For a variety of reasons, I’ve gotten interested (again) in blockchain technology. The last time I really addressed this was back in August of 2019, when I wrote ShelterZoom, Blockchain and Real Estate. In that post, I think I was rather skeptical, writing:
TL;DR: Blockchain might be the future, but it isn’t the present or the near-future of real estate. There are no real problems in real estate that it solves today. However, real estate should think very carefully about what happens in the long run if blockchain does become fully realized and implemented in real estate.
Well, here we are in 2021, after the COVID pandemic and more precisely, the government response to COVID, completely changed the world and the economic assumptions. I think I’ve had to revise my thinking on a number of topics as a result, including on blockchain technology and what it does, could do, and cannot do.
So I’m starting out on what I think will be a long journey into a technology that is both cutting edge and filled with hype. I hope that my attempts to separate hype from real promise, to understand what this really could do, what problems it’s really trying to solve, will help you the reader understand at the same time I understand things. Expect more writing and podcasts and interviews on this topic going forward.
But I wanted to write this post to lay down some basic learnings. I’ve spent a few dozen hours learning what I can about the basics of blockchain, and I think my questions will be informed initially by what I’ve learned.
What Is the Blockchain, and Why Do We Care?
Obviously, this is no place and I am not the person to explain what blockchain technology is. Google is your friend on that journey. But you might as well start with Wikipedia:
A blockchain is a growing list of records, called blocks, that are linked together using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data (generally represented as a Merkle tree). The timestamp proves that the transaction data existed when the block was published in order to get into its hash. As blocks each contain information about the block previous to it, they form a chain, with each additional block reinforcing the ones before it. Therefore, blockchains are resistant to modification of their data because once recorded, the data in any given block cannot be altered retroactively without altering all subsequent blocks.
A more useful place, if you’re looking to spend 20+ hours learning, is this video series put out by MIT called “Blockchain and Money.” It was a graduate-level course taught by Gary Gensler, who was recently named the chairman of the SEC. I’m going to be referring to a number of concepts he explains.
So why do we care about blockchain?
The short answer is because of cryptocurrencies like Bitcoin. We all got interested because crypto seems to be skyrocketing in value, with Bitcoin hitting almost $60,000 per coin (before retreating to around $34K as of this writing). Big funds and publicly traded corporations are putting down enormous bets on Bitcoin, on Ethereum, and on other cryptocurrencies. Until people were becoming billionaires because of this crypto thing, I don’t think 99.99% of us cared one bit about it.
Of course, as my article above shows there were technologists and visionaries even in our industry who have been thinking long and hard about blockchain technology and how it might disrupt the industry. Propy is a leader in this space, as is ShelterZoom, and there are a few others I’m starting to learn about. (My hope is to eventually speak to most of them to learn what I can, and share what I learn with all of you.)
Apart from the crypto riches, once you start thinking harder about what this technology does or could do, you quickly run into some rather dramatic statements and claims. For example, from 101 Blockchains, we get this:
The article linked talks about how blockchain is more secure, less expensive, more efficient, provides “true digital freedom” and is transparent. Blockchain maximalists appear to believe that it is the future of everything.
But from listening to Gensler’s lectures, it seems to me that blockchain isn’t the future of everything. It’s hardly the future of anything just yet, although there are significant efforts underway from startups and from big tech and from big corporates and governments, suggesting that it will be the future of something.
Question for us is, is blockchain the future of real estate?
The Issue: Benefits of Blockchain
The issue, as I see things right now, is that the specific benefits of blockchain do not necessarily mesh with how real estate works, at least in developed countries like the U.S. Gensler hammers this point over and over again in this lecture.
Gensler has a slide in the lecture that is forming the basis of my inquiries:
And he asks over and over again, what is it about append-only logs, consensus protocol and a native currency that makes blockchain the ideal solution? These are the questions that feed into “Why is blockchain technology the best solution?”
Blockchain and Real Estate: Propy’s View
One of the leading companies in this particular space is Propy. It has… evolved somewhat from its start. On the 101 Blockchains website, the description of Propy says:
Solution: Meet Propy, the perfect blockchain use case for property transactions. By using Propy, anyone can buy and sell the property and enjoy the benefits of transparency and security by using blockchain. This way both the seller and buyers are secure as it is next to impossible to fraud using Propy. It also works cross-borders and provides a nifty way to do a property search.
The latest homepage of Propy doesn’t talk about “anyone can buy and sell the property” at all. Instead, it talks about solutions for real estate agents: Offer Management, and Transaction Management. But in January of 2021, Propy put up a blog post titled “Why Is Blockchain So Important in Real Estate and How Exactly Does it Fit In?” In it, we get at least a glimpse into what the Propy team thinks about blockchain and real estate.
Propy mentions security, transparency, and lower transaction cost as the three major benefits. The post doesn’t exactly describe how exactly blockchain fits in, but we do get this:
Since blockchain technology eradicates the use of the intermediary to conduct transactions, it saves you plenty of costs that you would pay them. Without the role of a third party, a transaction involving blockchain technology is less costly. Intermediaries like banks and service providers take a small sum of your money to legitimize the record and process that transaction. Blockchain technology does all of that through a unique and infallible system without a third party’s involvement.
