A look into the disruptive capacity of blockchain technology.
Blockchain refers to a decentralized digital ledger. This ledger is made up of individual blocks that each contain the transaction history of a specific period of time. They also contain unique identifiers that help differentiate one block from another.
Blockchains are decentralized, meaning that the information is not stored in one specific location. Instead, it is stored on the computers of every user of the given blockchain. Most cryptocurrencies use blockchain technology to record transactions. For instance, Bitcoin and Ether, the top two cryptocurrencies by market capitalization, use blockchain technology.
According to the Security Token Market, the market capitalization of real estate tokens in the US is US$ 27.2 million as of December 2020. Before rushing in to avail the exciting opportunities that the sector has to offer, here is everything that you need to know about blockchain technology.
Tokenization
Before jumping into a detailed look at how the various aspects of blockchain can benefit the real estate sector, it is important to understand tokenization. Tokenization refers to the division of a property into tradable digital assets on a blockchain network. This means that instead of buying an entire building, one can now own a very small piece of it.
The purchase of a token would then represent an interest in the property. It can also be used to generate investments for development projects. A practical example of this is the ATLANT platform, which allows investors to purchase, sell and trade in property tokens.
The sale and purchase of these tokens works exactly like stocks. Tokens can be bought and traded and can also be exchanged for fiat currencies (Government-issued currencies). Once an investor buys a token, they own a percentage stake in the property.
This tokenization offers investors the freedom to invest in a property, even when they might not be able to afford the entire thing. Thus, the barrier of entry into the property market is significantly reduced. Investors can also buy tokens of various properties and diversify their investments.
Smart Contracts
A smart contract is a self-executing computer program. Buyer and seller agreements are directly embedded into the code of a smart contract. These smart contracts are distributed through decentralized blockchain networks, such as Ethereum.
Smart contracts are automatically executed when certain specific conditions are met. Once executed, they cannot be changed. The introduction of these smart contracts within blockchain networks can facilitate the tokenization of real estate. They standardize the transaction process which means that they do not need to be individually negotiated. This makes it possible to conduct real estate transactions over the internet.
Problems that blockchain can solve
Cutting out the middlemen
The traditional real estate sector relies heavily on brokers, lawyers and banks. To buy a property traditionally, one first views the property through a broker, then signs notarial deeds, which is then completed with bank transactions.
However, blockchain platforms can perform the functions of listing, payment and legal documentation without intermediaries. This will save both buyers and sellers the commissions and fees charged by the intermediaries.
Blockchain works round the clock. This means that buyers and sellers can now also save time that they would have otherwise spent running back and forth between the various intermediaries.
Making the most of expensive real estate markets
The possibilities of tokenization are being considered for expensive real estate markets like Hong Kong. For instance, Stan Group Holdings Limited, the Hong Kong-based property investment company, has unveiled a “buy-a-brick” tokenization plan. This plan not only incentivizes their employees, but it also allows them to get a share of the capital gains on a particular property.
Increased transparency
Due to blockchain’s decentralized nature, it offers a high level of transparency. Transactions can be viewed in real-time using block explorers. Blockchain is virtually unfalsifiable. The unique identifier for each new block is derived from the information of the previous block. This makes it nearly impossible to be tampered with.
Countries have begun taking advantage of these benefits. An example of this is the digital land registry of Sweden. The country began working with the Swedish blockchain company ChromaWay to build the registry back in 2016.
Disadvantages of Blockchain technology
Despite the many advantages of using blockchain, it still lacks scalability. This is because blockchain’s transaction speed is slow. Legacy organizations can do tens of thousands of transactions per second. However, the bitcoin blockchain can handle only about 7 transactions per second.
Another major problem with blockchain is its environmental implication. The process of mining blocks requires an extremely high computation power. The bitcoin network consumes 113.89 terawatts of electricity per hour per year (TWh/year). In comparison, traditional banking systems consume 263.72 TWh/yr.
The transaction history stored within the blockchain cannot be altered. While this may be one of the main strengths of the digital ledger, it can also be one of its main disadvantages. If, by accident, any personal data makes its way to blockchain, it will stay there forever. This raises major concerns for privacy.
Does Blockchain technology have a future?
Despite the disadvantages, constant innovation is underway to make the necessary changes for blockchain to reach its full potential. An example of this is the shift from proof-of-work (the process of mining each individual block) to proof-of-stake. Proof-of-stake seeks to address the environmental concerns associated with mining. It does not require heavy computational power like mining.
In 2021, Ethereum announced its plans to shift to proof-of-stake. For their system, proof-of-stake requires users to stake 32 Ether to become validators. A validator does the same thing a miner does in that they also create blocks. Due to the entry barrier added in, it limits an individual’s capacity to validate transactions.
With this, even the privacy concerns can be resolved. This can be done by shifting a public ledger to a public-private hybrid model. It can help secure data by regulating the public stores of data.
With blockchain, there is room for innovation. As more industries realize the benefits of blockchain, the points of concern with it will also continue to be addressed.
Header image courtesy of Unsplash
