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Ep 29: Balcony - Revolutionizing & Tokenizing Real Estate
107 Plays6 months ago
John Belitsky, Co-founder and Chief Innovation & Strategy Officer at Balcony sheds light on how they’re leveraging blockchain technology for greater transparency and efficiency in real estate, offering a glimpse into the innovative solutions reshaping the industry.
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Transcript
Introduction to OWL Explains Hootenanny
00:00:06
Speaker
Hello and welcome to this OWL Explains Hootenanny, our podcast series where you can wise up on blockchain and web3 as we talk to the people seeking to build a better internet. OWL Explains is powered by Avalabs, a blockchain software company and participant in the avalanche ecosystem. My name is Silvia Sanchez, project manager of OWL Explains and with that I'll hand it over to today's amazing speakers.
Real Estate Tokenization Discussion by John Balitsky
00:00:33
Speaker
Hi everybody, today we're diving into the world of real estate tokenization and blockchain architecture with the brilliant minds behind Balcony. We are joined by John Balitsky, co-founder and chief innovation and strategy officer who created Balcony's digital architecture and is regarded as a pioneer in the real world asset space.
00:00:52
Speaker
His work is focused on leveraging distributed ledger technology to maximize transparency and efficiency while minimizing trust, particularly within government and real estate applications. So, John, thank you so much for being here. To get started, could you provide an overview of Balcony and its mission in revolutionizing the real estate landscape? Absolutely. Thank you for having me. Balcony is focused entirely on tokenizing real estate. And initially,
00:01:21
Speaker
that was a project that was focused on fractionalization and the second and third order effects of tokenization, but has really become a mission to bring all of the data relative to real estate on chain. And to do this in particular with the focus on governments, which was a really important genesis of the project. It's when we realized, you know, the bottleneck here, the actual driver of inefficiencies in the space
00:01:51
Speaker
isn't the market, which is frankly very efficient. It's really how these records interact with governments and private markets to settle transactions and to actually move real estate digitally. That's amazing. Thank you so much. And following that thought, could you explain the concept of tokenization of assets specifically and how it applies to real estate with Balcony's RE-NFT protocol?
Balcony's NFT-Based Tokenization Approach
00:02:16
Speaker
Sure. I think people generally think of tokenization as fractionalization. And so it's really important to disambiguate between tokenization and fractionalization. Tokenization is the input that allows for fractionalization to happen. And it's got a lot of different flavors. There's a lot of different approaches to it. But ours is fairly unique. Our approach to tokenization is to bring the capital asset, the real estate, on-chain as an NFT, and then enrich that NFT
00:02:46
Speaker
with all the metadata that describes it, while interoperably interacting with the governments that validate that data, that settle and record transactions on chain, inclusive of the entire real estate ecosystem. So title insurance and mortgage brokers, lenders.
00:03:04
Speaker
investors, LPs, GPs, et cetera. Great. Thank you so much. And what advantages does the tokenization of data offer in the real estate industry? And how does Balcony leverage this technology? Could you elaborate on the process of tokenizing real estate assets and the benefits it offers to property owners and to investors? Yeah, there's this very strange thing that happens with data. It sort of appears places.
00:03:30
Speaker
And we have no idea how it got there. And this is fundamentally why it takes so long to record transactions and why it's so difficult for governments to do this efficiently. It's why settlement might take 90 days or more sometimes. And so what we've done is we've not just created a place for data to live and just created a new wrapper for data in an NFT. Instead, what we've done is we've created provenance for the data itself.
00:03:57
Speaker
And so as this data is created and migrated on chain and attached to this NFT, we've created provenance at every single step in that passage. This is hugely, hugely, hugely beneficial because if, for example, you are a property owner and you have a tax bill, you can now inspect that tax bill and understand every single person that interacted with it.
00:04:23
Speaker
You have a timestamp for when it happened. You have a wallet associated with the individual users that added to, manipulated, or redacted that data, and a version control that demonstrates how that data has changed through time and by whom.
00:04:39
Speaker
And so when we have this validated data, it allows for much greater speed in execution. It also allows for this data to be standardized, which makes it interoperable, which is hugely, hugely beneficial for governments because governments are taking very different data sets in very different formats and moving them around, which takes quite a bit of time.
