Blockchain technology evolved in tandem with other advancements and trends in commercial and residential real estate like fractionalized investing and crowdfunding. Given the historically opaque, complex nature of real estate transactions and the growing demand for transparency and elimination of third parties, it makes sense that blockchain would eventually serve as a supportive technology for a variety of real estate transactions and other activities. In this post, we describe the origins of blockchain and explain how the technology has intertwined with real estate over time. From the invention of smart contracts to the first homes sold as NFTs, follow below for an abridged timeline of the shared history between blockchain and real estate.
How Blockchain Technology Supports the Real Estate Industry
If widely adopted, blockchain technology could transform the real estate industry by streamlining clunky, outdated processes, cutting down on fraud and eliminating third parties. Over the last five years, a growing number of property owners and buyers have expressed interest in blockchain. At the same time, real estate agents, brokers, lenders and other real estate professionals have explored dozens of different blockchain applications.
Though still more common when managing digital assets, blockchain has already made its way into the real estate industry. Today, investors can buy virtual plots of land in the metaverse, claim an NFT of their home or crowdfund a new commercial real estate development with cryptocurrency. Once on the very fringe, blockchain technology is now widely, consistently and seriously discussed across the mainstream real estate industry.
Blockchain and Real Estate in 2022 and Beyond
Through smart contracts that limit the need for third parties, blockchain technology enables a speedy peer-to-peer transaction process. Its distributed ledger technology provides security and immutability. Blockchain also supports fractional ownership — another growing trend in real estate investment. This opens the real estate market to investors who were previously unable to engage with it due to lack of funds, connections and/or experience.
By tokenizing real estate, property owners and developers make a once expensive, illiquid asset far easier to buy and sell. The system itself is also flexible. Users can achieve varying degrees of security and transparency by choosing between public, private and permissioned blockchains for their unique needs.
Pros and Cons of Blockchain Adoption in the Real Estate Industry
Advocates argue that blockchain technology could enable every type of real estate transaction in a secure, immutable way. From buying an entire property to collecting rent payments and from taking out a home loan to establishing partial ownership of a real estate asset, each transaction in the real estate sector could be recorded on blockchain. Of course, there are critics of managing property data in this manner.
Some express concern over privacy, anonymity and security. Others worry about the jobs that could be lost as buyers and sellers rely less on real estate companies. Still others point to how energy-intensive it can be to validate new blocks of data in a public blockchain. While some fears are well-founded, the benefits of blockchain as a supportive technology in the real estate industry cannot be overstated or ignored.
In a recent article for Forbes, Adam Redolfi sums up these benefits in a way that truly captures the technology’s impact on the real estate industry. Redolfi writes that blockchain technology provides the industry with “a system that increases trust and reduces real estate broker dependency, while improving cost efficiency, accelerating transfers of homes and, most importantly, opening up avenues for networking by creating a digital platform other services can tie into.” It also democratizes the industry by removing certain barriers to entry.
The Origins of Blockchain Technology
Blockchain and its modern-day applications could not exist as we know them today without earlier innovations like reusable Proof of Work, digital signatures and smart contracts. In this section, we explore the origins of blockchain technology to better understand its current and future applications in the real estate industry.
Merkle Describes Digital Signatures in the 1970s
Way back in 1979 – four years before the internet’s “official birthday” – Ralph Merkle created the Merkle tree for digital signatures. In his article “A timeline and history of blockchain technology” for Tech Target, Robert Sheldon notes that the Merkle tree is just one of many “technologies on which blockchain is based.” Sheldon writes that Merkle initially “described an approach to public key distribution and digital signatures called ‘tree authentication’” while crafting his doctorate thesis at Stanford University in the late 1970s.
Years later, Merkle finally patented the tree “as a method for providing digital signatures.” For those unfamiliar with digital signatures – which are key to the immutability of data stored on public blockchains – this resource from the cryptocurrency exchange platform Coinbase explains. The post notes that “digital signatures are a fundamental building block in blockchains, used mainly to authenticate transactions.” According to Coinbase, when blockchain users “submit transactions, they must prove to every node in the system that they are authorized to spend those funds, while preventing other users from spending them.” Digital signatures allow each node in the system to verify a transaction, thereby limiting the possibility of duplicate transactions, fraud or hacking.
David Chaum Invents Digital Cash in 1983
Digital cash or digital currency is any form of electronic payment that does not have an actual physical form. Cryptocurrencies like Bitcoin, Ethereum and Cardano are all digital currencies used today. However, the creator of Bitcoin and its supportive technology blockchain did not come up with digital cash. Seeking to anonymize and encrypt payments, David Chaum invented digital cash in 1983.
Chaum later founded his company DigiCash in 1989. According to Jake Frankenfield in a recent article for Investopedia, DigiCash was an “important predecessor of modern digital currencies” because of the “cryptographic protocols” Chaum developed for its transactions. Interestingly, Frankenfield notes that Chaum’s 1982 UC Berkeley doctoral dissertation “is considered to be a prototype of blockchain technology.”
