Blockchain can transform the real estate industry by minimizing costs and improving accuracy and security.
Most people attribute blockchain technology to cryptocurrencies, but little do they know that it can revolutionize every area of our lives.
Before discussing how blockchain can drive efficiency in real estate, let us look at some of the major problems facing the property sector.
A Sector Fraught with Inefficiency
The private sector is well known for being difficult to access, lacking transparency, and highly flooded with traditional investors. Real estate markets are localized, and global investors cannot effectively access the assets. For property owners, the real estate setup makes it more challenging to raise funds because of fewer localized investors.
Real estate experiences low liquidity, as pricing and information are often inaccessible and outdated. Purchasing and selling property is problematic since the assets are priced on an ad-hoc basis. For investors to liquidate their investments, they rely on brokers that charge high commissions, of up to 10%.
The global real estate sector is based on fragmented systems and siloed networks that are not easily interoperable. Processes, like the on-boarding of new investors, are too slow and require a lot of paperwork. Besides, these processes are duplicated across service providers, making them ineffective and costly.How Blockchain can Drive Efficiency into the Rea Estate Sector
Blockchain technology can be tailored to the needs of individuals using it. Platforms can be open to everyone or limited to some members who are given access to the ledger via a predefined protocol. The technology further ensures that records of transactions are validated and kept in distributed computers. The validation process establishes the trust needed to transact remotely without an intermediary. This leads to lower expenses, greater certainty, and the elimination of counter party risk.
Smart contracts are computerized programs that perform predefined business logic automatically when specific terms are fulfilled. For instance, a utility pursuant where a party pays another party an agreed amount, based on certain conditions can be automated into a smart contract.Smart contracts eliminate the need to manually perform the process and make the real estate industry more transparent and liquid. In an industry where even the most straightforward transactions have become expensive, time-consuming, and complicated- and often entail low-value-add third parties, like lawyers- commercial real estate needs blockchain technology more than any other sector.
By keeping an immutable record of property ownership, encumbrance and conveyance, blockchain offers information surety, which brings more transparency and trust. The technology can allow all properties to have their digital addresses for storing specific data, like leases, taxes, bills, physical attributes, and transaction history.More importantly, all property-level information can be encrypted so that only specified participants can access it.
Tokenization is the process of issuing blockchain tokens - security tokens in particular- that digitally represent real tradable assets. It can be likened to the traditional method of securitization, with a modern twist.
Asset-backed tokens (ABTs) are created via a form of initial coin offering (ICO) commonly known as a security token offering (STO) to distinguish them from other tokens.
Tokenization has the potential for a more effective and fair financial world by significantly minimizing the friction involved in fundraising, investing, and property selling.
Importantly, tokenization opens up asset investment to a global pool of investors by reducing entry barriers. ABTs are highly divisible, meaning people can buy tokens representing incredibly small portions of the underlying assets.
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