Using Avalanche for Blockchain Management
00:05:02
Speaker
And so we've shortened that throughput time substantially by making all of this data
00:05:07
Speaker
standardized, interoperable, on-chain, and validated, which benefits both the government and citizens in the private markets, frankly, that are interacting with it. That's great. I love what you mentioned about interoperability because that is definitely a huge aspect on
00:05:23
Speaker
on the blockchain ecosystem in general. You can have a great project, but how does it translate to the ecosystem itself? Specifically, I wanted to ask you how does Balcony utilize the Avalanche subnet in its architecture? Why is it integral to the project? The subnet is absolutely critical to what we do. Fundamentally,
00:05:42
Speaker
Real estate has tremendous amounts of data. And if you create any system on any chain where that data is expensive to upload or download to interact with, you're effectively taxing data. And a tax on data creates less data, creates less transparency. And so the first thing that the subnet allows us to do
00:06:04
Speaker
is manage our costs of interacting with the blockchain, which is this incredibly important technology that creates a single source of truth.
00:06:13
Speaker
And so with the subnet, we've been able to fine tune the cost of changing state on chain so that it's thousands, thousands of a fraction of the cost that it would be if it were on most of these public blockchains. And then the second really important thing that the subnet allows us to do is control who gets to change state. And so real estate is inherently a centralized asset class.
00:06:43
Speaker
The idea that real estate should operate in a decentralized manner is kind of ridiculous. It just doesn't make sense. Every piece of real estate lives in exactly one location. The owners of the real estate are disclosed to the jurisdiction where it exists. The ability to censor real estate exists insofar as there's a jurisdiction or a government that's willing to do it. And there's no amount of decentralization that's ever going to change that.
00:07:08
Speaker
And so the idea of using a purely decentralized public blockchain as the infrastructure to manage this data really just doesn't follow, given this asset class. Instead, what we have is the problem of who does own this? We don't want anonymous actors coming in, manipulating data, changing state. We want to know every single person who touches this data. And the federated blockchain that we've developed allows us to identify, select, and partner with node operators
00:07:37
Speaker
that are critical to this infrastructure. So that's governments, that's institutions. And this allows us to really ensure all the data that's being manipulated and changed has a provenance that we can trace all the way back to its source. We don't have any potential malicious actors that are happening upon this chain, manipulating data and wreaking havoc.
00:08:02
Speaker
every single person and every single entity involved with forming these blocks and validating this data are disclosed to us and we can control that environment, which is absolutely critical. For sure. And I definitely hear on that and that aspect of
00:08:18
Speaker
Who gets to change the data? Or in fact, who doesn't get to change the data? That is definitely huge. And in fact, I wanted to ask you particularly, what challenges have you encountered when bringing this metadata on chain?
Challenges in Data Processing and Validation
00:08:32
Speaker
How does balcony address these issues that might come up when doing so? Yeah. So fundamentally, the provenance of data is only as good as the processing of the data that you're providing. And so we had to find a way to bring a massive amounts of data and b, validate that data.
00:08:49
Speaker
in real time, bring it on chain and make sure that that data can be relied upon. I don't want to use the word trusted because I think we're inherently building trust less, not trustless, but trust less systems. And so the goal is for this data to be relied upon to a higher degree than the existing data. And that's not easy. The first problem is the blockchain is not a database.
00:09:12
Speaker
Blockchain is not MySQL. It's not Postgres. The database is designed to hold a very small finite amount of data. And so it is not a place where all this data lives. This data has to live elsewhere. It has to be interrogated, authenticated, and validated. And then those proofs of validation and interrogation are then brought on chain and hashed to our subnet.
00:09:43
Speaker
And so that architecture allows us to do this in a way where you can trace back this data to its source, trace back this data to its location. Without that, we're left with
00:09:54
Speaker
this sort of parallel tracks approach where we have stuff on the blockchain that doesn't really describe an asset and some sort of representation of that asset that's also on the blockchain that's pointing loosely, if at all, to real world assets that really have no relationship to this metadata that's provable. And so this was our approach, right? By iterating back through the provenance of the data itself
00:10:21
Speaker
taking that data, authenticating it, hashing it, pushing it through our algorithms, then recursively validating that data with attestations from all the parties involved in those transactions, we're able to create a much higher degree of granular atomized veracity of this data. We can interrogate this data better, which is kind of the best you could hope for. If you're an investor, you probably have had this exact problem, right? You get an offering memorandum. You see a whole bunch of data.
00:10:51
Speaker
and the data that's presented to you adds up to the yields that's being suggested. But where does this data come from?
00:10:59
Speaker
How do you know that the data and the assumptions are accurate? Is it going to change? And so this solves those problems, but on a global real estate scale. All of the inputs, all of the metadata can be indexed and scored so that we can determine the likelihood of its truth or its truthiness. That's super important, especially when it comes to what you mentioned. I wanted to focus on that. The provenance of data is only as good as the processing because definitely some things can
00:11:28
Speaker
can get lost in the way and it shouldn't be that way because definitely tracing back the data to its source to the location I think that also gives you more more as you mentioned like not just the trust but reliability both as a user within that within that whole in the whole ecosystem and
00:11:46
Speaker
I know that you mentioned earlier that Balcony is collaborating with governments, so I wanted to touch base on this point specifically.
