The Future Of Real Estate Is On A Blockchain
This post is the first in a series of articles detailing the applicability of blockchain technology to the real estate sector. This first piece frames the discussion by providing a snapshot of where the industry stands from an innovation perspective, introduces the user to blockchain technology, and highlights some of its key use cases in real estate. It concludes by dispelling some common myths associated with blockchain technology and crypto assets.
In 2011 famed venture capitalist Marc Andreessen titled an editorial in the Wall Street Journal “Software is Eating the World”. It put C-level executives around the world on notice that their old ways of doing business would not suffice in the digitized 21st century. The article is also a nice bookend to former Intel CEO Andy Grove’s seminal book, Only the Paranoid Survive, in which he argues that the best managers are ones who can detect a massive change in their industries and adapt before a given inflection point passes.
The message from these two pieces is clear, evolve and become digitally fluent, or watch a data-driven company “eat” your market share. Still, despite the prescient nature of these themes, the real estate sector has largely remained stuck in the analog world.
In fairness, this is not because the industry — be it commercial or residential — is anti-change, but it is largely due to the fact that real estate professionals are trying to move their sector into the 21st century with a gigantic set of brick and mortar shackles around their ankles.
Real estate is the largest asset class in the world. At the end of 2017, the value of world’s real estate reached $280.6 trillion. In the US alone, the cumulative value of the national housing market increased by $1.9 trillion in 2018 to a total of $33.3 trillion.
With this much at stake, also taking into account the highly regulated nature of the industry, it should not be surprising that it has taken a long time to evolve.
However, things are finally changing.
They are being led by Airbnb, an Andreessen Horowitz portfolio company, that has gone from a tiny startup in 2008 to earning $2.6 billion in revenue last year. In a move that would have been inconceivable last year, a few weeks ago Marriott, the largest hotel chain in the world, launched its own rival service to Airbnb!
However, room-sharing is not the only innovation taking center stage in the PropTech revolution. Today, there are tech companies and startups applying new innovations in Artificial Intelligence, Big Data, Identity Management, Internet of Things, and Virtual Reality to the real estate sector. All of these products and services will lead to more efficient marketplaces and better homes and properties for renters, tenants, and owners.
That said, while all of these advancements are critical to modernizing one of the world’s oldest industries, they are still just the tip of the iceberg.
Finance is synonymous with the real estate sector, as every transaction needs to be structured, cleared, and settled around the world. Often times properties are then bought, sold, and securitized, passing through possibly dozens of hands in the course of a property’s life. Capital is the lifeblood of the industry.
And these days, it is almost impossible to have a conversation about capital without mentioning blockchain and crypto-assets.
Additionally, real estate transactions are notoriously complex and opaque. Frequently they are paper-driven and pass hands dozens of times. All of these moving parts can lead to costly mistakes, or even worse, create opportunities for fraud.
Fortunately, blockchain technology is designed to address these very challenges. Simply put, it is primarily intended for use cases that involve multiple parties in a non-hierarchical structure that involves a heavy financial component. Why is this so? Because blockchains are immutable data structures that provide a clear and irrefutable tracing of a given transaction as it passes through the value chain. Additionally, blockchains offer privacy-enhancing services to all parties to a given transaction and can speed up everything from the settlement of a transaction to its subsequent securitization and payment flows by multiple orders of magnitude.
Some near-term use cases include:
· Tokenization of Real Estate Assets to fractionalize ownership in a diverse set of properties and provide them with broad/liquid markets and investor pools
· Securitization of Debt Obligations to quickly allow developers to quickly replenish their capital and offer institutional investors a safe and secure investment opportunity
· Streamlining the Payments Process to avoid the costly fees associated with wires or the opaque nature of the correspondent banking system. Remember, blockchain’s origin is as a decentralized P2P payments system.
And these potential implementations are just a start, as in the future blockchain will do things such as help secure IoT devices in the home and protect user privacy on sharing applications such as Airbnb.
Now with all of this said, blockchains have certain tradeoffs and limitations, such as throughput, that are being addressed by developers as of this writing. I will detail the most pertinent ones for the real estate sector in future posts.
However, before concluding this piece I want to quickly dispel a few myths or misconceptions that I often come across when discussing blockchain in the real estate sector with the hope that readers will open their minds to the technology. They are:
1. No confidential or personal data needs to go onto a blockchain if you do not want it to
2. You do not need to touch cryptocurrency to utilize blockchain technology in the real estate sector if you so choose
3. Crypto/blockchain is not incompatible with other innovations such as AI/Big Data/Cloud Computing/Robotics etc
Therefore, despite its immutability the technology is still flexible for the user.
I look forward to expanding on these concepts with you in future posts, and please do not hesitate to reach out to me with feedback at email@example.com.
I am a New York City attorney specializing in Real Estate, Corporate and Blockchain Law. Since being first introduced to Distributed Ledger Technology in early 2013, I have represented many clients in a variety of real estate transactions involving digital assets. I currently serve as Chair of the Real Estate Working Group at the Wall Street Blockchain Alliance, a leading 501(c)(6) non-profit, that guides the comprehensive adoption of blockchain technology within the real estate industry, through fostering thought leadership and innovative solutions amongst our members and the global real estate community at large. My current practice is focused on advising domestic and international companies, high-net-worth individuals, entrepreneurs, start-ups, family offices and private equity funds in all aspects and stages of commercial and residential real estate transactions, including traditional venture capital, crowdfunding, as well as tokenizing existing ownership interests in real estate assets and/or raising new capital through tokenized equity offerings and other asset-backed digital security issuances.‹ Back to Blog