III. Towards autonomous real estate management
This part concerns blockchain’s potential to manage real estate assets. Real estate management consists mostly of working out the “business model” of tangible assets. In order to do so, real estate managers have a wide range of activities that need to be taken into account:
Defining a leasing strategy
Optimizing tenants mix
Hold — sell analysis
Negotiation & documentation of lease contracts
Selection & management of local service providers…
A lot of different actors are involved in the process: tenants, renters, a large range of services providers from cleaning to cooling systems’ maintenance… Possibilities brought by technological advances are large: new open source protocols will be available, bringing on top of them decentralized services.
Though, one of the biggest pain points for real estate asset managers is the siloed data between different actors and the time spent in doing due diligence and manual researches. Blockchain opens a new way towards unsiloing data, helping, therefore, asset managers. Also, it opens a path towards considering data as profit-generating and modifying revenue and costs structure.
Open source protocols are completely decentralized and made to be accessible by anyone. As protocols, they enable building on top decentralized applications, which are more user-oriented. Many protocols came up in the blockchain sphere and not all of them are relevant for real estate sector. Thus, we’ll focus here on two data focused protocols with potential impact on real estate.
As of today, there are no data standards for location. Geospatial applications, such as Pokemon Go, rely on centralized systems for now. However, centralization is bringing along several drawbacks: Pokemon-Go game is easily manipulable. Fake locations can be inserted in the map, leading to frauds and even players’ physical aggression.
Location: New York, United States
Founders: Katya Zavyalova, Kristoffer Josefsson, Ryan John King
Financing: $16 Mio
FOAM is a not-for-profit organization founded in 2015 in New York. FOAM creates an open source decentralized protocol allowing an interoperable location standard and geospatial applications. FOAM positions as a middle layer between Ethereum blockchain and developers’ building decentralized applications that require a “Proof of Location”.
FOAM has three components:
- Crypto Spatial Coordinate: an equivalent of the GPS coordinate
- Spatial Index and visualizer: an open source protocol for dapp developers, built on Open Street Map
- Proof of Location: static (rewarding system enabling map curation) and dynamic (bilateral communication instead of a one side GPS signal, a Low Power Ride Area Network based on LORa and consensus). In this mode, both agents send location “claims”.
Verification is done by “zone hackers” ie owners of LORa nodes. Their contribution to the map curation is incentivized by a crypto reward, coming in FOAM tokens. These tokens are used to do deposits, to send location claims and also to reward curators and zone hackers. The use of blockchain technology allows a decentralized, open, and trustless system.
Its decentralized nature makes it more robust and resistant to fraud than a centralized system. Dynamic proof of location is a huge innovation that could give valuable insights on things that move around or in a building, with exactitude. Though, reaching a critical mass of nodes in the network is crucial to enable the dynamic standard proof of location.
Another issue is that Real Estate stakeholders own data related to physical assets, but:
there is no data standard, neither global nor regional
there are privacy concerns on how to share data
data is seen as the new oil ie data owners want to keep it
These three factors disincentivize data sharing amid the real estate industry’s actors. Meanwhile, nascent startups are building complex artificial Intelligence powered models with a very limited amount of data, sometimes of bad quality. Building Information Modeling enables predicting behaviors and lifetime of buildings based on environmental, building related, construction and maintenance data. Though, without data, the accuracy and usability of Artificial Intelligence are limited. As of today, Building Information Modelling is underused due to no incentivization to share their data.
From this perspective, blockchain technology can incentivize data owners to share it by implementing a transactional layer. First of all, decentralization offers the possibility of guaranteeing data privacy by controlling access over a decentralized network. The second is the crypto-reward ie economical incentivization to share data.
Founders: Bruce Pon, Chirdeep Singh Chhabra, Daryl Arnold, Dimitri de Jonghe, Donald Gossen, Trent McConaghy
Financing: $44,2 Mio (mix of traditional equity funding and Initial Coin Offering fundraising)
Ocean Protocol is a not-for-profit foundation based in Singapore, building a decentralized protocol enabling sharing and monetization of data. The original motivations behind Ocean Protocol Motivation are privacy issues around data and also its heaviness.
The protocol is open source and accessible by anyone. Specific data marketplaces can be built on top of Ocean Protocol. Alongside the protocol, DEX is the reference decentralized marketplace built on Ocean Protocol. DEX is also open source and its code can be reused for other marketplaces. A multitude of data marketplaces can be plugged on top of the open source protocol.