The trouble for Propy, of course, is that the biggest third party in a transaction is not the banks and title companies that legitimize the record… but the real estate agent in between the buyer and the seller. That explains the pivot away from “anyone can buy and sell the property” to tools and platforms for real estate agents and brokers.
But that raises a further question: Why is blockchain the best solution for agents and brokers? Offer management does not need an append-only log with a consensus protocol and a native currency. Transaction management does not need decentralized ledgers. Both of those work just fine with traditional centralized databases; in fact, based on what I know of blockchain technology, something like offer management or transaction management work better with a single centralized database with a central authority to manage it.
Real World Difficulty: The Case for Title
Another problem is in the best use case for blockchain in real estate: recording title. This example was brought up over and over again in Prof. Gensler’s class in 2018, and just about everybody in real estate seems to agree that putting property records on the blockchain makes perfect sense. Look at this video from Propy for example:
Stuart Bronstein, the attorney, is absolutely correct about the deficiencies of the current system. However, there are two real problems here, one of which I pointed out in my 2019 post:
Using blockchain for property title makes all kinds of sense, but first, you have to convince a thousand local boards of aldermen in small New England towns to migrate to blockchain technology for their county clerk’s offices that have been using more or less the same system since 1652. Good luck with that, and get back to me once that’s been done.
The other major problem is whether judges will accept blockchain as evidence in a title lawsuit, if the record appears nowhere else. Suppose there’s an easement on a property, and that easement is recorded to a blockchain. But it is nowhere in the public records. Would the judge accept the blockchain’s record, or reject it because government records take precedence? If the public record has been lost or destroyed, sure, I could see the judge accepting that… but as long as the government is in charge of recording property information, I’m not seeing it.
Which means… that before blockchain can transform title, we must have a political movement to remove government employees from doing that work. That’s not an easy ask. AFSCME (American Federation of State, County and Municipal Employees) exists, and it’s possibly the most powerful political organization in the United States, probably more powerful than NAR even.
Setting Skepticism Aside
Let me now switch gears and play blockchain maximalist in real estate. Because skepticism is easy, and it is kind of the default mode, and inertia is especially strong in our industry.
The essential promise of blockchain technology is decentralization. Otherwise, what’s the point of distributed ledgers, of consensus protocols, and the rest of it? What uses cases are there in real estate where decentralization is the ideal, if not the only, solution?
I’ll be honest: I can’t think of many. The most obvious one — disintermediation of real estate agents — is one that the industry would fight like hell. If blockchain allows buyers and sellers to transact business without needing an agent, in a decentralized environment without something like the MLS, then that would answer a great many of Gensler’s questions. None of us in real estate would like such an outcome. But perhaps the long perspective says that if it’s going to happen anyhow, we need to prepare for it, rather than just fight it.
Once we move off of that and start looking at other loci of centralization in real estate, it seems to me that the obvious target must be the MLS and the Association, which centralizes so much of what happens within the industry. Perhaps some form of blockchain technology would allow millions of real estate agents and property managers and appraisers and so on exchange information, documents, and records without a centralized database (the MLS) or a centralized authority (the Association). Is that something we want?
However, all of that changes once we leave the borders of the United States and Canada. And we see this with finance as well.
The current generation of blockchain/crypto entrepreneurs aren’t necessarily focusing on developed nations; they’re focusing on undeveloped or underdeveloped countries where robust institutions do not exist. Land registries in the U.S., even in old-timey small towns in Vermont, are not really a problem; they might be a real problem in the Congo, or Uzbekistan, or Venezuela. Doing transactions without real estate agents might not be a real need in rural Kansas, but what about in rural Kenya?
And just like in finance, we need to think about blockchain and real estate because it might be the rest of the world that adopts some system based on distributed ledgers and consensus protocols that come in and stomp what we have. Just like the big American and European commercial banks are concerned about permissionless crypto and DeFi (decentralized finance), because those have enormous value in third world countries and could develop into a better system than we have in the developed West, we have to be concerned about whatever arises where our institutions do not exist.
If those systems are better, cheaper, more secure, and more transparent… then our older legacy systems will likely be replaced. Ultimately, technology that improves things takes over, whether we like it or not. (See, e.g., the internet.) So we have to care.
Open Mind, Open Eyes
This will be, I hope, the perspective with which I approach this project. I hope to interview some of the experts on blockchain in the real estate space. These will be men and women who have spent far longer thinking about and exploring what blockchain is, what it can do, and how it’s relevant to real estate. I will keep a wide open mind, but also keep my eyes open to try to cut through the hype and the marketing to get to what’s real.
If this blockchain technology is the future, then it will come to pass. And we all need to be prepared for that day, based not on hopes and dreams but also not dismissive of it. Clear eyes, full hearts, can’t lose.
I hope many of you will share your questions and perspectives with us all as we go down this path of inquiry.