The basic underlying principles of blockchain and cryptocurrency payments are likely to inform the future of real estate in some fashion. And with more buyers and sellers expressing an interest in these technologies, it’s incumbent upon those in the real estate industry to have a good understanding of the fundamentals.
Two separate, but related, new technologies — blockchain and cryptocurrency — are playing a major part in many up-and-coming real estate startups.
Are these technologies fads? Obscure curiosities at best and scams at worst?
Time will tell, but the basic underlying principles of blockchain and cryptocurrency payments are likely to inform the future of real estate in some fashion. And with more buyers and sellers expressing an interest in these technologies, it’s incumbent upon those in the real estate industry to have a good understanding of the fundamentals.
Blockchain vs. cryptocurrency: Do you know the difference?
Blockchain and cryptocurrencies are two related but separate innovations that have the potential to reshape how real estate transactions are completed and how they’re paid for. However, most of the people we’ve encountered in real estate have only a limited understanding of how they work, what they do, and what they would be useful for.
In an online survey of more than 600 Inman readers earlier this month, nearly 38 percent of respondents said they didn’t understand blockchain well at all. Thirty-four percent said they understood blockchain “not very well,” 20 percent said they understood the technology “somewhat well,” 7 percent said they understood blockchain “very well” and less than 1 percent said they’d consider themselves experts.
Slightly more people said they understood cryptocurrencies, with only 26 percent claiming they didn’t understand cryptocurrencies at all. Instead, 40 percent of respondents said they understood cryptocurrencies “not very well,” 25 percent said “somewhat well,” 8 percent said “very well” and just over 1 percent said they were experts.
Significantly, 37 percent of respondents said they did not understand the difference between blockchain and cryptocurrencies and 28 percent said they did, with the rest split between “kind of” and “not really.”
Cryptocurrencies are digital currencies that are traded and exchanged over the internet, used to buy and sell goods, invest and build wealth. The “crypto” in their name comes from cryptography, the field of studying and enacting secure communications. Cryptocurrencies are designed to offer a secure method of trading and secure record-keeping of who traded what, when–using computer programming (though the “who” is often an obscure number).
The best-known and most widely used cryptocurrency is bitcoin, created in 2008 by the pseudonymous Satoshi Nakamoto. Bitcoin started with barely any value and has now created its own millionaires and billionaires. Due to the structure of the math equations underlying bitcoin, only 21 million bitcoin can ever be made — or “mined,” in bitcoin terms — which holds the currency’s value (already, the world has collectively mined most of the currency, over 80 percent).
Bitcoin also becomes harder to mine as more hits the market, requiring more time, more computing power, and more energy. Eventually, at some point if and when all of it is mined, the only way to acquire bitcoin will be by trading it.
There are a host of other cryptocurrencies as well, each with their own distinguishing features. Ethereum, launched in 2015 by Russian-Canadian programmer Vitalik Buterin and collaborators, is a platform that hosts the cryptocurrency ether, which is traded through a smart contract. The smart contract allows cryptocurrency exchanges to take place through an “if:then” model. In other words, if a certain condition is met, then the trade takes place and is recorded on the ethereum blockchain — the master record of all ethereum trades and information that is stored across the internet, on the computers of ethereum’s users (more on blockchains below). The smart contract feature enables ethereum to be used for many other functions than just trading currency — it can store information about all sorts of transactions, including asset transfers and home sales.
Due to the smart contract and other features, it’s also relatively easy for people to create their own custom cryptocurrency tokens that are not ether and trade them on top of the ethereum network, which is what many startups—including some real estate startups—are now doing. In order to work and be traded properly using ethereum’s system of smart contracts, these tokens must comply with a set of rules known as the ERC-20 Standard. However, many new, custom tokens have also been created by individuals and organizations using bitcoin’s blockchain.
Tokens such as the startup Propy’s PRO token or Deedcoin’s DEED token both use the ethereum blockchain. But rather than being used primarily as vehicles of monetary value, they are custom digital chips that people can buy to be used for whatever purpose their creators have designed for them, whether that is hiring a real estate agent, serving as the record of a share in a company, or something else. They are similar to how a casino will issue chips that can be used to gamble. Whoever makes a custom token can say what they will be used for within their own products and services. Just like in a casino, these tokens can often be exchanged for money — although in these cases, you often have to exchange it first through an existing cyptocurrency such as ethereum or bitcoin.
