Blockchain technologymight be one of the most popular and talked about innovations of this time. Developed to support bitcoin, the technology powers thousands ofcryptocurrencies, pushing developers to integrate it into various businesses, including medicine, finance, and real estate.
If you have a keen interest in banking, investing, or cryptocurrency, then you might have probably encountered the term blockchain. But in order to understand the technology, it might be helpful to understand how blockchain works, what its advantages and disadvantages as well as applications are, and what makes it different from other internet technologies.
What is Blockchain Technology?
According to most tech sites, a blockchain is a time-stamped series of unchangeable records of data which is managed by a network of computers. The growing list of records called blocks of data are secured and linked to each other through cryptographic principles.
Blockchain technology may be applied to legal contracts, property sales, medical records and any other industry that needs to authorize and record a series of actions or transactions.
How does blockchain work?
According to the EC-Council, the purchase and sale of bitcoin is entered and transmitted to a network of computers that are also known as nodes.
- It starts with bitcoin mining where the network of thousands of nodes around the world vie to confirm the transaction using computer algorithms. The first miner who successfully completes a new block is rewarded with bitcoin for their work, which is paid with a combination of newly minted bitcoin and network fees that are shouldered by the buyer and seller. The fees can increase or fall depending on the volume of transactions.
- Once the purchase is cryptographically confirmed, the sale is added to a block on the distributed ledger. The majority of the network must confirm the sale.
- The block is then chained to all previous blocks of bitcoin transactions, using a cryptographic fingerprint known as a hash. Afterwhich, the sale is processed.
With bitcoin as an example, we have listed some of the advantages and disadvantages of how blockchain technology works when applied to cryptocurrencies.
The Advantages of Blockchain technology
Decentralization
There is no government
agency that issues or controls bitcoin and other cryptocurrencies, which means
that its ability to influence the fate of a public blockchain is eliminated.
The lack of intermediaries reduces cost since the fees associated with third-party transactions are also eliminated.
Time efficiency
Blockchain technology also promotes time efficiency since it is open for business 24 hours a day, 365 days a year, unlike banks and other intermediaries.
Transparency and anonymity
All transactions in Bitcoin blockchain are recorded on computers across the network. There’s transparency in every transaction because the address and transaction history of bitcoin wallets are viewable by the public, but the owners of each wallet connected to those public addresses are anonymous and not recorded.
Accuracy and security
There is lower risk of error since most of the transactions involve little human interaction. Each transaction must be confirmed and recorded by the network nodes, which makes it difficult to manipulate or alter information.
Blockchain applications beyond cryptocurrencies
Blockchain technology creates efficiencies that can be applied to various industries beyond cryptocurrencies. While cryptocurrencies are on a public blockchain, many business applications can be created on private blockchain networks such as blockchain supply chain, electronic medical records, smart contracts, digital elections, and property transactions, among others.
The Disadvantages of Blockchain technology
Criminals like crypto
Like other new technologies, some of the first adopters of the blockchain technology have been criminal enterprises. They use cryptocurrencies like bitcoin as payment and as a means to target holders of bitcoin for scams.
Blockchain cryptocurrencies are highly volatile
The popularity of cryptocurrency exploded in 2021 as bitcoin hit its highest record spot price. However, the price of bitcoin tends to drop fast then climb up again, making blockchain cryptocurrencies highly volatile.
Crypto use is still niche
According to most fintech websites, there are exchanges, brokerages and payment apps that now sell bitcoin, and many companies such as PayPal and Microsoft accept bitcoin for payment.
However, the sale of bitcoin for purchases on cash apps such as PayPal requires users to pay capital gains taxes on the bitcoin sold, beyond whatever state and local taxes are paid on the product or service.
Environmental impact of bitcoin
Since the process of bitcoin mining uses a network of high-speed computers, it is expected to consume a lot of energy, adding carbon footprint to the environment.
Bitcoin blockchain is slow
According to the EC-Council, the blockchain can process about seven new transactions a second as compared to credit card companies like Visa which says it can process 24,000 transactions per second, resulting in scalability problems of the blockchain system.
Blockchain Technology and Real Estate
Blockchain technology disrupted financial services and has made a strong impact on various industries and business applications which include payments, remittances, and foreign exchange. Initial coin offerings (ICOs) have also challenged stock investing, startup loans, and venture capital.
