Smart contracts are an incredibly useful feature that’s come out of cryptocurrency and other blockchain technology use cases. Smart contracts are already impacting many areas of business and culture — perhaps you’re following the buzz around NFTs — but they are particularly well positioned to revolutionize real estate. Before we get into how smart contracts will transform the world of real estate, it’s helpful to first understand what smart contracts are and what they do.
A quick blockchain for dummies on smart contracts
Smart contracts are self-executing applications running on decentralized networks. The automation inherent to smart contracts removes administrative overhead associated with tracking transactions in an exchange for which rules and conditions are defined. The blockchain, or decentralized network, confirms the transactions, checking against predetermined conditions.
Smart contracts are a form of automation that digitizes business rules and mimics them in the blockchain protocol (software) that governs the exchange. Critically, though, smart contracts offer something automation software can’t: smart contract code runs on an immutable ledger within a decentralized network. This means:
- Two distinct parties are can participate in a transaction governed by impartial third parties
- The established rules and the transaction activities are immutable/unalterable and require consensus to change
- Transactions benefit from the transparency inherent to blockchain technology
It’s important to note that while smart contracts are involved in cryptocurrency transactions, we are talking about the benefits of smart contract features here and not the possibility of using cryptocurrency to buy real estate. (There’s more to say on this but we will dig into the topic of blockchain vs. bitcoin or cryptocurrency another time). That said, aspects of real estate can be tokenized and therefore be traded like cryptocurrencies.
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A second quick blockchain for dummies on tokenization and NFTs
In order to tokenize an asset, the rules governing that asset—its qualities and ownership—must be converted to the digital realm and coded on a blockchain. During the process of tokenization, an asset’s value can also be fragmented into different shares and ownership can be assigned to each of these shares. Non-fungible tokens (NFTs) are relevant here because they use unique hash values to represent unique digital entities that can be traded in an exchange.
You’ve probably heard something about NFTs, if only from the buzz around Elon Musk claiming he planned to sell a tweet as an NFT in exchange for over a million dollars — something he ultimately never did. Tokenization and NFTs offer the business world a lot more value than the hype swirling around these types of transactions. Asset tokenization essentially defines ownership rights of a particular asset into a unique digital token on a decentralized network. In the case of real estate, such tokens would need to be non fungible because each real estate asset is unique.
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Once an asset is tokenized it can be traded using smart contracts. So here’s what we see happening to real estate:
Real estate markets, trade, and liquidity
Real estate markets traditionally deal with high illiquid assets. A large house on the coast may go for over a million dollars if a seller is willing to wait for a buyer wanting to pay that amount. Generally, though, sellers list properties in order to realize a profit and will settle for offers under listing if need be in order to liquidate their asset in a timely manner.
Smart contracts will connect buyers and sellers more quickly and directly than ever possible. Tokenizing real property will facilitate digital exchange that enables property to be listed within a smart contract where buyers can claim it when conditions set by the contract are met. It will even offer opportunities to fragment assets and sell across multiple buyers if the conditions in the smart contract permit this. As a consequence, real estate will become much more liquid.
Decentralization, intermediaries, and institutions
Typically, the exchange of real estate for currency requires heavy involvement by brokers, lawyers, and banks. These centralization authorities mire property trade in painfully slow processes that are opaque to buyer and seller. Not only can blockchain technology and smart contracts improve the liquidity of markets, but it can function as a listing agent, payment broker, and legal documenter as well. This improves liquidity, as well, and puts more power in the hands of the buyer and seller in terms of defining how they want the transaction to transpire.
Removing central institutions and intermediaries from the exchange of real estate also reduces the costs associated with real estate transactions. Registration, loans, and legal require fees to move transactions forward. If real estate exchanges become truly peer-to-peer with exchanges defined with the digital realm of smart contracts, then more money goes into an already massive market but the margins improve for the transactors.
Where to start
Blockchain’s disruption of the financial services industry and subsequent maturation across different enterprise blockchain technology use cases has touched almost every industry at this point. Real estate hasn’t escaped. For businesses that want to keep up, smart contracts are a good place to start as they can be integrated into existing infrastructure for demonstrable improvements to the transaction of property assets.
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