Many startups also tend to release their custom tokens for pre-sale or outright purchase to the public in large batches, known as “Initial Coin Offerings,” or ICOs. This can be a way for a startup to crowdfund future development of its tokens and applications, or just get people using its tech. However, regulators including the U.S. Securities and Exchange Commission have begun scrutinizing ICOs and charging some of their organizers with fraud, essentially for fabricating aspects of their business.
There are also many other cryptocurrencies less popular that bitcoin and ethereum, including Litecoin, Ripple, Monero and Dogecoin, along with plenty of smaller cryptocurrency tokens launched by individuals or companies.
Blockchain is the underlying technology that powers all of these cryptocurrencies — and it has plenty of applications outside of them. The name is fitting because it is literally an electronic chain of blocks of information, each block representing the latest transaction or many transactions, plus a record of the previous block, and the answer to a tough math equation.
A blockchain is a distributed, decentralized digital ledger where transactions are recorded. A blockchain exists not in any one place, but thanks to the internet, is spread out across multiple computers. Which computers? The ones being used by anyone who has made a transaction on the blockchain, from individuals to organizations. The system allows financial transactions to take place without a middleman, like a bank, which is how cryptocurrencies are traded.
“It’s a public ledger, first and foremost, and you can transact anywhere in the world without a middleman at a relatively cheap price compared to traditional avenues,” explained Josh Olszewicz, a cryptocurrency day trader.
There are multiple different blockchains each with their own cryptocurrencies being traded and transactions recorded. Additionally, many of the leading blockchains can host a potential infinite number of custom tokens on top of it as well. A blockchain stores all the information about cryptocurrency and token trades in chronological order, so you can go back and see the very first trades, as well as assigning numbers to each user of the blockchain, so you can see who owns what. The record of these trades can’t be altered or tampered with.
“In essence, what blockchain really means is that data basically becomes tamper-proof,” added Chao Cheng-Shorland, co-founder of the real estate blockchain startup ShelterZoom. “You can’t manipulate it because it’s stored in so many copies around the world. Every participant who can access the data can guarantee this is trusted information. It’s not centralized, so someone can’t go in and manipulate.”
To understand the difference between blockchain and cryptocurrencies, remember that a blockchain can support a number of cryptocurrencies — or even no cryptocurrencies (if used to keep track of something else). But cryptocurrencies need to rely on one blockchain to function (a single system of record-keeping).
How blockchain and cryptocurrencies will revolutionize real estate
These technologies are already being used throughout the real estate industry. Properties listed around the world accept bitcoin as payment, although those transactions usually convert bitcoin to cash rather than exchanging bitcoin for property directly.
In late 2017, the global property startup Propy helped facilitate what it said was the first real estate transaction on the blockchain, which was an apartment purchased in Kiev, Ukraine, by Propy advisor and funder Michael Arrington (also the founder of the blog TechCrunch). Propy also claims to have enabled America’s first blockchain property transfer in 2018, transfering the title for an owner’s condo to her own LLC via blockchain in partnership with a town government in Vermont.
Cheng-Shorland’s startup, ShelterZoom, powers rent payments and offers to buy via an “offer now” button online that relies on blockchain technology. The company also facilitates payment in cryptocurrency.
The startup Property Coin created its own cryptocurrency token that is backed by real-world real estate assets. And the startup Deedcoin claims to lower real estate commissions by having buyers buy and then sell back to the company its own cryptocurrency token and receive a cash commission refund.
The startup Streetwire wants to speed up real estate transactions by recording property listing and ownership data (title) on a blockchain. And the startup Harbor takes the big-picture view with plans to attach digital tokens to asset-backed securities, including property and art, and allow those securities to be divided into smaller parts, traded digitally and legally.
ShelterZoom is able to facilitate blockchain real estate offers because the technology means that the startup doesn’t need to see the details of the transaction to push it through. ShelterZoom and startups like it can use blockchain to speed up every part of the real estate transaction, from mortgages to title to insurance to attorney review to moving companies. Blockchain also has the potential to facilitate clearer, less complicated fractional ownership of properties, one of the ways Harbor plans to apply its technology.