Ocean Protocol Value Proposition is to enable data marketplaces advent by:
1) creating a global common format for data
2) giving token rewards, users have a monetary incentive to share their data and curate marketplaces
In early 2018, Ocean Protocol raised $22 million with a token sale. For this token sale, investors had a vesting period of 6 months, starting from Network Launch Token Distribution date, which will occur in Q1 2019. The vesting period tends to discourage investors only searching for (ultra) short-term profits.
Since the token pre-launch, Ocean has been focused on bringing together a top-notch team and building the Protocol, for which the V0.1 Testnet (Plankton) was released in mid-August. The next version of the Testnet (Trilobite) will be released in November 2018, with the Network Launch version (Tethys) scheduled for the end of Q1 2019. Ocean is also heavily focused on building a healthy and sustainable community and will be shortly announcing a comprehensive ambassador program as well as a bounty program.
Data forces should shift, bringing power to the edge by enabling real estate professionals to share the data they own and monetize it. Considering the growing number of connected device and data collecting sources, revenues and costs related to a building should be impacted.
Nevertheless, the success of these protocols is correlated with several aspects:
The user-friendliness and usability of the protocol, from a developer and/or business stakeholder perspective
The quantity and quality of applications built on top of these protocols.
They will thrive once they reached a critical mass of users. One of their biggest challenges will be to convert traditional real estate traditional stakeholders to adopt these new tools.
Decentralized service providers
Managing real estate assets involves relying on external suppliers and service providers. On top of these protocols, decentralized applications are built, bringing in a range of new type of suppliers. These decentralized application providers can be more efficient and cost-effective than the ones used currently ones. I’m not trying to be exhaustive here but rather highlight some of them. I also classified them through their degree of readiness to market.
Decentralized communication providers:
Replacing smart locks systems with decentralized systems brings more security as long as there is no central part which can act as a point of failure. At the same time control of accesses can be managed in a decentralized manner. Last but not least, these systems don’t rely on the internet to work. Decentralized communication schemes are also relevant within the construction, maintenance, and supply chain areas. Yptokey and Slock-it are two companies based in Germany, providing the software services.
Decentralized exchange of energy:
As of today, the proportion of renewable energy in Europe on the total energy consumed represents 17% and in 2020, 20% is expected. Over the last years, a growing number of energy “prosumers” are producing energy through photovoltaic panels, biomasses or wind turbines and consuming it meanwhile. Communities of prosumers are connected to a smart grid and blockchain acts as a transaction layer when exchanging energy. In the US, the project Brooklyn Microgrid was the first prototype successfully implemented by LO3 Energy. Brooklyn Microgrid is a community dedicated to decentralized energy production and exchange. Microgrid offer surplus producers to exchange it directly with their neighbors. The community consumes locally produced energy, reducing wastes due to transport and storage. In Europe, LO3 Energy is implementing a Proof of Concept in partnership with a German utility: a microgrid project in Allgau. 5 participants are connected to the grid and able to exchange energy.
Example: LO3 Energy
Decentralized reputation networks:
China is currently working on a social-rating system for its citizens, which should be the pillar for further financial, housing services. However, by attributing full power to the Chinese government, the risk of huge biases is huge. Our current reputation systems, such as Airbnb scoring, are actually easily corruptible and not reliable enough to peg services. Moreover, they’re not interoperable from a service to another ie your Airbnb rating cannot be used as a proof of trust for your drive sharing app.
Here again, decentralization is enforcing the overall reliability of a reputational system because users keep control of their data ie who has access to what. Also, it enables interoperability between different reputation systems.
At the end of the day, on top of having a robust reputation system to choose your occupants or landlord, there is a possibility of alleging all kind of services — mortgage, loans — based on reputational scoring.
Some of these applications are already operational and industrial (Slock-it), others Proof of Concept stage (LO3 Energy) and others still in the conception phase (Ontology, Reputation network). Timing depends on the level of complexity.
Decentralized Autonomous Organisations
The same way Wikipedia disrupted knowledge industry, the open source brought a new dimension to software development. However, due to their decentralized nature, open source projects lack governance structure and may face predictability issues. If blockchain as a distributed ledger technology is a technological innovation, a Decentralized Autonomous Organizations is an organizational innovation representing a paradigm shift in terms of organizational management. Decentralized Autonomous Organisation is bringing now a new form of open source decentralized management with machine consensus mechanisms.