Nick Szabo Proposes the First Smart Contract in the Early 1990s
Smart contracts were first proposed in the early 1990s by Nick Szabo – who later coined the term. According to IBM, smart contracts are “programs stored on a blockchain that run when predetermined conditions are met.” This type of self-executing contract is often used to automatically complete a transaction so that all involved parties “can be immediately certain of the outcome, without any intermediary’s involvement or time loss.”
These smart contracts can help streamline nearly any type of real estate deal as well as a number of other operations – from executing lease agreements and collecting rent to crowdfunding major developments. As Joe Liebkind writes in his article “How Blockchain Technology is Changing Real Estate” for Investopedia, “the introduction of smart contracts in blockchain platforms now allows assets like real estate to be tokenized and be traded like cryptocurrencies like bitcoin and ether.”
Cynthia Dwork and Moni Naor Invent Proof of Work in 1993, Hal Finney Introduces Reusable PoW in 2004
Originally coined by Markus Jakobsson and Ari Juels, Proof of Work or PoW was later invented by Moni Naor and Cynthia Dwork. They created this type of cryptographic proof to combat spam, hacking and other attacks. In the late 1990s, Adam Back built on this concept when he invented Hashcash — which he designed for a similar purpose. In 2004, American computer scientist Hal Finney came up with reusable PoW. According to Robert Sheldon in his article “A timeline and history of blockchain technology” for Tech Target, reusable PoW is “a mechanism for receiving a non-exchangeable — or non-fungible — hashcash token in return for an RSA-signed token.” As many readers of this post will already know, “the PoW approach plays a vital role in bitcoin mining.”
Public blockchains like Ethereum are now trying to transition from PoW to PoS. Proof of Stake was initially developed by Scott Nadal and Sunny King in 2012. At the time, Nadal and King pointed to the need for a less energy-intensive method of validating data on public blockchains. As we note in our post “What’s the Difference Between Public and Private Blockchains?,” researchers in the industry “believe transitioning from a Proof of Work to Proof of Stake validation structure would significantly reduce energy consumption by public blockchains.” While PoW uses competitive validation to add blocks of data, PoS randomly selects miners instead.
Blockchain and Real Estate: A Timeline
In this section of our post, we offer an abridged history of blockchain and real estate — beginning with the introduction of Bitcoin in 2008 and ending with the launch of our Blockchain Home Registry. Below are a few of the biggest moments in this shared history.
Satoshi Nakamoto Introduces Bitcoin and its Blockchain in 2009
In 2008, Satoshi Nakamoto – who some believe to be a pseudonym of Nick Szabo – published his white paper “Bitcoin: A Peer-to-Peer Electronic Cash System.” Later in 2009, blockchain evolved from a concept to reality as a supportive technology for the cryptocurrency Bitcoin. In the ensuing thirteen years, public, private, and permissioned blockchains have been used to support many different types of transactions – not just those conducted using cryptocurrencies like Bitcoin.
Groundfloor Emerges in 2013, Later Becomes the First Real Estate Microlending Platform with Regulatory Approval
In 2013, CEO Brian Dally and EVP Nick Bhargava founded the real estate investing platform Groundfloor. According to Rebecca Grant in an article for VentureBeat, Dally and Bhargava introduced the peer-to-peer microlending platform so “people of all wealth classes” could leverage the $3.5 trillion real estate market to pull themselves out of their “‘financial dessert.’” Like Lending Club and Prosper, Groundfloor helps regular people crowdfund real estate development projects without involving major financial institutions like banks.
Two years after its initial launch, Groundfloor became the first company in over half a decade to “achieve SEC qualification for peer-to-peer microlending.” According to a press release published by Businesswire, Groundlfoor was also the very first company to “ever qualify for real estate microlending.” An innovator in fractional investing, Groundfloor remains a leader in the alternative finance space.
Kevin McCoy Creates the First NFT in 2014
NFTs – short for “non-fungible tokens” – first became a cultural sensation in 2020 as they made waves across the art world. A year later, an apartment in Kyiv became the first property sold as an NFT. However, the first NFT was actually created by Kevin McCoy back in 2014. McCoy’s artwork “Quantum” – which was minted on the Namecoin blockchain over eight years ago – recently sold at auction for $1.4 million USD.
Ethereum Blockchain Goes Live in 2015
Several years after Bitcoin was first introduced, another blockchain platform called Ethereum went live in 2015. In the same year Ethereum launched, one of the first official DeFi — decentralized finance — projects started. The Maker Protocol is Ethereum’s oldest and longest lasting DeFi project. Founded by Charles Hoskinson, Vitalik Buterin, Gavin Wood, Anthony Di Lorio and Joseph Lubin, Ethereum now supports many real estate transactions and smart contracts in both the real world and the metaverse. In his article “Blockchain: A Very Short History Of Ethereum Everyone Should Read” for Forbes, Bernard Marr explains how Ethereum differs from Bitcoin.
