This is part two of a two-part series on blockchain applications in commercial real estate. While the blockchain is best known as the distributed database that underpins the digital currency Bitcoin, it has other potential applications as an online communication protocol with specific advantages.
Read part one on how the blockchain may help solve IoT challenges in commercial real estate or sign up for our weekly newsletter.
Before the internet revolutionized the way we make simple purchases, things were bought and sold in places called stores. Transactions were slow and paper-driven in this bygone era, and buyers had to trust that the object they were buying really did have the features and qualities that the seller claimed.
In the sunlit age of free two-day shipping, transactions are faster, easier, and more easily verified than ever before, but stubborn real estate hangs on to its snail-slow legacy processes. If experts are to be believed, though, there might be hope on the horizon for this errant sector: The blockchain, the distributed network that underpins bitcoin and other digital currencies, may hold the key to fast, verified commercial real estate transactions.
What is the blockchain?
A quick recap: The blockchain is a network designed around the concept of ‘distributed trust’ in order to facilitate online transactions between strangers. This is crucial for peer-to-peer transactions in a digital currency; at the end of the day, a bitcoin is nothing more than a unique string of letters and numbers with an agreed-upon value. Data is infinitely reproducible online, giving rise to the need for a system that verifies transactions automatically.
Without the blockchain, bitcoin simply wouldn’t work. Someone selling a bitcoin could receive dollars and send the string of characters that represents the coin by email, but nothing would prevent him or her from selling the same coin to someone else down the road. This is a simplification of the ‘double-spend’ problem that the blockchain seeks to address.
Without delving too far into details, every ‘node’ through which transactions pass contains a copy of the global ledger of all recent bitcoin transactions. This ledger is called a ‘block.’ What’s more, each block contains a link to the previous block, which in turn contains a link to the block before it, and so on back to the original transaction. This is called the ‘blockchain.’
Nodes are constantly comparing their ledgers to the ledgers of other nodes and incorporating data from them. When there is a discrepancy, the most agreed-upon version is accepted. In this way, the system is virtually impervious to tampering; one would need to control more than half of all processors in the network to fool it. (This possibility is frequently considered and monitored – generally, it is called a ‘51% attack.’ Such an attack would require significantly more processing power than is owned by Google.)
What implications does this have for CRE?
In many ways, the ownership of a property is not very different from the ownership of a commercial property. True, bitcoin is intangible and buildings are very real, but the claim to ownership, the deed, is just information. A unique string of letters and numbers, if you prefer.
By acknowledging these similarities, experts are working to find ways in which the same system of transactions can be used to simplify and streamline the process by which real estate is bought and sold. Many of the people and processes involved in a real estate transaction are there to provide security, either by providing authenticated information about a property or by ensuring that the transaction occurs properly. It is possible that the blockchain could cut some of these middlemen out.
“The blockchain, ultimately, will usher in a new era where we can transact real estate deals in a much quicker fashion,” Jason Ray, principal at White Nautilus, told Aquicore. “At the end of the day, being able to transact quickly comes down to your certainty that everything has been buttoned up. You understand what property you’re purchasing, you understand the legacy of that property, you know; who are the previous owners, how efficient is the property, are there any liens that would preclude you from being able to do a clean transaction. So if you can have all of those attributes stored in a fashion that is extremely difficult, if not impossible, to tamper with, and it conveys perpetually, then that has a profound impact on your ability to transact quickly.”
The way that the blockchain verifies transactions would also reduce or eliminate several kinds of fraud. Forged ownership documents and false listings would be essentially impossible through the use of unique digital deeds, which themselves would be very similar to bitcoins.
Further use cases, including bitcoin’s automated digital escrow, could further simplify and reduce costs for the system of real estate transactions.
When will this actually happen?
The largest and clearest barrier to blockchain adoption for real estate transactions is that the current system is rigid, and it’s likely that many key players would need to buy into a new system before it would become viable.
Ray explained that REITs and other high-transaction real estate players are particularly interested in making use of this technology to streamline their business practices. The notion that businesses could obtain verified information about a property with little-to-no investment in research and then buy or sell that property with a few clicks of a button is a serious break from current practices. It isn’t only REITs that are making waves in this sector, though.
“All of the large REIT and large development companies are starting to invest in at least researching what effect [the blockchain] could have on their ability to transact quickly and with more certainty,” Ray said. “That being said … some of the larger shops are investing internally, but I think we’re going to see a lot more startups in the comings months and year in blockchain and its potential effects on commercial real estate.”
Because of the nature of network-based innovation, it could be the case that blockchain adoption in real estate seems to spring up very suddenly. Alternately, it could be that there is too much static momentum in the sector and mass adoption never occurs. Ray suspects that, ultimately, a major player will take a leadership stance and the rest will follow. What is clear, however, is that public opinion is moving closer to viewing the blockchain as a normal, possibly inevitable piece of technology in the sector.
“I got a number of comments on my initial post [in 2015] that said, ‘hey, sounds very space-age,’” said Ray. “I think one gentleman asked, ‘what century is it actually going to have an effect on the industry?’ You wouldn’t hear that today.”
This is part two of a two-part series on blockchain applications in real estate. Check out part one or sign up for our weekly newsletter.