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Crypto and real estate: What you need to know

If you opened this article expecting to read how crypto is going to solve the housing affordabili...

If you opened this article expecting to read how crypto is going to solve the housing affordability crisis, I have bad news. It won’t. Crypto is not a miracle to solve all problems, but it is one of the most impactful technology trends today.

Understanding how it can impact real estate is crucial for our industry.

As Wayne Gretzky said, “I skate to where the puck is going to be, not where it has been.”

Crypto and Web3 explained

As is the case with any new technology, you can expect a lot of new words and complicated explanations. Partly because it is based on cryptography, which is complicated. However, it’s also partly because when tech is new, it’s not all that well-defined.

Ask five people to tell you what Web3 is, and you’ll get five different answers!

– What is Web1? It’s reading your favourite newspaper on a website. Read-only.

– Web2? That’s Facebook, Twitter, LinkedIn, YouTube etc. Content is no longer centrally created. It’s created by the users but ownership stays with the platform. In other words, Read-Write.

– Web3 is the Read-Write-Own concept. It is decentralizing ownership of the platform itself. Web3 (blockchain, crypto) is the Internet owned by builders and users. Blockchain technology, smart contracts and tokenization allow for individual ownership.

The reason we started referring to it as Web3 is because this new technology resides on the Internet. It is not on an isolated server within a company. It is on a network of millions of computers.

Within this technological eco-system:

– Cryptocurrencies and non-fungible tokens (NFTs) are digital goods.

– Decentralized finance (DeFi) is the financial system.

– Layer 1 networks are what powers everything.

– Decentralized autonomous organizations (DAOs) govern everything.

– Smart contracts are self-executing contracts.

Cryptocurrencies and NFTs (non-fungible tokens), a.k.a. “digital goods”

NFTs are interesting for real estate. They represent a verifiable, portable and programmable digital property.

The “real world” version of NFT might look like this: You own a condo and proof is in your “wallet” on a blockchain (think of it as a global transaction ledger). Log into your “wallet” and proof of ownership is there.

With that you can:

– Take out a loan against your home equity, placing your NFT as a collateral.

– Grant access to your property to a tenant through programmable NFT.

– Automate bill payments for heating, utilities etc.

– Sell your property in an open market directly to another buyer with no intermediaries.

DeFi (Decentralized Finance)

DeFi allows you to loan, borrow, trade or transact directly without requiring centralized financial institutions in the middle.

1. Instant transactions. Next time you go to the bank to wire funds, take note of how much effort it is and how many people sign off and how long it takes to deliver the money around the world. The cryptocurrency of today can wire funds within minutes. No banks. No managers. It has its downside – if you send it to the wrong address, there is also no one to help you! That’s DeFi for you and it will impact real estate in how we transact with one another.

2. Borrowing. With DeFi, you can borrow against your assets on the blockchain instantly. No need for underwriting and long approval processes.

3. Investing. Many investments under securities laws are only allowed to accredited investors. There are high-net-worth and high-income criteria to  meet. A retail investor with $10,000 has fewer options (such as REITs and stocks). However, with blockchain/Web3, fractional small investments will be easy to manage.

DAO (decentralized autonomous organizations)

Web3 user ownership also promotes financial inclusion.

DAOs make people owners and democratic voters. DAOs do not have CEOs; instead they are governed by coded consensus mechanisms. In plain English – by voting and requiring multiple signatures to proceed.

In real estate, we will see the line between renters and owners blending. Renters will be able to own part of the DAO that owns the apartment rented. Instead of competitive advantage, the new way is about cooperative advantage.

This is like co-op models that already exist, but with new technology. New technology makes voting, buying, selling, borrowing etc. easier than ever and leaves immutable proof of transaction.

Web3 and consumers

There will be other impacts for consumers:

– You will own your online identity in a very tangible way, rather than just being a guest on several ‘free’ platforms. This means that if you choose to leave Facebook, for example, you could take your data with you.

– The value you create will transfer with you anywhere you go. Your contribution and reputation will be as good as real money that can be exchanged for goods, services or ownership.

– Instead of a centralized authority making the rules, it will be a community. There are downsides to this democratization of power. Jack Dorsey can’t de-platform you, but the majority vote still can.

– Some of the big players (Facebook, Apple) and some countries (China) are fighting against this.

Another advantage of blockchain is that it offers an immutable record to buyers and sellers. All records are held on a centralized database, which updates itself through cryptography. This makes them tamper-resistant so no one can fraudulently alter or delete data.

The use of blockchain in the real estate industry is still in its infancy, but it’s clear that it has a lot of potential.

This could mean that in the future, buying and selling property will become faster, cheaper and more secure. Rent-to-own models may become automated through DAOs. Automation and peer-to-peer transactions can reduce the costs of renting and ownership.

This will not fix the affordability crisis, but every little bit helps.

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