Blockchain Definition

What Is Blockchain?

Blockchain is a type of distributed ledger—a digital record of transactions stored across several computers in a network. Blockchain stores individual records of transactions in files called “blocks,” forming a single chain.

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How Does Blockchain Work?

blockchain

The simplest definition of blockchain is that it is a digital record of transactions. It is a method of storing transaction information across a network of computers, called “nodes.”

Blockchain is a type of digital ledger (a record of transactions) called a “distributed ledger.” In this scheme, several computers across a network store a copy of the entire blockchain, and all of these computers read, validate, and update the blockchain simultaneously whenever a transaction occurs. This structure is the opposite of a centralized ledger—or a record stored in one place—that most institutions use[1].

Thanks to its stability and security, blockchain technology powers cryptocurrencies, such as bitcoin (BTC) and Ethereum (ETH). However, they can be used for purposes other than cryptocurrency payments. Other uses include title and deed transfers, copyright and patent protection, voting, digital IDs, tax regulation, data backup, and more[2].

What Happens in a Blockchain Transaction?

The process can be broken down into five steps[3]:

  • A transaction or record is requested on the blockchain.
  • The request is broadcast to all computers in the network that store a copy of the blockchain.
  • These computers receive the request and run a “consensus,” where they validate if the request is legitimate.
  • The agreement must be unanimous before the request is verified.
  • Once verified, a new block containing a record of that transaction is added to the chain.
  • This change is distributed across all computers in the network.

Why Is Blockchain Highly Secure?

Companies are looking at blockchain to store confidential data because of its security. Blockchain is immutable, which means the data in a blockchain, once verified and stored, cannot be changed.

To achieve near-perfect immutability, blockchain uses a cryptographic algorithm[4] to protect and write unique “hash values” for each block in the chain. These seemingly random 64 alphanumeric characters contain information about the transaction stored in that block and its exact place in the blockchain.

Suppose an attacker wants to modify the details of a transaction stored in a block. To do so, they must know not only the exact hash value of that particular block but all the preceding blocks in the chain. In other words, the attacker must change all the existing blocks in the chain to overwrite the data in a single block.

Even if they can do so, the blockchain network must agree unanimously that the request to do so is valid—which never happens, as blockchain does not allow modification of existing blocks. This is because blockchain is designed to be “append-only[5],” meaning that one can only add new blocks, not modify existing ones.

Thanks to these factors, blockchain empowers alternative currencies like cryptocurrencies to proceed even without a central clearing authority, like a bank[6]. A user may directly transfer money in the form of cryptocurrency to another person, for example. Blockchain also empowers transactions that require transparency and security, such as voting and transfers of deeds, to proceed without fear of fraud or dishonesty.

How Blockchain Is Used in Real Estate

Blockchain in real estate is still an emerging technology, but the number of real estate businesses using it is rising[7]. Some of these businesses are set up as real estate marketplaces that use blockchain as their underlying technology. Others are designed to be blockchain platforms that focus on real estate investment.

There are three main ways blockchain technology attracts real estate investors: tokenization, payments and/or financing, and smart contracts. Here’s an overview.

Tokenization

In a blockchain ecosystem, any asset that can be digitally traded can be represented by a token. Tokens are essentially a store of value. In the context of commercial or residential real estate, blockchain tokens may represent a form of ownership stake like equity, cash flow, or debt. But unlike traditional ways of tracking equity, a token can be transferred digitally and execute commands depending on its programming.

tokens

For example, if a 50-unit apartment building is owned by 10 investors secured on the blockchain, then each of them could own tokens that reflect their ownership of the building’s equity—much like shares and stocks. From there, the owners can easily trade, sell, or liquidate their tokens at will. This can transform the real estate market from its traditionally illiquid nature to a more liquid one.

An example of an Ethereum tokenization in action happened in 2019 with Mata Capital, a French asset management company. They used Ethereum to tokenize $350 million worth of real estate[8].

Financing

Cryptocurrencies use blockchain technology to eliminate the role in a transaction of a third-party financial institution, like a bank[9]. This means a real estate buyer who has cryptocurrency can simply transfer the appropriate amount of money to a seller without making a loan from a lender or a bank, which typically comes with high interest.

The decentralized nature of blockchain can also democratize real estate financing. Say, a seller is seeking buyers for the 50-unit apartment building mentioned above, placing its value at $10 million. This is normally a price that only the wealthiest investors can afford, which narrows the selection of buyers somewhat. Instead, the seller may choose to break the cost into 10 million tokens of one dollar each. Each token can be sold to other partners, giving the seller a bigger pool of investors who can put their money in the asset.

