Understanding Real Estate Blockchain and its Disruptive Force
If you've been paying attention, you've probably heard the term "blockchain" making its way around the conversation circuit over the past year or so. And for good reason. Blockchain is arguably the most significant technological development since the Ethernet. It will impact everything from self-driving cars to the global commodities market. Simply put, if storage and integrity of information makes the economy go 'round, blockchain is may yet revolutionize it.
Built on open-source software, blockchain is, at its bare essence, the underlying means by which bitcoins are created and their transactions recorded. However, the technology is adaptable to any type of information storage and transaction system imaginable.
At a blockchain's core is a network of computer servers called nodes. Technically, a blockchain network can number anywhere from the hundreds to tens of thousands.
Each node can reside anywhere in the world and is often independently operated.
Individual transactions of a specific type on a blockchain system are bundled into groups, called “blocks.” Each block is then encrypted and a copy of the code is sent to all of a network’s nodes in the form of a “hash,” which is an incredibly long string of characters. To ensure the block is valid, the first character set of a new hash must be identical to the last character set of the preceding hash, and a majority of nodes on the network must verify the continuity between blocks as each new block is added. If a consensus of nodes rejects a hash, its corresponding block is denied entrance onto the blockchain--possibly because the block is fraudulent.
As each block is added to the chain, the parties to a specific transaction receive a key (a different set of characters, based on ridiculously complex math). That key -- and that key only -- will allow human access to the specific transaction record. A key part of what makes a well-designed blockchain so incredibly secure is the unimaginably massive amount of computer processing power required for a nefarious actor (or machine) to do the math and generate a fake key that could fool 51 percent of the servers on a large distributed network .
Now back to commercial real estate: At present, the three most talked-about use cases are title transfers, peer-to-peer lodging and smart grid systems..
1. Title Transfers.
Title insurance isn’t cheap. For a policy to get underwritten, the insurer performs an exhaustive amount of research, which frequently includes visiting the local municipal building and combing through all the records, many of which are buried on a roll of microfiche. And this is actually super important. Goldman Sachs, in a 2016 report, estimated that approximately 30 percent of all titles are vulnerable for challenges. The lion’s share of your title insurance premium goes to cover the costs associated with manually researching and then, if necessary, rectifying whatever “cloud” may be on the title.
Now imagine if all the commercial title records in your city -- going back 300 years or so -- were converted to a standardized digital file living on a blockchain ledger. The title search would amount to little more than plugging a digital key into a computer, unlocking the file containing a property’s title records and then handling any possible vulnerabilities. Goldman says, in the same report, that blockchain technology could eventually save $2 to $4 billion per year in title insurance premiums.
2. Peer-to-peer lodging.
To be sure, peer-to-peer lodging apps like airbnb have started to disrupt the hospitality industry. In 2015, 79 million room nights were booked through airbnb. Two years later, the company is on pace to top 200 million, according the the Goldman report. But experts are questioning if a ceiling is on the horizon.
Human nature dictates that there is still a “creepiness” factor in staying overnight at stranger’s property, or allowing a stranger to stay in yours. When you book a stay through airbnb, you place your trust in a few staged photos, reviews that may or may not be total BS, and a text chat with the owner once you actually book. The owner has even less to work with in terms of deciding whether he or she wants to open their home to some random person or group. As a result, the process can take days -- rather than hours or minutes -- which isn’t good for either party.
How can a blockchain change this? Under one scenario, guests and host create individual files tied to their driver’s licenses (or other existing forms of government ID) and social media profiles. Each person’s file lives on a blockchain and instantly updates when guest or host reviews are submitted, nights are booked, and payments go through. Once a guest and host establish communication through the airbnb app, a “smart contract” is immediately generated, which contains each party’s up-to-date file and allows each user to pull necessary information, including reviews and criminal history, that might indicate possible red flags about a guest or host. By putting critical information at people's’ fingertips, Goldman believes booking speed and market share could increase exponentially, growing revenues from $1.5 billion in 2016 to $6.9 in 2020.
This could be the most disruptive blockchain use of all. Since the early 20th century, the power grid has been a centralized beast. If you want electricity to run your home or commercial asset you’ve had little choice but to pay the monopoly man. This has been due less to greed than the reality that hundreds of utility companies operating their own grids is technically impossible. Until now. New technologies and forms of energy have allowed some consumers in certain places to transact directly with existing or upstart power companies. Property owners can even generate their own power and get a statement credit for any excess power they send to the grid each month. But this is barely scratching the surface of what’s possible once blockchain gets fully immersed in the game.Eventually property owners will be able generate actual revenue by selling their excess electricity directly to other users. However, a peer-to-peer distribution system can’t operate on a centralized data and transaction platform. It would quickly get too massive to administer efficiently, too slow to process a constant flow of transactions and too vulnerable to data security threats. Because a blockchain operates on a distributed system, it is eminently scalable, automated through smart contracts and airtight; it will allow property owners to seamlessly provision excess solar or wind power through localized microgrids to neighbors for a mutually agreed-upon price. According to Goldman, a decentralized smartgrid will eventually generate up to $7 billion per year in energy revenue, very little of which will go to the beast.
Clay Christensen, Harvard Business School professor and coiner of the term “disruption” (as it relates to commerce) said: “An innovation will only get traction if helps people get something they’re already doing in their lives done better.” If this is the case, at least in real estate, we are about to see how a single technology can revolutionize a $7 trillion industry.