenges such as climate, migrations, scarce resources and… collapsing bridges.