Algorand has a lot of real-world and potential use-cases, but one of the most interesting is in the real estate market. Let's explore three ways Algorand could disrupt the real estate industry.
1. Algorand as a currency
Starting with the basics, Algorand is essentially a currency. While many cryptocurrencies can boast of their speed and security relative to a normal wire transfer, they can’t all do it as fast and as cheap as Algorand can.
This efficiency gives Algorand the upper-hand at upending transactions of all kinds in our economy. But in particular, in the US profits drive widespread behavior in the real estate transaction market. The purchase and refinance market sees trillions of dollars shifted from bank to bank in a giant mortgage and vendor payout cycle.
If more of those funds can stay in investors’ hands, they will figure out a way to do it.
Algorand simplifies all of these cross-border investments and speeds up the process for domestic and international buyers. But the real gain is in the near-instant settlement. Every day that funds are borrowed and in transit, someone is paying interest on that money — or it’s being hedged against future movement in borrowing costs. When we are talking about trillions of dollars, moving multiple times, the exposure is significant.
The net gain in efficiencies from using Algorand as a transaction vehicle can be enormous for this reason.
2. NFTs on the Algorand blockchain
No, we don’t mean the latest CryptoKitties are going to impact the real estate market. But what if the deed to your home was a Non-Fungible Token (NFT)?
Right now, a title and escrow company is required for every home refinance and purchase transaction, and typical charges are between $800 - $2800 per transaction. It’s a huge sum that gets buried in the relative cost of the purchase.
But what does this money actually get a buyer? The main job for a title and escrow company is to ensure that the person selling the home actually has the ownership rights to refinance or sell the home. The title company will verify ownership and supply insurance for the lender and the owner, just in case they are wrong. In almost all cases, this insurance isn’t optional, adding yet another transaction cost to the process.
In contrast, the Algorand blockchain doesn’t have any issue with verification of ownership, as the protocols for verification are built right into the blockchain. When a title company makes a mistake, the insurance has to pay hundreds of thousands of dollars, adding additional cost to the base transaction. But because Algorand doesn’t fork, the NFT will never make a mistake about ownership. The efficiency potential keeps adding up.
Another major function of a title and escrow company is to act like the money police and sort out who gets what funds, leaving behind them a trail of paperwork scattered across databases to verify ownership.
When all is finally verified in our current real estate system, the lender wire transfers the money to the title company, and the lender places some of the funds in escrow. Some of the transaction amount may go to the prior lien holder or to pay off any other debts associated with the transaction. The lender keeps their fees and in turn pays out everyone else like the notary. Various filing fees and taxes are deducted. And the transaction comes to a laborious, days- or weeks-long end.
But if the deed to the property were easily verified via an NFT, a lot of time and fees lost could be saved. Some fees could be avoided outright, or paid out quicker with a smart contract.
While interest for a few days on a $300,000 mortgage might only be $32, multiply that by the 6 million loans being processed per year. Add in insurance, unnecessary middlemen, spent time — and the money lost in slippage is eye-opening.
On an interesting side note, what if the original builder of the home retained some royalties on the home when it was sold again?
3. Algorand as a base for DeFi
DeFi may have slowed, and it may no longer seem to be the hot new crypto fad that it was during the summer of 2020. But DeFi use-cases in the mortgage industry could be very disruptive and are still emerging.
Particularly using the Algorand blockchain, DeFi projects could be launched to secure funding for construction of a community through a real estate investment. Private loans via DeFi may then be used to secure financing, completely by-passing the current convoluted mortgage market. The DeFi market could charge a much lower rate of interest than a traditional bank, and this interest could be used to fund the community and eventually replace the staking income many Algo holders have become reliant on.
To sum up, Algorand has built-in efficiencies over the dollar as a cryptocurrency. With the ability to tokenize assets as NFTs on the blockchain, further efficiencies are introduced in verifying ownership and the speed, ease, and cost of smart contract transactions. Finally, the blockchain itself can become a vehicle for securing lending by having a leg-up on interest rates. This could in turn help the entire community of holders on the Algorand blockchain.
The old world of trudging, slow, and costly transactions in real estate may be ending soon. And Quicken Loans and SoFi might not be doing Super Bowl commercials when crypto takes over the marketplace.
— Monty Allen
for The Algo Post
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