First, Marr writes that “Bitcoin trades in cryptocurrency, while Ethereum offers several methods of exchange, including cryptocurrency (Ethereum’s is called Ether), smart contracts and the Ethereum Virtual Machine (EVM).” Unlike Bitcoin’s blockchain, Ethereum “allows both permissioned and permissionless transactions.” Marr identifies the key difference between Bitcoin and Ethereum as Ethereum’s ability to “trade more than just cryptocurrency.”
A National Government Registers Land Titles Via Blockchain for the First Time in 2016
One of the first major interactions between blockchain and real estate occurred in 2016 when the Republic of Georgia decided to register land titles on a private blockchain and later secure these titles through a public blockchain. In her article “The First Government To Secure Land Titles On The Bitcoin Blockchain Expands Project” for Forbes, Laura Shin notes that the Republic of Georgia contracted “bitcoin hardware and software firm Bitfury Group launched a project to register land titles via a private blockchain” in April 2016.
Less than a decade after Bitcoin was first introduced, the Republic of Georgia became the first national government to “use the bitcoin blockchain to secure and validate official actions.” According to Shin, Bitfury chose the bitcoin blockchain instead of a completely private blockchain for this project “because it is public, for purposes of transparency, and because it is the blockchain that would be most difficult to fraudulently alter.” Bitfury’s Republic of Georgia project signaled a previously unparalleled level of trust in public blockchains.
The World’s First Real Estate Transaction on Blockchain Occurs in 2017
According to the real estate transaction platform Propy, the world’s first real estate transaction enabled by blockchain technology was processed in 2017. The purchase of an apartment – and a piece of art housed in that apartment – in Kyiv, Ukraine was executed by Ethereum smart contracts. Owner Michael Arrington – who is the founder of both TechCrunch and Arrington XRP Capital – later sold the apartment as an NFT in 2021.
The First Major Real Estate Asset is Tokenized Through Ethereum in 2019
In 2019, the first major real estate asset – a crowdfunded condo in New York – was tokenized through the Ethereum blockchain. Writing for Pop Up City in her article “Blockchain-Based Crowdfunding: The Future of Property Development?,” Malina Mayer describes the project. According to Mayer, a “12 unit construction with 1,700 square feet units in the East Village…was crowdfunded [entirely] through blockchain tokenization” in late 2019.
Two local companies – Propellr and Fluidity – sold tokens to fund the property development. These tokens now “represent the condo unit’s debt and can be traded as private security.” A number of other tokenized real estate developments have followed this East Village condo project.
Decentraland Opens to the Public in 2020, Spurring Sales of Virtual Land Parcels as NFTs
Originally ideated in 2017, the Ethereum-based virtual world Decentraland officially launched in 2020. That same year, the first sales of virtual land parcels in the metaverse – represented by NFTs – occurred. Around this time, financial institutions began to explore blockchain solutions for home loan origination.
Blockchain Gains Wider Acceptance Across the Commercial Real Estate Sector in 2021
A year later, blockchain gained wider acceptance across the commercial real estate sector – both in the metaverse and in the real world. In 2021, certain real estate developers started accepting cryptocurrency for deposits. Around the same time, proptech company Aqarchain.io launched the first worldwide blockchain-powered real estate crowdfunding platform. According to a post from CoinCu News, Aqarchain.io’s project was also the “first global blockchain platform to offer fractional NFT for properties.”
2021 also saw established real estate investment companies participate more actively in the metaverse by launching REITs and funds. For example, Metaverse Property created the first metaverse real estate investment trust (REIT) called Metaspace Real Estate Investment Trust (MREIT) while Republic opened reservations for its MetaVerse Real Estate Investment Fund. Sale prices for land in the metaverse hit new highs. In November, Metaverse Group bought a virtual real estate plot in Decentraland for a record $2.4 million.
Financial Institutions Announce Crypto Mortgages as the First Single Family Homes Are as Sold as NFTs in 2022
Though the year is not yet half over, 2022 has seen some of the most exciting applications of blockchain technology in the real estate industry. In February, Barbados became the first sovereign state to develop its own diplomatic embassy within the metaverse. The country announced its plans to establish the first digital embassy in Decentraland last November. Both blockchain technology and cryptocurrency are becoming more mainstream in the real estate industry. A couple of months ago, lending companies like Milo announced the creation of crypto mortgage departments.
Writing for Fortune in his article “Crypto mortgage lenders are entering the hottest housing market ever,” Marco Quiroz-Gutierrez notes that this is yet another step away from traditional lending. While Quiroz-Gutierrez writes that other lenders like United Wholesale Mortgage “have also tried to blend their businesses with crypto,” Milo is the very “first crypto loan company [to offer] a 30-year mortgage.”
This year also marks the first single family homes sold as NFTs in the real world. In April, the team at Torii gave homeowners even more control over their property’s data when we introduced our Blockchain Home Registry. The Web3 real estate platform “allows homeowners to claim a verified NFT of a property they own – giving them access to a permanent, transferable historical record of their home.” Learn all about BHR here.
