How to unlock new opportunities for DeFi in real estate
Decentralized processes and blockchain technologies have been a buzzy industry darling for years. To get a sense of their disruptive force beyond coins or non-fungible tokens (NFTs), look no further than decentralized finance (DeFi).
From peer-to-peer transactions to tokenization of assets, these innovations herald a real estate industry that is more liquid and more accessible, with seamless processes for DeFi mortgage and loan management.
In an industry that has historically lagged behind others when it comes to technology innovation, DeFi real estate solutions rewrite the rulebook of operations and redefine wealth creation and management for individuals and institutions alike.
So let’s take a look behind Door #1, shall we?
The lay of the land
In essence, DeFi aims to replace some aspects of traditional banking and financial intermediaries with blockchain-based protocols. For the real estate industry, that means new methods and more efficient processes for buying, selling, and investing in properties. This transformation enables the decentralization of real estate transactions and empowers individuals to engage with financial products and services more directly.
With the application of DeFi and blockchain tech, aspiring homeowners and investors alike can benefit from reduced costs and dismantled barriers, more transparency, and enhanced speed.
All of that paves the way to an entirely new landscape of real estate interactions and opportunities.
OK . . . but what does that look like?
That’s just the blueprint, though. Hammering into specific software development and use cases for DeFi in real estate reveals just how transformative this tech is within the sector.
For investors, perhaps the most dramatic prospect — thus far — lies in the tokenization of assets in real estate: Using DeFi solutions, a property can be divided into numerous tokens of fractional ownership, each encrypted with blockchain technology for better security and transparency.
This model makes it possible to trade and own smaller portions of a real estate asset, which in turn makes real estate investments and loans more accessible by reducing the typically high barrier of entry — and that matters when a typical down payment in the largest 50 US cities averages $62,000.
It also allows for enhanced liquidity as tokens can be freely traded on secondary marketplaces, where investors can purchase assets or securities from other investors.
And then there’s smart contracts, a technology that automates transactions and contractual obligations. These make transactions and ownership more seamless, requiring fewer intermediaries. Owners, renters, and realtors alike benefit from greater visibility into a property’s transaction and ownership history.
Smart contracts also improve transparency and trust by moving title research and government property taxes to a public chain. DeFi smart contracts can manage escrow, transfer property rights, and even service mortgage loans with minimal involvement in the need for lawyers, banks, or real estate brokers.
And by applying smart contracts, a technology that automates transactions and contractual obligations, to real estate, users gain greater visibility into ownership history, title research, and government property taxes.
Furthermore, DeFi enables peer-to-peer transactions, which eliminates the need for costly intermediaries (think brokers’ fees), and improves transaction speed, which can reduce the number of days until closing.
DeFi disruption vs. traditional approaches in real estate
Unlike conventional real estate investing, which often involves high capital requirements and limited supply and limited access, DeFi systems can enhance accessibility and therefore offer users greater access to the entire property transaction and management lifecycle.
Despite these advancements, DeFi still faces limitations, especially in the realm of industry regulations. As financial news headlines will tell you, DeFi compliance is murky across the board. Moreover, while blockchain-based solutions and app development increase security, that doesn’t mean that hacking risks will vanish or that there will never be bugs in smart contracts. For real estate platforms, that spells jeopardy to confidentiality and time-consuming hiccups in transaction processes.
While DeFi could help level the playing field in real estate, it also risks creating a new barrier between those with the requisite technical expertise and appetite for risk and those without it.
Current solutions to the challenges of DeFi in the real estate sector
There are undeniable hurdles in integrating DeFi into the real estate industry, including regulatory uncertainty, uneasiness about crypto as an asset class, and the complex learning curve of blockchain technology. However, effective real estate solutions are being developed to tackle these challenges.
Regulatory uncertainty in the real estate sector can be addressed over time as the laws governing blockchain and DeFi continue to evolve around the world. Entities like the Chamber of Digital Commerce and Global Digital Finance are pushing for a global regulatory framework for DeFi that provides clear legal guidelines and consumer protection in the context of real estate transactions.
The risk of app development mishaps, such as smart contract glitches or cyber attacks, is a significant concern in the real estate industry. Companies like OpenZeppelin offer audits and security services tailored for blockchain platforms in the real estate sector to address this. These services are essential to ensuring the robustness of smart contracts and fostering trust among real estate investors and development vendors alike.
As for the volatility of cryptocurrencies, this challenge can be mitigated with conditional access chains, which provide more stability than public chains. By limiting chain access only to those with a need to view and participate in a particular transaction, transparency in the real estate industry need not come at the cost of robust security and data protection.
Lastly, the complexity of blockchain-based protocols and DeFi projects presents an education barrier that could discourage new entrants in the real estate industry. But as education and awareness improve, more industry professionals and consumers will grow comfortable relying on DeFi for real estate transactions.
Success stories: DeFi and real estate apps and companies
The convergence of DeFi and real estate is being championed by pioneering apps, companies, and developers around the globe. Here are a few standout examples that have made significant strides in this arena and showcase novel approaches DeFi developers are taking to buy, sell, and invest in real estate:
RealT is a trailblazing real estate platform that facilitates real estate tokenization. It allows users to buy fractions of properties and earn rental income, making real estate investment more accessible and liquid.
Propy is a Silicon Valley proptech that leverages blockchain for robust security and “self-driving transactions for agents, home buyers, and sellers.” By using smart contracts, Propy automates transactions and ensures the entire homebuying experience is transparent, efficient, and less prone to human error.
RealBlocks, a technology platform based in New York, provides customers with blockchain-powered methods for investing in real estate. By utilizing tokenization, the firm enables investors to acquire fractional shares, which cuts back costs and improves liquidity.
How DeFi stacks up in real estate
From a developer's perspective, the DeFi architecture for real estate primarily hinges upon blockchain technology, smart contracts, token standards, and a layered protocol that makes mortgages, loans, and other real estate transactions easier.
- Blockchain technology: Most DeFi projects leverage Ethereum's level 1 blockchain due to its extensive support for smart contracts. Ethereum's open-source platform provides a foundational layer on which DeFi applications can be built, stored, and executed.
- Smart contracts: These are self-executing contracts with terms directly written into the code. They're central to automating real estate transactions in DeFi applications. Platforms like Solidity are popular for writing these contracts on the Ethereum network.
- Token standards: ERC-20 and ERC-721 are commonly used token standards in real estate DeFi. ERC-20 is used for fungible tokens, representing fractional ownership of assets. ERC-721, the standard for NFTs, is used to represent unique property assets.
- Decentralized exchanges (DEXs): These facilitate the trading of tokenized property and real estate assets. Uniswap and Sushiswap are popular DEXs used for trading ERC-20 tokens, enabling investors to buy and sell fractional real estate shares.
How we can help
We’re not strangers to leveraging emerging tech in real estate. Vention specializes in software development that leverages our pool of global engineering expertise and the latest emerging tech — including DeFi development, smart contracts, and API integrations — for real estate solutions custom-built to your business requirements.
No matter your need, our teams can equip you with services that prioritize security, accessibility, and usability, and lay the foundation for your continued growth.
- Technology consulting
- DeFi app development
- API and protocol integrations
Like any development in any industry, DeFi doesn’t come without challenges. Regulatory uncertainties and the need for wider technological literacy present serious future obstacles in the real estate industry, but as this technology continues to locate proper use cases in real estate, the promise of a more equalized, efficient, and transparent marketplace, mortgage and loan process, and ownership model becomes more tangible than ever.
And what unites DeFi and real estate becomes clearer, too: Decentralized or not, it all comes down to pushing the boundaries with technology.