Much have been said about blockchain technology in recent years and how it is disrupting the real estate industry. While applications of blockchain in commercial real estate (CRE) may have benefits, we cannot ignore the fact that the technology also poses some challenges. These challenges are preventing it from being widely adopted by the industry and ultimately making a significant impact on the property market as a whole.
Some of these hurdles include:
- Operational complexity and lack of standardization: There may be many special-purpose blockchains created for a wide variety of applications. To gain widespread adoption, we believe technical standards will be needed to ensure similar technical implementations across industries, particularly in cases where multiple blockchains need to interact with each other. According to the Financial Times, SWIFT undertook an evaluation of banking transfers; this required the creation of 100,000 subledgers, which is not viable operationally.
- Lack of trust and conflicts: A blockchain database, like all databases, is only as good as its underlying data and business process. Failure to reach a consensus among counterparties because of business process or commercial conflicts could significantly slow or even halt blockchain’s adoption.
- Privacy concerns: Applying a distributed database to commercial transactions raises the question of whether organizations want to share information about counterparties. Similarly, the idea of “reputation management” could raise concerns about the ability to permanently impact reputations. Users will need to carefully weigh these factors.
- Slow speed and performance: A distributed database is inherently slower than a centralized one, raising the question of whether blockchain is appropriate for high-speed, high-volume applications. Although many blockchain variants promise to enhance performance, this remains a question for commercial applications. The blockchain design requires all participants to keep records of transaction and there are limited on how many transactions the computers can share and store in a specified time period. Bitcoin is estimated to be able to handle seven transactions each second.
By contrast, a firm such as Visa handles 50,000 transactions per second. While efforts to work through this involve adding new databases, the operational efficiencies of these still remain to be worked out.
However, these barriers are slowly falling in recent years.
Blockchain companies are working to overcome the various hurdles to adoption and there is considerable financial backing for this. Per CB Insights, just over $1.0 billion in venture capital was deployed in 2017 by investors in the blockchain space, representing 215 total deals. Total investing in the fourth quarter of 2017 was $392 million, nearly four times the $93 million invested in the fourth quarter of 2016.
In a recent report, Deloitte notes that some headway is being made in overcoming some of the hurdles:
- Operational Complexity: Major tech companies, including IBM and Microsoft, are developing platforms that are both easier to use and more cost effective. Blockchain complexity has led to a steep learning curve, making implementation difficult. Streamlining and clearing up processes would allow users to focus in the increased efficiencies gained by adopting blockchain instead of the complexity of the system.
- Collaboration and agreement: Collaboration among users is increasing as many entities, including regulatory bodies, are joining consortia globally to develop market-specific standards.
- Standardization: Efforts are underway to introduce standards for the different applications of blockchain. Implementation of standards would allow separate blockchains to work together, improving collaboration.
- Increasing speed: Firms such as Zilliqa are developing “sharding,” a process that helps improve speeds. Processing speeds have reportedly increased to 2,000 transactions per second.
The implementation of blockchain technology in the CRE space will increase as hurdles are addressed, although the impact on real estate markets will possibly lag slightly.
If blockchain and cryptocurrency are to gain traction, early adoption by large users — such as banks and insurers — will need to occur. Once the systems are in place, are verifiably secure and are shown to improve efficiencies, other users will most likely follow.
This article first appeared in Cushman & Wakefield’s Tech Disruptor series called Blockchain, Bitcoin and Real Estate.