How do smart contracts work in real estate?July 22, 2022 . Real-Estate Industry . 10 min read
As the name suggests, a smart contract in real estate is an electronic transaction protocol or digital program of a legal agreement. Simply speaking, the respective terms and conditions of a legal agreement are coded into this protocol with the help of an if/then algorithm where one action triggers another.
Similar to encryption, the content of the documents is hashed by the algorithm, creating a unique key. The unique key acts as an authentication mechanism that ensures there has been no tampering.
This essentially helps prevent fraud and offers more functionality such as automatic triggers. For example, it enables the automatic release of funds upon the successful addition of the correspondent land registration. However, unless this condition is met, the protocol does not allow for the payment transfer to take place. State governments are actively deploying smart contracts for a plethora of use cases such as degree and caste certificates, along with land records.
What are the benefits of using smart contracts in the real estate industry?
You might ask yourself why you should opt for smart contracts when normal legal contracts have been working well for so many years. You need to know that smart contracts are one of the greatest innovations in Blockchain technology and offer countless benefits. Some of them are listed below. Keep reading to know more.
Transparency is one of the primary advantages of using smart contracts. The data of your legal agreement is immutable, thus altering or deleting it after its creation is out of the question. Besides this, the data is visible to all the participants involved. The crowd control feature enables it to be stored on a network of decentralised computers and devices, which are called blockchain nodes. Moreover, all the participants can view the complete transaction history which ensures total transparency and avoids any confusion.
Faster transaction speed in smart contract
We know that normally, real estate agreements are very time-consuming. The finalization of transactions might take a significant amount of time ranging from a few weeks to even years. However, you can eliminate this issue with the help of smart contracts. Replace all the heel-dragging and red tape with a safe, well thought and precise computerized process. The automatic transaction makes the entire process easy for both homebuyers and even investors.
Fractional ownership is a system where multiple investors pool funds to buy a property. This is one of the most important aspects of the real estate business. Fractionalization has many advantages. For instance, it makes access to the asset simple, reduces the investment barriers, helps to diversify the portfolio of the investors, and many more.
Smart contracts help in fractionalization as any property or asset can be divided into several portions which can then be traded individually. Moreover, it does not have a limit on the number of investors who can participate in the purchase process.
Better real estate liquidity
The real estate business is known to be illiquid due to multiple reasons such as time-consuming transactions, higher transaction costs, higher hold periods, complicated outreach, and so on.
Incorporating smart contracts can considerably boost the liquidity of assets as the transaction process would not take many months to finish, fractionalization will help in the trading mechanism and the asset will be available globally. Therefore, it is safe to say that placing bets on smart contracts is indeed a smart choice.
More security and protection in smart contract
Most entrepreneurs are incorporating this blockchain-based technology due to its high-security features. The crowd control feature, which has already been discussed earlier, comes with the dual aspect of decentralization and data encryption, thus strengthening security. This lowers the risk of fraud and is evidently a safer choice than traditional legal agreements.
However, this does not imply that your smart contract is entirely immune to cybercrimes such as hacking. However, if you get hold of an experienced IT professional who can perform tasks such as security audits, vulnerability scanners, penetration tests, and so on, you can be assured that there is no chance of any cybercrime taking place.
In the traditional legal agreement system, there is a high chance that the papers are damaged, lost, or stolen. Thus, it is better to entrust your important documents to a safe digital space where there are no possibilities of a breach. Moreover, smart contracts are also economical and environmentally friendly unlike the former. Thus, you are not only saving on money but also contributing to a worthy cause.
Smart contracts were introduced in the real estate industry many years ago. It has become a powerful and useful tool that has sped up draconian manual document verification and processes. It has countless advantages ranging from better transparency in communication and transaction time, reduced cost, and greater security. As per the records of the Blockchain market globally, smart contracts have revolutionized this industry.
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