Ever since Bitcoin hit the market in 2009, the media have been buzzing about blockchain, the concept that made cryptocurrency possible. A glance over the tech headlines yields copious, often breathless speculation on its potential to revolutionize the way we do, well, anything and everything—and the real estate industry hasn’t been immune to its siren song. For as much as blockchain is discussed, however, it is still little understood, and the hype swirling around it is apt to leave lay people scratching their heads over exactly what it is, how it works and whether it can deliver on tech gurus’ lofty promises.
What Is Blockchain?
Before delving into blockchain’s potential applications in the real estate world, it’s worth going back to the basics. At its core, a blockchain is simply a way of recording a series of transactions, but it differs from your typical ledger is in howthat information is stored, as well as where.
Rather than being stored in a central location, a blockchain is distributed among a network of peers. Each party involved has their own copy of the full blockchain, which is updated to reflect the latest transactions. As a result, the blockchain offers an unprecedented level of transparency; whereas a client of a traditional bank, for example, might not always know how the money in their account is being invested, a blockchain user will be able to track their funds along every step of the way using their copy of the ledger. Anyone else with a copy can also view all of that user’s activity—but they won’t know who the user is, or be able to track them across multiple transactions.
This leads in to the next key property of blockchain: because of the encrypted state in which the information is stored, blockchain is not only transparent but anonymous. Each user of the blockchain is identified by a private address (or wallet, in cryptocurrency parlance) known only to them. That private address is encrypted to produce public addresses visible to other users. Since a new public address can be generated for each transaction, and there is no known way to decrypt a public address into a private address, users can be confident that their identities are safe and that only the parties involved have access to the details of a given transaction.
The decentralized and encrypted nature of blockchain provides protection against fraud. Each user’s copy of the blockchain can be validated against the rest of the network, so if one user’s copy doesn’t agree with the overall consensus, the discrepancy can be easily noticed. This holds all the more true because blockchain benefits from what is known in cryptography as the “avalanche effect,” in which small modifications to the input have drastic effects on the encoded output. If even one digit in a single block is replaced, the change will reverberate throughout the chain, throwing up red flags that will be difficult to ignore.
In theory, the combination of these factors should make tampering with a blockchain a much more complicated matter than fudging numbers on a single, centralized ledger. Though formidable, these protections aren’t foolproof. Along with its advantages, blockchain carries some unique security risks, which we’ll touch on later in this article.
What Can Blockchain Do for Property Owners?
Blockchain’s potential applications to real estate are numerous, and fall into several categories. Some of the concepts that have been floated can be put into practice today, while others—including many of those most specific to the industry—are speculative and largely untested.
Where financial transactions are concerned, property owners are likely to be attracted to the technology for some of the same reasons as other businesspeople and investors have been. Blockchain allows users to escape the frustrations of doing business through traditional financial institutions, sidestepping irksome fees, delays and other bureaucratic red tape.
But blockchain is, of course, more than just a novel way to move money around. Some of the most intriguing ideas that have surfaced in recent years look beyond cryptocurrency to imagine ways in which the technology can streamline the way real estate investors do business more broadly.
For example, there has been talk recently of using blockchain to create “smart contracts,” pieces of code that automate the enforcement of contract terms. If this idea were implemented, it could cut down on property managers’ workloads by partially automating certain routine interactions with tenants and contractors, triggering rent payments, security deposit refunds and payments for maintenance and repair if the agreed-upon conditions were met. Smart contracts could also provide protection against property fraud, by securely storing important documents, like those pertaining to property ownership, in the blockchain.
Related, some have speculated that recording property title information on blockchain could lessen the threat posed to buyers by defects in title, and perhaps even lessen the need for title insurance. With a decentralized record of all the pertinent information on a property at their fingertips, rather than scattered in multiple formats across several municipalities, buyers could rest easier—and richer, (given the expense of title insurance)—knowing that there are no nasty surprises lurking around around the corner to derail their next deal.
Finally, some enterprising sellers have recently experimented with the “tokenization” of real estate using blockchain. The concept is similar to that of an REIT or Real Estate Investment Trust, in which a company managing commercial properties allows individuals who may not have the resources or inclination to purchase a property on their own to buy “shares” in their portfolio, in much the same way as they would invest in a mutual fund. However, when a property is tokenized using blockchain, it’s possible to buy in without going through a middleman and, as mentioned above, the technology promises a level of security and transparency REITs may not. Additionally, because cryptocurrencies transcend national borders, tokenization opens the market to a truly global pool of potential investors.
Is Blockchain the Future of Real Estate?
To put it simply, it’s too early to tell. In all likelihood, some of the uses of blockchain described above will become ubiquitous in the coming years, while others will fall by the wayside as the hype fades, or as unforeseen downsides come to light. Moreover, there have already been indications that investors should tread softly when incorporating cryptocurrency and other blockchain applications into their business models.
Despite its unique security features, blockchain is not fraud-proof. Enterprising hackers have found several ways to abuse the technology, including altering wallet addresses to divert investors’ funds and compromising cryptocurrency marketplaces’ payment systems in order to drain their coffers. And bad actors aren’t the only threat to investors’ wallets; in 2017, a bug in a piece of software resulted in over $200 million in the cryptocurrency Ethereum being rendered inaccessible to the funds’ owners. These incidents may be exceptions to the rule, but each was staggering in scope, involving numerous victims and massive sums of money.
Worse still, those affected have little hope of recovering their funds. Since cryptocurrencies are not regulated by any central authority, there’s no equivalent to FDIC insurance for investors to fall back on. When digital currencies are lost or stolen, they’re typically gone for good.
Alarming as these risks may sound, though, they’re not a reason to give up on blockchain entirely—just a reason to think twice before converting your life savings into a stream of encrypted data. As shown by the potential applications described above, blockchain is much bigger than cryptocurrency; concepts like smart contracts and the decentralized storage of title information, if implemented widely, could change the way property investors do business. Or perhaps they won’t; only time will tell. In the interim, it’s probably wise to approach blockchain like any other developing technology: optimistically, but with a critical eye and a healthy dose of caution.