How Blockchain technology will change the real estate market
Tiago Dias7 September 2022
At the end of the last decade of the 20th century, there was the innovative and visionary idea that one day all companies would have to take the decision to adopt the internet and make their entire business digital, and many, to their sorrows, distrusted and ignored this plan. Many, much later, realized that they had made a capital mistake and, as history tells us, many companies, comfortable with their status quo at the time and dominance of the market in which they operated, struggled to reposition themselves and even some practically disappeared. Who doesn’t remember the cases of Kodak, Nokia, Blockbuster and many others?
I could now try to draw parallels between the magnificent days we are living in and the Dotcom bubble, and it would make perfect sense to do so, but there is something substantially different to be seen.
Due to its constant evolution, the world adopts and accepts innovations, disruptions and consequently changes at a much faster pace. Who doesn’t remember setting up their first email account, how access to knowledge became more widespread through the daily use of the internet, enabling millions to set up their own businesses with an infinitely lower cost of entry, or the evolution of mobile phones into smartphones with the launch of the iPhone, which revolutionized the industry forever. I could also mention the way we transfer data, facilitated by Bluetooth technology, or how all the information a person generates and acquires in a week these days is equivalent to all the information acquired by a person born and living in the 17th century. Nothing, but nothing, has ever been the same again and everything happens much faster.
Blockchain technology will be no different and we can also look at the following figure for the Gartner curve taking into account the adoption and maturity of Blockchain technology and realize that we are living in a time very similar to the DotCom bubble.
Figure 1 – Gartner Curve 2022, Blockchain & Web3
As I mentioned in my previous article, Blockchain technology is often confused with crypto, or with Bitcoin, but this analogy doesn’t make any sense. Simply put, Bitcoin is the first and best-known cryptocurrency, a form of payment or a store of value, but what is really interesting to study, debate or iterate on is the technology that supports it and allows the market to operate in a decentralized way, without the control of a central authority, with total transparency, security and data integrity. And this is where all my personal interest and motivation lies, as I am ecstatic about the infinite applicability and possibilities that this technology will bring to the “real world”, and in our case, to the real estate market.
It is undeniable that Blockchain will increase the trust, credibility and integrity of any and all information and, consequently, of the market. Let’s see how this public and unalterable ledger would work, fed in a distributed and decentralized way by the entire ecosystem that makes up the real estate market (mediators, real estate agents, financial and credit entities, lawyers, solicitors and notaries, real estate developers, citizens and public and government institutions):
1. A transaction or registration is requested; 2. This request is transmitted over a network of computers, which we’ll call DB access nodes; 3. Using algorithms, each node will be able to process the previous request(s); 4. The request made in point 1, which could be a contract, a simple registration or a “coin”, is verified by the entities that are part of the ecosystem and that access this public ledger through each of the nodes; 5. Once the verification is complete, the public ledger (better known as the decentralized database) is updated with a new block, which contains all this new, complete set of data; 6. This new block is added to the Blockchain and can never be deleted or altered (immutability is the key variable that will be the catalyst for the much sought-after transparency).
As we can easily conclude, this process I’ve just described can have various applications in the real estate market and will add a level of reliability and credibility to those who provide their services through this technology. Let’s see. The real estate market is not interconnected in a consistent way and real estate brokerage business processes are considered by everyone involved to be extremely inefficient and opaque. This lack of transparency results in a lack of trust between the different stakeholders, as many of them have conflicting interests. The actual process of buying or selling a property involves a wide range of different actors who have different roles and objectives, making it difficult to ensure that all interests are aligned. These conflicting forces make the business process very inefficient, expensive and time-consuming.
Because there is no trust between the different parties, the process requires the authentication of various documents, the signing of a multiplicity of contracts that come with high legal fees, the validation of everyone’s identity and the need to closely monitor the payment of the commission fee, which in cases of litigation comes with high legal costs. These requirements are made even more difficult to overcome because the information is stored in public and private silos (the CRMs of the mediators or the IS of the different stakeholders) which do not communicate effectively with each other. This is an almost endless process of authenticating and validating everyone’s paperwork. The process is paper-based, which means that it is difficult to guarantee data integrity throughout the entire process or lifecycle of a real estate transaction.
This results in a set of challenges/problems that the market will have to solve in the medium to long term:
1. There is no simple, intuitive way to access credible, secure and accessible information in real time; 2. The process of validating all documentation is opaque and inefficient and done offline (paper-based); 3. Any real estate transaction process is too time-consuming and, worse, does not comply with the GDPR; 4. Very high transaction costs; 5. Very illiquid market with huge barriers to investment; 6. The vast majority of information systems or proprietary software do not communicate with each other; 7. Fraud;
Long story short. Blockchain brings with it a different paradigm and, above all, a way of doing business based on trust, immutability, transparency and the integrity of information.
Without wanting to go into more technical details that are of little interest to this article, I want to say that Blockchain is in fact a much fairer and more democratic technology that has the direct consequence of reducing the risk of corruption, money laundering or fraud by guaranteeing immutability and transparency with regard to the information generated and shared. The world is now beginning to realize the real impact and added value that this technology can bring to society in general and to the great challenges that challenge and concern us today. It can be applied to a patient’s medical records, to each citizen’s identity (in all its various forms), creating a single citizen’s record, or simply to tax collection by central governments. Believe me, the applications are endless once you understand the technology and its evolution.
In the real estate market, it can create the much-desired trust between all those who make it up, which is so complex and competitive, and one of the most important for national economies. It can also act as the public book of property records, reduce the time of any real estate transaction (digitally signing contracts, validating identities, etc.), reduce the risk of fraud, reduce indirect costs that exist in a real estate transaction, reduce administrative fees and, in the end, bring the much sought-after real-time liquidity to everyone.
Although there are still some challenges to be solved, I can say that the progress of some startups in recent years seems to have been impressive, however it will still take 2-3 years before it is possible to scale technological solutions based on distributed technologies but the message to the ecosystem is clear. Blockchain technology is here to stay and will have a fundamental say in how real estate processes are shaped and redesigned and will open the door to a range of ways of generating value that have never been possible before.
It seems to me that the advice derived from the knowledge that professionals have of the land and that comes from the empirical experience and networking that is normal in any market will continue to be crucial and none of this will change. However, the way in which property registration is designed and executed, the way in which any real estate transaction process (sale, lease, transfer or exchange) is carried out will change radically and will benefit, once again and in the first instance, those who have already automated and digitized their entire business.
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