Collaborations with New Jersey Government
00:11:53
Speaker
In what capacity is Balcony collaborating with governments at the local, state, and federal levels? What could you tell us about that?
00:12:01
Speaker
Yeah, so we're working with very many government entities at the moment. I can only tell you about a few at this exact juncture, but we now have contracts in the state of New Jersey, the first ever, to bring this data on chain, to tokenize it and bring these systems to bear so that going forward, this data can be validated and it could follow the procedures that I was just discussing.
00:12:24
Speaker
But for municipalities, they have a really interesting problem. If you're a local municipality, your interaction with the county is pretty frustrating. You have different data sets, you care about different things, which is obvious, right? A municipality might be focused, for example, on zoning, whereas a county would not be necessarily, at least in New Jersey.
00:12:46
Speaker
And so the data sets and the processes and the workflows that they use are dissimilar, but then they have to have some sort of an accord, some sort of consensus over who owns this property, what's the size of it, what are the taxes, and so on and so forth.
00:13:01
Speaker
fragmented multiple steps involved with dissimilar information, dissimilar data sets, schemas that are not standardized, that are moving in between local county and state agencies. And so what we've been able to do is standardize that data.
00:13:19
Speaker
and demonstrate bespoke workflows for both municipal, county, and state agencies so that they can use this data in a way that services their individual goals but still is interoperable and allows for greater sharing and interoperability of data across these different forms of government and these different governments and agencies.
00:13:39
Speaker
Great, thank you for that. And I know that there's not a lot of specific details, so I won't get into that. But thank you for painting that picture on that. And since we're talking about real estate, what types of real estate assets are most suitable for tokenization, if there are any that you would think that are more suitable for tokenization than others? And are there any limitations to the types of properties that can be tokenized? No, there's no limitation. So my worldview, how I approached our architecture, it actually happened during COVID.
00:14:09
Speaker
I started writing this program called The World, and the world was if you had to take an object-oriented programming view of the entire world and you wanted to categorize every single thing that exists in the world, how would you do it? And it just became this exercise that I was playing with when everything was locked down. And what I landed on is this sort of grammatization of assets, meaning an asset becomes a noun,
00:14:36
Speaker
All the things that describe it are adjectives. To the extent that there is a discernible noun, a specific asset that exists, anything that describes it can be brought to it. And when you start there, then it becomes a question of, OK, what needs to be true for that type of a system to exist, to function, and to be efficient? And so we had to create a way to catalog every single asset, regardless of asset type.
00:15:05
Speaker
bring that asset into the highest order NFT, and then begin to build all of these sort of adject groups, these sets of different descriptors into it in a way where anybody anywhere can start to look at this asset and understand all of its composite parts. And so this process can be applied to any noun, to any asset. And there isn't really a, not even really, there is not a real estate asset class.
00:15:33
Speaker
that frustrates that process. If it exists, if it's land, minerals, if it's improved real estate, raw land, whatever the case may be, it has these descriptors that describe it. And we have a system that has tokenized all of these assets and created an index for them.
00:15:52
Speaker
so that we can describe them perfectly. Got it, got it. Thank you on that. Thank you for that. And can you discuss any future developments or upcoming features planned for the balcony platform?
Blockchain Solutions for Vacant Properties
00:16:02
Speaker
I know you mentioned something that is coming up this May, so what would you like to share with our audience?
00:16:08
Speaker
Well, this may, we're pretty excited. We are rolling out a particular module in a city in New Jersey, which we're really excited about, and it really addresses the most vulnerable aspect of real estate, which is vacant and abandoned properties. Vacant and abandoned properties are hugely problematic. They take up inordinate amounts of time.
00:16:28
Speaker
for municipalities to manage because they are operating on multiple fronts to try to wrangle in these assets. So you have an eyesore that is a public safety hazard. It's likely to catch on fire. It's likely to have squatters. It's likely to have all sorts of nefarious and illicit activity happening in it.
00:16:46
Speaker
You've got DPW going to these abandoned assets. They're constantly mowing the lawn, taking out the trash, dealing with the visible defects of this property because there's no one there to do it. You have your legal team trying to identify who the owner is. It's oftentimes really difficult to identify the owners. You're receiving no tax revenue on it because it's vacant and abandoned.