With such a strong influence, real estate has not escaped blockchain disruption too. Before, real estate transactions were conducted offline involving face-to-face engagements with various entities but blockchain changed the real estate game through the introduction of smart contracts in blockchain platforms that allows assets like real estate to be tokenized and be traded like cryptocurrencies.
There are various ways you can trade real estate. Here are some ways blockchain has changed the real estate game.
Various Platforms and Marketplaces
As we may know, real estate technology has traditionally been concerned with property listings as well as connecting buyers and sellers. However, with blockchain, there are now new ways you can trade real estate that enable trading platforms to support real estate transactions more comprehensively.
Real estate companies can use the blockchain technology to facilitate real estate and rental property transactions. Sellers can now “tokenize” assets and handle it like a stock sale, and liquidate the asset through a token sale using the platform. The collected tokens can then be exchanged for fiat currency that owns a percentage stake of the property.
No Intermediaries
The lack of intermediaries can enable new platforms to assume functions such as listings, payments, and legal documentation, resulting in buyers and sellers getting more out of their money since they can save on commissions and fees that are being charged by these intermediaries.
Liquidity
Although real estate is said to be a stable investment by many, it has long been considered an illiquid asset since it takes time to seal the deal. However, this is not the case with cryptocurrencies and tokens since theoretically, they can be readily traded for fiat currencies through exchanges.
This means that a seller does not have to wait for a buyer who can afford the whole property in order to get some value out of their property.
Fractional Ownership
Fractional ownership pertains to percentage ownership in an asset where the shares of the asset are sold to individual shareholders who share the benefits such as usage rights, income sharing, priority access, and reduced rates.
Allowing fractional ownership will enable blockchain to lower the barriers to real estate investing. Typically, investing in real estate requires a significant amount of money, but through blockchain, investors would simply have to access a trading app to buy and sell even fractions of real estate tokens as they see fit.
Additionally, fractional ownership would also help them avoid managing, maintaining, and leasing the properties, which oftentimes entails a huge amount of money.
Decentralization
Blockchain is known for its decentralized architecture and technology with built-in security which builds and commands trust in terms of transactions. All the information stored in the blockchain is accessible via the network, making data transparent and immutable.
Since information can be verifiable to peers, buyers and sellers can have more trust and confidence in conducting transactions. There will also be lesser to no fraud attempts.
Costs
Aside from enjoying the transparency of having a decentralized network, cost reduction is another attribute associated with real estate transactions.
With blockchain, there is no need for intermediaries, thus cutting out professional fees and commissions as well as other costs like inspections costs, registration fees, loan fees, and taxes associated with real estate will immensely reduce your expenses. These costs also vary depending on the territory that has jurisdiction, which means these can be reduced or even eliminated as platforms automate these processes and make them part of the system.
Blockchain technology will enable more people to access the market where transactions can be made more transparent, safe, and secure. Real estate transactions may also become a peer-to-peer activity with blockchain-powered platforms doing most of the work.
According to most fintech websites, one of the most exciting benefits of the blockchain technology in the real estate industry is the digital securitization of real estate properties or the so-called tokenization. Additionally, digital assets can represent real-world assets such as real estate, real estate funds, revenue streams, governance rights, and more.
When these real-world assets are tokenized, they can be divided into smaller pieces, made accessible to various investors, and leveraged to increase capital. Once tokenized, this will enable the secure and compliant digitization of the transactions and processes around these assets.
There is no doubt that blockchain technology will make the processes easier and smoother. Imagine the digitalization of securities processing, liability management, document processing, and accounting. These will inevitably change with blockchain technology.
However, real estate companies must still take note that the advice, knowledge, and know-how of real estate professionals will remain crucial to real estate buyers and investors.
Blockchain Use Cases in Real Estate
According to tech website Concensys, enterprise blockchain technology can transform the real estate industry with several use cases such as:
- Asset Management and Real Estate Funds
- Project Financing
- Loan and Mortgage Securitization
- Property Management
- Land and Property Registries, Sales, and Reassignment
- Urban Planning
- Property Development and Construction
- Investor and Tenant Identity
- Payments and Leasing
- Real-Time Accounting
The Future of Real Estate And Blockchain Technology
As many experts would say, real estate is the largest asset class in the world. Real estate professionals are now recognizing the transformative impact and value of blockchain technology in optimizing the real estate transaction process as well as streamlining property sales and payments, as well as increasing access to real estate funds and other investment opportunities.
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