I’ve come across many new projects recently stating the intention to “transform” a given industry through blockchain technology. These projects — regardless of what it proposes to do — often involve the creation of an online platform that requires the use of a native/new token. This has resulted in glut of altcoins. As of this summer, there are over 2000 cryptocurrencies available. Conducting transactions within a proprietary platform or “ecosystem” is the main (often only) use for most of these tokens. Some of them are also traded on exchanges.
Interestingly, blockchain technology does not require the use of cryptoassets in order to function. It is possible to use blockchain technology without tokens. The tokenization of value is just one of its possible applications. Given this, it can be difficult to understand why some projects create a unique token for what they propose to do. When ICO contributors buy such tokens what kind of value do they hold? Why don’t the startups develop platforms that accept existing cryptocurrencies, such as Bitcoin, NEO, ETH, Ripple, etc.?
To answer these questions, I’m going to first discuss some basics of blockchain technology. Then I will dive a bit deeper into its application in the real estate sector.
Blockchain Has Many Applications
When you hear of someone buying something with Bitcoin you can think of it essentially as a cash sale. The BItcoin is cash that has been converted to Bitcoin first. Unlike cash, however, there is no physical coin. Bitcoin is a digital asset. The blockchain assures it’s value, not a bank or government. Bitcoin transactions are executed and validated by a consensus of thousands of dispersed nodes in the blockchain network. These nodes essentially act as “witnesses” to the transaction.
However, Bitcoin is just one application of blockchain technology. It is a means of exchanging value. However, blockchain is not just a way of making financial exchanges. It can also be implemented for just about any kind of transaction, including all sorts of record-keeping (e.g. criminal records, voting records, intellectual property rights, trademarks, supply chain management, medical records, credit history and person data), as well as assuring contracts between one or more parties (smart contracts).
Real Estate and Blockchain
Blockchain technology has the potential to transform the real estate industry because of its various applications. For instance, startups are developing smart contracts that can complete sales, escrows, and property records (deeds) autonomously. The Blockchain validates smart contracts. Similar to a Bitcoin transaction, a consensus of nodes ensures smart contracts are executed according to specified terms.
In the context of real estate, a smart contract could be used to make a conditional offer to purchase a house. It can be programmed to hold a buyer’s deposit until some specified sale conditions are met, at which point it releases the funds to the seller. If the conditions are not met, the smart contract returns the funds to the buyer. Blockchain technology and smart contracts can also record the title or deed and send it to the appropriate public records.
Until now,real estate lawyers or notaries have done these holding and verification functions. However, smart contracts can now do them autonomously without the need for intermediaries.
An Example of a Blockchain Real Estate Startup
There are startups looking to use blockchain technology to “disrupt” the real estate market as described above. I recently came across Elements Estates (ELES). This project is targeting a specific segment of the real estate market know as “distressed assets.” Distressed assets are properties that are up for sale, sometimes at a low price, by a bank for reasons including bankruptcy or failure to pay a mortgage. In these cases, a loan or mortgage is no longer profitable so the financial institution seizes control of collateral assets. The complexity of purchasing distressed properties from banks means they are mainly accessible only to large scale institutional and wealthy private investors.
Elements Estates plans to disrupt this model by creating a hybrid real estate agency and quasi-AirBnB that sells and rents distressed properties. Unlike AirBnB, however, ELES is not based on the sharing economy concept. It plans to buy distressed properties via a private corporate fund. The Elements Estates online platform will then sell and rent them out using cryptocurrencies. The whitepaper explains how the project will start by targeting properties in South East Europe because there are a large number of distressed assets left in the wake of the 2008 financial crash.
Why use a Token?
The ELES token will be sod during an ICO. Thus, its first function is to raise funds for buying distressed properties. The properties will go on the market (for sale or rent) through the Element Estates platform where the ELES token is the only means of payment. The whitepaper describes how the project plans to manage the token supply to increase its value and make it a long-term source of capital for future property acquisition.
We can now understand why new blockchain startups are creating so many so-called utility tokens. Most of the time, they not necessary to the functioning of online platforms. The reason they exist is to raise funds during an ICO. The incentive for contributing is the promise that the value of the tokens increase as the project becomes successful. Thus, the purpose of most cryptocurrencies is not meeting technological needs. Instead, they are a like security investment.
Disclaimer: I do not own any ELES tokens and have not participated in the ELES ICO. This article is not intended as investment advice. Please do you own research and never risk funds you can’t afford to lose!