The Disruptive Power of Blockchain

The technology behind Bitcoin can do a lot more than just transfer funds. Learn how blockchain distributed databases will change real estate transactions for good, and how you can take advantage of this shift.

More and more companies, researchers, and governmental entities are looking at the potential impact of blockchain distributed databases on business and daily life. You may have seen some of the myriad of articles on this topic, a few of which are in the context of real estate.

Unfortunately, the media often uses terms such as Bitcoin, smart contracts, and blockchain all in the same breath, which leads to even more questions and misperceptions. Thus, I hope to help you understand blockchain technology and its implications for real estate and your businesses in writing this introductory article.

So What Is It?

Let’s start with some myth busting: There is not simply one blockchain, but multiple blockchains for various applications that use the technology in different ways.

Think of a blockchain as a grouping of boxes, each containing a compressed block of data. Each box of data is added to the previous one with a cryptographic hash function, resulting in a chain. Then, each block has to be verified through something called “algorithmic consensus mechanisms,” which contribute to the overall security of the chain. It basically means that certain members of the blockchain have to approve new blocks and, if they do so, this block is updated across every computer and node on the blockchain.

Some systems are more open than others. Permissioned blockchains are those where only selected members have the ability to add new blocks to the chain. In contrast, unpermissioned blockchains, such as Bitcoin, are not controlled by any entity.

The technology is regarded as relatively secure due to the fact that it is decentralized, meaning that data is stored by every participant in the network, creating a high level of redundancy. Adding to this, the cryptographic functions and underlying algorithms enable a certain anonymity while providing transparency. Simply put: Blockchain, depending on the specific design, enables an individual to avoid revealing her or his full identity (name or address), while transparently transferring data in a verifiable way. Yet, as in the case of cryptocurrencies, the transactions are not fully anonymous because users’ identities could be revealed through IP addresses and other meta data.

So not only can blockchain technology be used as the foundation of cryptocurrencies like Bitcoin, Litecoin, and Ether, it can also be used for smart contracts, where it enables people to digitalize their assets in a relatively secure way. It can be used to transfer currency, but it can also be used to turn other assets, such as intellectual property, real estate, ownership-claims, insurance, and much more, into digital “value.”

Top 5 Real Estate Advantages

Here are the top five positive influences blockchain will have in relation to business and real estate.

  1. It is a democratizing force, especially in the case of unpermissioned blockchains, such as Bitcoin. Everyone can participate and there is no governmental entity, intermediary, or central bank that can control your data. For countries with authoritarian regimes or low security of investment, such a solution can help to foster economic development and empower ordinary people.
  2. The built-in redundancy means that if data is destroyed on your memory or even multiple users’ memories, it can still be retrieved from other members of the network. The government of Haiti lost most of its land register in the 2010 earthquake, which is why they’re now among a number of countries that are analyzing the possibility of using blockchain distributed networks to secure their data against future disasters.
  3. The automation of blockchain means users can avoid intermediaries in regular transactions, which will lower transaction costs and maximize profits. Santander Bank postulated that this benefit of blockchain could save banks $20 billion a year. There’s no reason your industry can’t realize much larger gains than that simply by circumventing intermediaries in real estate transactions, depending on the market.
  4. Cryptocurrencies can help avoid double payment problems and prevent fraud. In the United States alone, we lose an estimated $190 billion per year to fraud, which makes a convincing economic argument for adopting this new technology.
  5. Blockchain technology allows for an increase in transparency, which can help us better understand the true value of products. In real estate, blockchain technology can store granular information about a property, such as construction materials, previous leases and ownership, HVAC costs, and much more. The industry could transfer Building Information Modelling data to create large “anonymous” datasets which can be used to better understand construction materials, usage patterns, issues in facility management, and much more.

How Brokers Could Make Use of Those Advantages

Because this technology is still relatively new, you can shape your use of it to your business’ advantage. The most obvious way to incorporate blockchain in your business would be to accept and make payments with a widespread cryptocurrency such as Bitcoin.

Aside from this, you might also consider storing business data, such as leases, your contact database, and other relevant documents in a secure blockchain system, also known as a distributed ledger. In fact, REALTOR® associations and MLSs could even create permissioned blockchains for members. Municipalities might find ways to use blockchain technology to gather and store property or city data, especially with the proliferation of smart city projects.

But the first step to taking advantage of new technology is making sure you fully understand it and its implications. You can learn more about this technology for free at Khan Academy or by taking the cryptocurrency course on Coursera from Princeton University. Or, if you’re looking to keep tabs on developments or to connect with other like-minded individuals, check out the International Blockchain Real Estate Association.