“Instead of a hierarchical structure managed by a set of humans interacting in person and controlling property via the legal system, a decentralized organization involves a set of humans interacting with each other according to a protocol specified in the code, and enforced on the blockchain. “
Vitalik Buterin, co-founder of Ethereum
A Decentralized Autonomous Organization doesn’t rely on any central party. The organization runs through rules encoded as computer programs called smart contracts. A DAO has a new approach towards ownership, governance, and control to various stakeholders. In theory, the security, transparency, and fluidity brought in by the technology makes the organization resistant to opportunism and eliminates information asymmetry. Also, they don’t require much human coordination to operate and therefore incurs very few employees’ spending.
Practically speaking, its open source aspect makes it fragile to misbehaviors due to the economic incentive underlying. Back in 2016, the first DAO project, aimed at being a decentralized venture capital fund gathered $150 million in Ethereum, form 11 000 investors. This settled the record of the biggest crowdfunding campaign of history. Few months after, the DAO was hacked and robbed due to a code failure.
Applied to real estate, a decentralized autonomous organization could theoretically be able to manage a range of real estate tangible assets. Members of the DAO as early investors own tokens, which act as proof of ownership. They are able to take part in decisions (assets, tenants, suppliers)… by staking these tokens. On the long-term, members of the DAO receive a return on investment accordingly to real estate portfolio performances. These return on investment are released automatically to token holders.
A first Real estate x DAO project emerged in Singapore in 2016. As of today, the company is focusing on a first project: community investment for holiday properties villas.
REI DAO — CrowdVilla
Founded in July 2016
Located in Singapore
Funding: $25 Mio
Founders: NEO Kok Beng, Darvin Kurniawan, David Chandra, Hendrik Tanjaya Tan
REI DAO started in 2016, with the aim of being a decentralized autonomous organization managing real estate assets on a decentralized basis. As of today, the company REI DAO is focusing on Crowdvilla project. Crowdvilla is held under a not-for-profit organization based and regulated in Singapore.
Crowd Villa is a community-based sharing model for holiday villas. Crowd Villa tokens sale (CRV), which started in August 2018, gathered $25 Mio. Token holders, investors who hold tokens from the sale, can use them to buy nights at holiday properties. Besides that, holiday villas can be sold to corporates or to the broad public.
Two different tokens are used to run the system:
1/ the CRV token given out of the token sale, representing stake in the community
2/ the CROWD, a utility token used to book nights in the different holidays properties.
CRV tokens are generating CROWD (Crowdpoint) tokens periodically. On the MVP of the booking platform, 1 night in a holidays property worths 1CROWD.
Crowdvilla Alpha booking platform is expected for the second semester of 2019. Crowdvilla is planning to do community shared holidays villas in Japan, China, Hong Kong, South Korea, Australia, United States, France, Spain, Switzerland, United Kingdom, Thailand.
The community sharing based model for holiday villas will be ready to the market beginning of 2019. As testimonies REI DAO initial project then pivot, real estate may not be mature yet to accept the idea of a fully decentralized organization. DAO. So far, there is no regulation for Decentralized Autonomous Organisations, as long as there is no central party, able to endorse risks and liabilities for the organization.
The idea of an autonomous, transparent and fair organization, completely fraud resistant is appealing, especially when activities are subject to moral hazard and behavioral uncertainty. Conversely to hierarchical organizations, the marginal cost of organizing for a DAO is near 0, which gives them huge growth possibilities. Some projects are dedicatedly working on governance for DAO (Aragon, Colony, Covee). While the number of new business created globally is on the decrease, the second half of 2018 was a peak period in terms of emerging tokenized models offering tokens to investors.
Decentralized protocols are bringing new solutions to real estate data management. Using these protocols will reduce asymmetric information and also enable interoperability. These protocols main challenge is to onboard actors developing on top applications.
On top of these protocols, decentralized service providers will offer alternative decentralized services to manage real estate assets, such as decentralized communication, supply chain tracking… The maturity of these applications depends on the complexity and decentralization level.
Endly, Decentralized Autonomous Organisations will outperform traditional organizations regarding scalability, behavioral incentivization, and tailor-made governance models. They question the legitimacy of traditional hierarchies when technology is offering so many potentialities. Though, their readiness to market is still unforeseeable, due to a regulatory gap.