There are also other uses for financing using blockchain. Escrow accounts, for example, can be placed in distributed blockchain ledgers. Buyers can transfer their cryptocurrency directly into an escrow account without having to deal with banks and notaries. Things like transfer of ownership are also guaranteed only after the blockchain network verifies the legitimacy of the request.

The St. Regis Aspen Resort, where they raised $18 million by selling 18.9% of the property in equivalent tokens[10], is an example of blockchain technology used for real estate financing.

Smart Contracts

Property purchases, developments, and/or construction projects are riddled with contracts and agreements that different parties need to comply with. Instead of relying on these traditional agreements, blockchain allows the use of smart contracts. These are agreements and transactions programmed into blocks that self-execute, i.e., can conclude digitally without any human involvement if prescribed conditions are met.

Smart contracts leverage blockchain technology to create, authenticate, and audit smart contracts in real-time. It roots instructions in transactions so that payment can only be made after all the terms of the contract have been satisfied. As a result, blockchain not only makes contracts safer but also streamlines the process.

Real Estate Transactions

An entire real estate transaction can happen on a blockchain. That includes submission of an offer, title verification, acceptance, due diligence, financing, and closing. Every one of those steps can easily be recorded, codified, and verified on a blockchain.

As a result, blockchain fully digitizes loan origination and underwriting as well as property transfer. It also offers lending institutions a single version of verified information through a secure ledger. This could potentially change the way real estate registries like titles are stored.

Owner and Tenant Relationships

Thanks to blockchain, identity verification and signing of lease contracts can entirely happen on an immutable digital ledger. Property owners and managers simply need to access the blockchain to verify information about their current and potential tenants. That includes references, employers, income, credit score, and so on.

Similarly, tenants can use the same blockchain to verify the ownership of a property. They can also ensure that the property has the necessary insurance and tenant incentives (like discounts for good behavior).

Takeaways

Blockchain is a decentralized digital ledger, which powers such technologies as cryptocurrency (as in bitcoin and Ethereum), smart contracts, and tokens. Because it is decentralized, it is highly resistant to cyberattacks, unlike a centralized ledger with a single point of failure.

Its high security and immutability make it appealing to other industries other than finance. In real estate, for example, it can expedite real estate transactions, property development, financing, and even rentals. It eliminates the role of a central clearing authority in transactions, which speeds up the process and lowers middleman costs.

Sources

  1. TradeIX. (2018.) The Difference Between Blockchain and Distributed Ledger Technology. Retrieved from https://tradeix.com/distributed-ledger-technology/
  2. Williams, S. (2018.) 20 Real-World Uses for Blockchain Technology. The Motley Fool. Retrieved from https://www.fool.com/investing/2018/04/11/20-real-world-uses-for-blockchain-technology.aspx
  3. Euromoney. (n.d.) How does a transaction get into the blockchain? Retrieved from https://www.euromoney.com/learning/blockchain-explained/how-transactions-get-into-the-blockchain
  4. Rhodes, D. (n.d.) SHA-256: An Overview & Guide of the SHA-256 Algorithm. Komodo Blog. Retrieved from https://blog.komodoplatform.com/en/sha-256-algorithm/
  5. Liquid. (2018.) What is blockchain technology? Retrieved from https://blog.liquid.com/what-is-blockchain-technology
  6. PwC. (n.d.) Bitcoin, cryptocurrency, blockchain… So what does it all mean? Retrieved from https://www.pwc.com/us/en/industries/financial-services/fintech/bitcoin-blockchain-cryptocurrency.html
  7. Deloitte Center for Financial Services. (2017.) Blockchain in commercial real estate: The future is here! Deloitte. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-dcfs-blockchain-in-cre-the-future-is-here.pdf
  8. ConsenSys. (2020.) How €350M Worth of Real Estate Was Tokenized on Ethereum. Retrieved from https://consensys.net/blog/enterprise-blockchain/how-350m-worth-of-real-estate-was-tokenized-on-ethereum/
  9. Nakamoto, S. (2008.) Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin.org. Retrieved from https://bitcoin.org/bitcoin.pdf
  10. Carroll, R. (2018.) In $18 million deal, nearly one-fifth of St. Regis Aspen sells through digital tokens. The Aspen Times. Retrieved from https://www.aspentimes.com/trending/in-18-million-deal-nearly-one-fifth-of-st-regis-aspen-sells-through-digital-tokens/

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