“Efficiency — it’s real-time, it’s minutes. Timeliness and accuracy of data are all blockchain’s strength,” Cheng-Shorland said. “If you look at MLS services provided around the country, it really fits the bill.”
Blockchain experts outside the real estate industry also see the technology’s potential here.
“With bank wires, there are all these bottlenecks required to transact normally. Anyone needs so many days for a wire, for a check to clear. For escrow, for real estate specifically, it’s going to be huge. You can prove that instantly,” Olszewicz said. “Anything that touches government or needs a third party or needs an intermediary — any of that stuff is ripe for blockchain improvements.”
Not every part of the real estate industry has potential to see significant change from blockchain innovations.
Property search, for example, has already been upended by technology through Zillow and Trulia and doesn’t have that much left for blockchain to disrupt — at least not obviously.
And while buying property with cryptocurrency is a growing trend, not everyone agrees that it’s wise.
“It’s not a good move to buy with bitcoin. Bitcoin’s price is rising,” said Hartej Sawhney, co-founder of the blockchain security startup Hosho. “It’s not far off from the people who paid for pizza with bitcoin in 2010.”
And other parts of the world are likely to see significant blockchain innovation in real estate sooner than the United States. Developing countries with less entrenched financial systems can implement blockchain technology for transactions more easily.
Sawhney agreed that blockchain has the potential to disrupt the real estate industry through its transactions.
“Blockchain makes data more accessible and cuts out middlemen,” Sawhney said. “It can be leveraged in real estate for a more secure, speedy process for buying and selling property.”
How real estate agents can get involved
Even though many real estate professionals don’t fully understand these technologies yet, they do know that blockchain and cryptocurrencies matter to their industry. Forty-five percent of respondents to Inman’s survey said they see blockchain playing a bigger role in real estate transactions in the future.
Sixty-four percent said they think blockchain and cryptocurrencies will meaningfully impact their business in the future.
For these agents, there are ways to learn more and get involved. Piper Moretti is an agent with Christie’s and her own company the Crypto Realty Group in southern California.
Moretti got involved with the cryptocurrency community by happenstance in 2016, when a client of hers was interested in buying a house with bitcoin. Moretti educated herself to help the buyer complete that transaction, and now she is one of the leading real estate agents working with cryptocurrencies.
Moretti has completed five transactions in bitcoin, four out of those five with the same buyer. The transactions have ranged from $1.8 million to $3.5 million. Her transactions usually involve educating the other party in the transaction about cryptocurrencies and assuaging any of their concerns about the legitimacy of the transaction. She and her clients use BitPay, a bitcoin payment service, to pay for property in bitcoin.
Moretti isn’t the only agent to work in this space. In Inman’s survey, 17 percent of respondents said they had discussed blockchain or cryptocurrencies with clients “a few times” and 4 percent said they had those discussions frequently.
As for actual transactions, 0.8 percent of survey respondents said they’d been involved in a cryptocurrency transaction as a buyer’s agent, 0.3 percent said they’d been involved as a seller’s agent and nearly 1 percent said they’d been on both sides. Ninety-one percent said they’d never been involved in a cryptocurrency transaction.
For agents interested in securing more clients in this space, Moretti suggests learning the basics: watching the documentary “Banking on Bitcoin” on Netflix, taking a blockchain course through Blockgeeks.com, following the ups and downs of cryptocurrency markets on CoinMarketCap.
These techniques are good for agents who, like Moretti, hope to brand themselves as cryptocurrency agents in their marketing, or for agents who just want to have all the information they might need to serve clients in this space.
This knowledge doesn’t only serve buyers who want to pay for multi-million-dollar properties in bitcoin. Moretti said she’s heard from investors interested in buying up multifamily properties in California and accepting rent payments in cryptocurrency, from a seller in Maui who wants to sell in a bitcoin transaction and from people interested in transactions involving Ethereum, not just bitcoin.
“It’s not just happening on the coasts,” Moretti said. “I got a call from a guy in Ames, Iowa who wants to sell [in cryptocurrency].”