What Is Blockchain? An example applied to real estate

Blockchain is the core technology behind bitcoin and thousands of cryptocurrencies and has promising potential beyond digital currencies.

We have seen crowd funding to raise money for someones car repair or a medical bill. Imagine applying that logic to buying a loft. Say you have 60% of the amount you need to purchase your property and you could crowd source the rest by selling $1 shares on the open market. You just bypassed the whole mortgage lending industry. Read on to see how blockchain is more than just cryptocurrency.

What is blockchain?

A blockchain is a public digital ledger of transactions that records information to make it difficult to hack or alter. The technology allows a secure way for individuals to deal directly with each other without an intermediary like a government, bank, or another third party.

The growing list of records, called blocks, is linked together using cryptography. Each transaction is verified by peer-to-peer computer networks, time-stamped, and added to an ever-increasing data chain. Once recorded, the data is unalterable.

While popularized with the growing use of bitcoin, ethereum, and other cryptocurrencies, blockchain technology has promising applications for legal contracts, property sales, medical records, and any other industry that needs to authorize and record a series of actions or transactions.

How does blockchain work?

Using the Bitcoin system as an example, here’s how blockchain — also known as distributed ledger technology — works:

• The purchase and sale of bitcoin are entered and transmitted to a network of powerful computers, known as nodes.
• This network of thousands of nodes around the world vies to confirm the transaction using computer algorithms. This is known as bitcoin mining. The miner who first completes a new block makes a bitcoin for their work. These rewards are paid for by network fees, paid by buyer and seller. The fees can rise or fall depending on the volume of transactions.
• After the purchase is cryptographically confirmed, the sale is added to a block on the distributed ledger. The majority of the network must then secure the deal in a “proof of work.”
• The block is permanently chained to all previous blocks of bitcoin transactions, using a cryptographic fingerprint known as a hash, and the sale is complete.

The concept of blockchain technology first appeared in academic papers dating back to 1982, in a dissertation discussing “the design of a distributed computer system that can be established, maintained, and trusted by mutually suspicious groups.” But it was a 2008 paper by the pseudonymous Satoshi Nakamoto titled “Bitcoin: A Peer-to-Peer Electronic Cash System” that brought an academic theory into real-world use.

What is blockchain in real estate?

Blockchain is often confused with cryptocurrencies like bitcoin. Simply put, bitcoin is a cryptocurrency that utilizes blockchain as its technology to operate. Blockchain enables the tracking of transactions and records across a distributed network of computers. Blockchain increases trust as it acts as a ledger distributed across an array of unalterable computers and accessible to all.

Here’s how the blockchain process works:

As you can see, this process can have several real estate applications, such as legal contracts, financing, buying and selling a property, and so on. In addition, blockchain can add a level of trust in a real estates business activity, such as transactions and leasing a lovely loft in the Arts District in DTLA.

Applying algorithms and technology to legacy real estate processes will reduce a significant amount of friction and speed up buying, selling, leasing, and financing this asset class.

How blockchain technology is changing the real estate industry

Blockchain platform technology can be applied to numerous aspects of the real estate business. Here are a few worth noting:

Smart contracts

Nick Clare, Head of Project Management, JLL UK, says that blockchain can “create, authenticate and audit contracts in real-time, across the world and without intervention from a middle man…[and] have instructions rooted in the transaction so that payment can only be taken as long as the instructions are fulfilled, providing complete transparency to all parties and reducing the likelihood of payment disputes.”

Intelligent real estate contracts enabled by blockchain will speed up the leasing process, save on costs, and improve due diligence. In addition, blockchain would have the ability to verify identities and incomes and reduce the likelihood of fraud.

Transactions

The entire real estate transaction process can be held on the blockchain. The submission of an offer, verification of title, the acceptance and confirmation of that offer, the due diligence process, the financing, and closing can all be verified and codified within a digital ledger. The use of blockchain for real estate transactions has significant implications for real estate agents and broker jobs.

