What is DeFi and How Does it Help in Real Estate Accounting

  • November 16, 2021
  • admin

Cryptocurrency and blockchain technology have taken the world by a storm recently, with being extremely lucrative and safe for use at the same time. However, it is decentralized finance, or DeFi, that has been at the forefront in the crypto-umbrella. Statista lists that the market for DeFi grew by approximately $100 million US in FY21, making it the dominant share in the overall market cap value of the crypto-world. However, what implications does blockchain technology or cryptocurrency have over the real estate industry?

Fact of the matter is, many industries have already begun to adopt blockchains as an integral part of their operation, and the real estate industry hasn’t fallen behind. Blockchain and DeFi technology are all set to transform the way properties – or real estate – are treated today.

Let’s take a long, hard look at what DeFi is and then discuss how it can potentially help the real estate industry.

What is Decentralized Finance?

Although a common consensus about where DeFi belongs is still under deliberations, it has been widely accepted that the applications and implements based on Ethereum can be termed as DeFi (Ethereum is a technological framework based on a decentralized network of blockchain on which users can exchange cryptocurrencies and develop applications). This makes DeFi an automated, autonomous administrator of cryptocurrency transactions governed by a thing called “Smart Contracts”, which are a set of programmed rules that DeFi works on.

This just means there are no humans involved anywhere in the architecture of DeFi. In simpler analogy, consider DeFi as an online, automated bank that carries out essential economic functions such as these on the blockchain framework:

  • Borrowing and lending
  • Insurance and derivates
  • Funding and trading

DeFi in Real Estate does carry a lot of weight in terms of clarity in transactions. Let’s see how significant DeFi technology is in the real estate industry.

Significance of Decentralized Finance in Real Estate Accounting

Property business requires transparency in transactions and efficiency, which DeFi has built into it by default. Some of the major accounting benefits relevant to real estate that DeFi tehnology brings into the industry are as follows:

Reduces Frauds

Blockchain security is absolute, irrefutable and cannot be fudged. Transactions happening over a blockchain framework are one of the most secure and impenetrable data sets on the planet right now. Properties are a matter of high consideration and bulk payments, which can be securely carried out over DeFi, without the threat of fraud or cyber-theft.

Reinforces Trust in Accounting

Blockchain works like the double-entry accounting method, wherein each transaction happening on it has its own timestamp and details stashed away into a decentralized, uneditable “block” that is tied to a chain of succeeding and preceding activity. This ensures that the data in a blockchain is verified, evidenced and secure, which enhances trust in accounting.

Additionally, no physical ledger needs to be maintained, making everything streamlined and more efficient.

Improves Traceability

Blockchain security and crumb trail are notorious for being absolutely transparent. Real estate is a business with a complex supply chain – it is difficult to trace property years down the line back to its ownership. Through decentralized finance, everything is stored on blockchains that have a distinct audit trail and can be traced easily.

A collection of such amazing benefits makes DeFi a great option for the real estate industry. Let’s see some of the popular applications of decentralized finance in the property business.

Tokenized Real Estate

Tokenization pertains to assigning a virtual token to an actual, investable real estate asset. Think of it this way: when you hold the virtual token to a real estate asset on DeFi, you actually possess ownership of the property that token represents. Bringing decentralized finance into the picture has merely worked to cut out the paperwork and facilitate simpler, more efficient and secure transactions over the blockchain.

Mortgages, Loans and Trading

DeFi in real estate is creating a disruptive revolution in the traditional mortgage system. Since blockchains are absolute, the loans you take out on DeFi platform can be released in mere seconds, rather than having to wait for weeks on end with a traditional banking institution. You can then use this loan to purchase tokenized properties on DeFi.

As the prices of real estate fluctuate, you can sell the fractional shares of your property when its prices rise to make some profit and use this money to pay off your mortgage – all of this over decentralized finance!

Conclusion

Blockchain technology has come to the world like a boon. Simplified security, efficient workflow and sturdy framework of blockchains allows real estate to cash in on its benefits by cutting out all the unnecessary paperwork, reducing times to possession and simplifying finances related to properties.