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How Smart Contracts Are Disrupting Real Estate

 3 min read / 

An industry estimated to be worth $4,236.7 billion by 2025 according to Grand View Research, the real estate market plays a key role in global financial markets. It is then no surprise that the recent wave of digital currencies and blockchain technology is making its way towards this legacy industry with the sole aim of disrupting it.

Blockchain, the technology that underpins digital currencies, has been seen by many financial institutions as possessing value above the cryptocurrencies it enables. Jamie Dimon, CEO of J.P. Morgan, even called Bitcoin a “fraud”, but expressed that he believed that “The blockchain is real”. With this in mind, how then can blockchain technology be used to improve the inefficiencies of real estate transactions? The answer resides in another piece of innovative technology known as smart contracts.

Smart Contracts Getting Rid of Middlemen

Proposed by computer scientist and cryptographer Nick Szabo in 1993, a smart contract is a self-executing piece of code that operates on top of a blockchain to enforce the terms of an agreement between two or more parties. For example, in the sale of a house between two parties, the service of an escrow company is typically employed. Funds are sent to an escrow account by the buyer and upon closing of the agreement, the funds are then sent from the escrow account to the seller of the house. In this scenario, the escrow company act as a middleman and takes a cut of typically 1-2% for its services.

However, smart contracts can prove to be the cheaper alternative by replacing escrow companies and disintermediating the entire process. Instead, the contractual agreement between both parties is programmed into a smart contract, with the funds being sent to the smart contract by the buyer. Through the use of a blockchain oracle, the smart contract can then determine that all the terms have been satisfied by both parties and execute its preprogrammed code, which in this
case would be the sending of funds from the smart contract to the seller. As well as reducing counterparty risk, the implementation of smart contracts in multiple areas of real estate transactions, not just escrow services, offer significant
cost savings.

The potency of using smart contracts to purchase property was put on display in September of last year when TechCrunch founder, Michael Arrington, used the Ethereum blockchain platform to buy a house in Kiev, Ukraine for $60,000. The transaction was facilitated by a decentralised real estate platform known as Propy and was settled entirely via smart contracts.

Future Is Coming Slowly

Despite some fatigue that some audiences might be feeling after all the hype surrounding digital currencies over the past few years, there is no doubt that the technologies underpinning them are seeing relevant applications in the real world.

Implementation of smart contract technology in the property market is seeing improvements in the transaction process as well as the disintermediation of middlemen. The cost savings could extend to legal costs, house valuation costs, and also surveyor fees. However, the technology is still nascent and as such, if one wanted to purchase a property using smart contracts, the process one would have to go through is not entirely clear.

There is no doubt that smart contracts will play a role in the digitisation of major industries. As the use cases for blockchain technology and smart contracts continue to increase, so too will the number of industries that are disrupted.

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1 Comment

1 Comment

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  1. Devansh

    June 9, 2018 at 4:39 PM

    The article also needs to explore the democratization of Real Estate Investing.

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