Financing

Credit checks, income, identity verification, debt to income ratios, and so much more can be held on and verified using blockchain. For example, the mortgage financing process is fraught with friction and frustration. If all your critical documents are stored on the blockchain, you no longer need to scramble to get dozens of different papers to your bank or broker.

Land titles

Traditionally kept offline, blockchain tech can store and verify these critical legal real estate documents. Imagine if you could log into a blockchain land registry to verify title ownership of any plot of land in your area.

Property Leasing

Identity verification and contracting signing can be facilitated and held on a blockchain. Whether it’s income verification of the tenant, employer checks, or other references, this can all be facilitated and stored on a digital ledger.

Ownership

A real estate blockchain can be used as a single source of truth to verify ownership of assets. This includes fractional ownership through a token, and all the owners of those tokens will be publicly available.

Liquidity

If an asset becomes tokenized to 1,000 investors instead of 10, you automatically increase the liquidity of that real estate investment. In addition, if buyers and sellers of tokens are more easily able to sell and buy shares in a particular asset, exit strategies and liquidity problems drop significantly.

Bottom line: Future of blockchain in real estate

Blockchain has significant implications for the real estate industry. It could eliminate the need for intermediaries in transactions, improve trust among transactors, act as record-keeper, speed up all contracts, leases, and commerce, improve liquidity, reduce fraud, and reduce costs and fees. This is a significant disruption, but much of this innovation is presently theoretical.

Although some real-world examples of blockchain exist, we are some time away from executing on the full promise of blockchain in real estate. Investors should consider all of the above and start thinking about ways to expose themselves to these forthcoming innovations in the real estate industry. Blockchain can “tokenize” real estate.

Think of tokens as a store of value. In a residential or commercial real estate blockchain, tokens represent an ownership stake in various classes such as equity, debt, or cash flow. For instance, if a 100-unit apartment building, owned by 50 different investors secured on the blockchain, each of those investors could hold tokens to reflect their ownership in the equity of that asset.

In this example, the real estate blockchain platform is used to document, store, and verify these ownership tokens. The tokens can then be more easily traded, sold, and liquidated. Thus, the real value of blockchain is not just trust and efficiency but liquidity as well.

The real estate sector is traditionally an illiquid asset as the sale is long and process-heavy. If real estate tokenization is issued via a blockchain, it becomes easier to buy, sell, and trade. Your interest in any real estate asset using blockchain as the platform for the transaction is verified. It could be processed much more quickly.

It also democratizes real estate investing. For example, consider that the same 100-unit apartment building mentioned above is worth $20 million. Instead of a REIT or group of accredited wealthy investors purchasing this, a lead investor buys it through a blockchain transaction. This lead investor breaks that cost into 20 million tokens or shares. These tokens can then be sold to prominent street investors for $1 each, giving the lead investor access to a broader range of buyers and creating a marketplace to buy and sell tokens of this particular asset.

#blockchain

The future of blockchain technology

While the Bitcoin system is the best-known application of blockchain technology, thousands of cryptocurrencies exist on the back of this emerging technology. While it remains to be seen if Bitcoin will succeed in supplanting other forms of traditional payment methods, the applications of blockchain technology are growing fast, and proponents say they may lead to dramatic changes across industries.

Entar Coin interest page for real estate blockchain enthusiasts. Fill out the online form:

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Copyright © This free information provided courtesy L.A. Loft Blog with the information provided by Corey Chambers, Realty Source Inc, DRE 01889449; MPR Funding Inc NMLS 2000513. We are not associated with the seller, homeowner’s association, or developer. For more information, contact 213-880-9910 or visit LALoftBlog.com, Licensed in California. All information provided is deemed reliable but is not guaranteed and should be independently verified. Properties are subject to prior sale or rental. This is not a solicitation if the buyer or seller is already under contract with another broker.