Blockchain and cryptocurrencies are evolving technologies that could transform the financial industry and, by extension, the real estate industry. Only time will tell how significant the impact will be. But as you’re probably hearing these terms more and more in the media, it’s a good idea to get an understanding of the basics.
Technology fundamentals
A cryptocurrency, such as bitcoin or ethereum, is a digital currency exchanged over the internet. These currencies provide a secure way of exchanging goods, and keeping a record of the transaction, outside the traditional banking system.
The blockchain is a public ledger, of sorts, and it’s the underlying technology that makes cryptocurrencies possible. The technology is a chain of records, or blocks of information. Information is never deleted or altered — new records are simply added to the chain.
As a distributed database, a blockchain isn’t housed in one place. Data is stored, duplicated, and synced across the multiple systems used by anyone who has made a transaction on the blockchain. Because the data is duplicated in copies around the world, it’s considered hack-proof. You can’t tamper with the data because the data isn’t held in one centralized location.
Private cryptographic keys allow users to access only the information they own. These same keys allow people to exchange data ownership or value.
Today, blockchain technology is allowing parties to trade goods and services outside our traditional monetary system. You can use the blockchain to transfer value without assistance from a bank or broker. The technology records transactions, verifies identity, and establishes a permanent record of a contract, all without involvement from financial services.
Applications in real estate
Bitcoin is already being used to buy and sell real estate. (Although in reality, investors in these transactions typically convert bitcoin to cash, thereby bringing traditional currencies back into the equation.)
Now, more startups are working to trade real estate on the blockchain. The technology provides a way to trade value as well as keep track of contracts, escrow, and property records.
Blockchain technology also enables the use of smart contracts. These are applications that run without human interaction, once the programmed conditions have been met. It’s like a workflow management system — one action automatically triggers the next step in the process, permanently recording each step until all the conditions are met.
As more information becomes accessible in the blockchain, computers can basically qualify users and verify information automatically, dramatically simplifying review and record-keeping processes.
In the future, contracts, identity management, and a host of complicated transactions could be carried out with a blockchain public ledger system. Theoretically, title companies could become obsolete, now that there’s an un-hackable record of ownership transfer. (Sweden, for example, is testing a national blockchain title registry and is asking for volunteers to participate in blockchain land title transfers.)
Blockchain technology has the potential to reduce fraud in the real estate industry (e.g. forged documents, false information, rental scams). The technology could also make real estate investing more affordable by creating new opportunities for fractional ownership.
There are numerous ways blockchain technology could shake up the real estate industry. Some experts suggest it’s less a matter of whether the technology will transform the industry and more a matter of how long it will take.
