Let’s be honest, homebuying is a long, difficult process with many steps, third parties, and expenses. One of the hallmarks of the process is the red tape that is found along the way. Obstacles like escrow, homeowners insurance, mortgage loan origination, and title insurance are all hurdles that must be bounded before closing the house. At Millennial Blockchain, we’re on a mission to change that, and we believe blockchain and smart contracts are at the core of the solution. But what are smart contracts and what are the examples of smart contracts improving the homebuying process?
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Blockchain? Smart Contracts?
For the uninitiated, you may be wondering what any of this means. What is a blockchain? What is a smart contract?
In simple terms, a blockchain is a ledger that is owned by users who put their information in it. Since no one person or organization owns the ledger, blockchains are also known as “decentralized ledger technology.” Within the ledger, all transactions are encrypted (or “hashed”) and stored using that transaction’s information as well as the information for the transaction before it. Each transaction forms a block, and since each transaction “borrows” the information from the one before it, these blocks form a chain. Because of this structure, blockchains are exceptionally secure; it’s technically possible to hack, but to infiltrate the blockchain, a bad actor would need to alter every block in the chain. Since there are potentially millions of transactions on the blockchain, hacking is impractical.
If you can imagine a contract that, once fulfilled, automatically executed itself, what you’re envisioning is a smart contract. Smart contracts allow people to exchange money, properties, shares, and other valuable assets in a transparent way while avoiding the services and charges that come with traditional paper contracts. The classic analogy is that smart contracts are like vending machines: when you “drop” the specified amount of cryptocurrency into the “machine” (IE, the account of the buyer), you, in turn, automatically receive the good you’re buying. Like traditional paper contracts, smart contracts also define the rules and penalties. Furthermore, since smart contracts are converted into computer codes, once the agreement is reached, it can’t be changed, which better allows for automation.
Smart contracts turn an asset into a digital token.
Examples of Smart Contracts Streamlining Homebuying
Real estate transactions face many rules and regulations. With this comes a seemingly endless pile of paperwork and legal hurdles. The benefit of turning to smart contracts is that they can compile all the required documents into a single database that all interested parties can easily access. When the home buying process is more transparent, attorney and agent fees can be greatly reduced.
Another function of blockchain and smart contracts is a process known as tokenization. In simplest terms, tokenization turns an asset (a house or property, for example) into a digital token that can be traded like a cryptocurrency. Additionally, tokenization can divide real estate assets into assets; the advantage of this is that small investors can trade bits and pieces of the property at a time, which decreases liability.
Third, experts believe that smart contracts can be applied to mortgage loan origination. The blockchain framework eliminates the need for third parties and intermediaries, which reduces extra expenses. Blockchain and smart contracts also bring with them increased speed; traditional contracts require a back-and-forth of negotiations—which can take weeks to complete—while the implementation of blockchain means this editing time can be reduced to seconds.
What Does a Smart Contract Look Like?
Like all computer programs, smart contracts are built on a series of logic gates. For example, let’s say we have two parties: a homebuyer (let’s name him Bob) and a home seller (let’s name her Sarah). If Bob wants to buy Sarah’s house and they form an agreement on a blockchain using a smart contract. In simplest terms, the smart contract may read something like:
WHEN Bob pays Sarah 5 Bitcoin, THEN Bob will receive ownership of the house.
In this scenario, both Bob and Sarah both get to avoid the fees that come with third-party companies like banks, lawyers, and brokers.
Welcome to Millennial Blockchain
Smart contracts are showing the promise of bringing unprecedented levels of transparency, efficiency, and speed for real estate transactions. They will also bring immutability, privacy, and security so homebuyers can trust that their investment is truly their own—in time, blockchain can also expedite the processes behind title searches. Millennial Blockchain is at the forefront of this homebuying revolution, so if you’re ready to see how smart contracts can make the home buying process better, contact us today!
