Why you should care about Blockchain if you care about Affordable Housing
What is Blockchain?
In 2009, Satoshi Nakamoto, introduced the protocol used in Blockchains and introduced Bitcoin, a new kind of digital currency to the world. As a result, many people seem to think of the two things – Blockchain and Bitcoin – interchangeably, but there is an important distinction. Bitcoin is the first application built on the protocols that later evolved into the technology concept now called Blockchain. While Bitcoin needs the underlying technology of a blockchain to be successful, the technology of Blockchain is not tied to Bitcoin or to cryptocurrencies in general.
According to Wikipedia, Blockchain is a growing list of records, called blocks, that are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. It is sometimes called Distributed Ledger Technology because the Blockchain is managed through a peer-to-peer network of protocols and is a record of the consensus of replicated, shared, and synchronized data. As a result, it does not require central administration.
Key features of Blockchain
Like most other technologies, such as the internet or your phone, there is little need for most people to know how it works. What is important is to understand the key features of the technology so you can understand whether there is a value to you. There are a few key features of Blockchain that are both central to what blockchain is, as well as important to understand why the technology has so many possibilities in housing. The key features of blockchain are:
Distributed. Each participant on the blockchain has a full copy of the entire history of the ledger. This means: 1) each participant has a record without transferring information and 2) every participant’s record is identical and doesn’t need to be reconciled.
Fully Transparent - Records on a blockchain cannot be changed or erased, modifications are shown as additions with a full audit trail of activities that happened to that record and that information is shared over the full distributed network.
Secure/Verifiable – Because the records are secured by the cryptographic hash, you can uniquely refer to the digital asset and verify that the record has not been tampered with
The Potential Applications of Blockchain in Real Estate
As many of the readers involved in real estate today know, there is a significant effort and associated expense spent on sending and reconciling data between supply chain partners throughout the value chain. There is also significant time and expense to meet regulatory and audit requirements, as well as prevent fraud. You can see that a technology that can meet these requirements natively holds promise for re-engineering these processes and significantly lowering their cost.
There are two other related concepts that are also helpful to understand to see the applications of blockchain in housing. These are:
Tokenization.. Since you can refer to the unique underlying digital asset, you now have the ability to create a token that represents that asset for trading value. That token, representing the underlying asset, is called a Security Token Offering. The ability to create a representation of the underlying asset, as well as the other attributes of blockchain technology make it much easier to split the asset into shares, assign value to the shares, and trade those tokenized assets.
Smart Contracts. This is the ability to imbed in the blockchain bits of code that stipulate terms of an agreement between parties. It has the same characteristics as other parts of the blockchain meaning it is also secure, verifiable, transparent and distributed. A typical type of smart contract might be that funds are not released until a particular condition is met. Those in the housing world might recognize that as typical of an escrow agreement.
The Benefits of Blockchain to Drive More Affordable Housing
What makes blockchain so powerful is that it allows so much of what happens in real estate transactions today through trusted intermediaries to be automated through the technology. It also enables business models that are difficult to enable through current structures due to administrative cost and expense, such as fractionalized ownership, much easier.
As I discussed in this previous post on this blog on the History of eMortgage Adoption, an electronically signed Promissory Note reduced cost, but the initial issue that the industry needed to solve was that all digital records were identical so how was anyone to know who “owned” the Promissory Note and could enforce it when multiple parties might have identical copies. Moreover, how could you ensure that the note had not been tampered with so that it was enforceable in a court. Out of these issues, the MERS eRegistry was created as a national record for identifying the enforceable copy of an electronic promissory note. In addition, the MERS eRegistry also used a cryptographic hash to ensure that the electronic record had not been changed after consumer signature. The cryptographic hash is now a unique identifier for that record. This is the type of problem that blockchain technology solves elegantly, and you can see why it is a key enabler to creating unique tradeable digital assets.
What’s Next For Blockchain In Real Estate?
Blockchain technology is still relatively immature, although many of its component technologies, like cryptography are significantly more mature. Its first application, bitcoin and other cryptocurrencies, are furthest along the development cycle and have been evolving the underlying blockchain technology as they evolve.
Blockchain is just starting to be applied to real estate, but based on its characteristics you can see why it might be a strong fit for an industry that is characterized by:
A complex set of supply chain partners all who are reliant on sharing a common set of data representing truth and ownership
A highly regulated environment where security, auditability, and fraud prevention are key
A high reliance on legal agreements focused on ensuring contract details are fulfilled before funding occurs
An underlying physical asset that is funded and traded through digital representations of the projected cash flows
Common examples of potential use cases for blockchain in real estate include:
Property and Title Records
Automating Escrow arrangements or contract compliance
Due diligence
Lending platform
Real estate tokenization
Registries
Real Estate Marketplaces
Regulation / Audit Automation
Property Management
To learn more about blockchain’s potential applicability to Sustainable Housing:
Do you have any thoughts on where blockchain might be helpful in reducing costs or creating new opportunities in housing?
If you would like to learn more about FinTech4Good's efforts in applying digital technology to affordable and sustainable housing or would like to join us in our efforts please sign up here Digital Innovations For Affordable and Sustainable Housing Interest Group.
Article by Ann Epstein
Comments