00:17:06
Speaker
And so it represents a shortfall in municipal budgets. You're spending actual dollars against this shortfall to true this thing up municipally. It's really problematic. On top of all that, who wants to live next door to a vacant abandoned property? So they have this domino effect, this second order effect of dragging down the property values around it and making these municipalities less attractive to residents and less attractive potentially to investors.
00:17:33
Speaker
And so bringing this module online and onto the blockchain, being able to describe these assets, understanding all of the liens and the encumbrances attached to it, and then being able to broadcast that to investors who can now really understand with great clarity an atomized view of the actual liabilities that these assets represent, allows them to navigate them more quickly,
00:17:57
Speaker
purchase them more quickly, purchase tax arrears more quickly, and then take this asset and fix it more quickly. It also allows for the municipalities to manage that workflow that I just described while this thing remains vacant and abandoned in a way that has much, much, much more validity.
00:18:16
Speaker
all of the data that they're passing back and forth between sending DPW out, creating the lien from DPW for the work that was done, interrogating the existing liens, calculating the balances of the liens that exist against this asset, all of these things can be done with verified and validated data on chain so that investors and municipalities don't have to guess what the status of this asset is.
00:18:38
Speaker
That's definitely an amazing use case. And of course, the way that all of these things operate now, I think that that's a great way to put it. And because you're mentioning that balcony places a really strong emphasis on transparency, on deficiency, and also in the correct management of the data, particularly in real estate transactions through blockchain technology. So now this is more of a general question.
00:19:01
Speaker
because obviously most of our audience is policymakers or individuals new to blockchain and just curious about these types of use cases. So what take away would you like them to have regarding the adoption of blockchain technology and these types of applications? Yeah, I mean, look, I am a blockchain maximalist, unabashedly. I'm completely obsessed with this technology. It's totally changed how my brain works.
00:19:32
Speaker
But my worldview is that every asset that can be tokenized will be tokenized. It's a pretty popular refrain in the real world asset space. I believe that from the depths of my soul. I just don't see a world where we don't tokenize every single asset that we can tokenize.
00:19:49
Speaker
That to me is a fake complete. But the real question is, how do we do that? What are the actual systems and the workflows that we put in place to do that? And this is not a question that's going to be answered by people who have no exposure to the assets that they're looking to tokenize. What's needed, and what I think we have at Balcony, is a group of people who understand the asset class very well, who come from it.
00:20:14
Speaker
who can envision the types of workflows that meet the requirements of the stakeholders and the ecosystem that's meant to interact with it. And so I think if you're listening to this and you're thinking, that makes sense, I would like to do it for our XYZ asset. I think you should, but I think you need to either understand that asset class incredibly well, or you need to partner with people who do. Because the peculiarities of each individual asset class
00:20:43
Speaker
are the only thing that matters. The only thing that matters is developing schemas and developing workflows and data processing methodologies that actually comport with the asset class that you're tokenizing. And so that's been our focus. We think it's been our unfair advantage is I've spent 25 years in real estate.
00:21:02
Speaker
My partners have grown up in real estate. We're all developers, brokers, real estate investment bankers. We've done sort of every single piece of this. We've worked with local governments, state governments, worked with them on pilot programs and this redevelopment plans, you have to kind of understand the nuts and bolts of these asset classes to
Importance of Understanding Asset Classes
00:21:26
Speaker
tokenize them. Otherwise, what you'll create instead of a truth
00:21:30
Speaker
is a really convincing fiction. And that is probably the most dangerous, greatest threat to any real world asset, is something that appears to be truthy on the surface, but really is not.
00:21:44
Speaker
Of course. And I believe that you mentioned a really good point, which is pretty much the core of what we do here at All Explains, which is understanding the technology. In this case, it's, okay, understand the asset. Because while it's true that you can tokenize literally everything, since you're just digitally representing something on the blockchain, whether it is a pint of blueberries, a house, a computer, whatever it is,
00:22:08
Speaker
You really need to get down to, okay, what am I tokenizing? What is the nature of this asset? Because that should be the starting point.
00:22:17
Speaker
I wanted to also focus more on the real estate of this side because that's the thing that we're tokenizing here and that's the thing they're talking about with Balcony. So as pioneers in the real estate tokenization space, what challenges have you and Balcony faced along the way with the tokenization of real estate? How have you overcome them to drive the platform success to be where it's at today?
00:22:39
Speaker
Yeah, I mean, it's an incredibly challenging mission. It's really not easy. One of the biggest issues that we had at the onset was we took for granted
00:22:49
Speaker
how important really accurate tokenization was. And we had iterated too far forward, closer to fractionalization, to crowdsourcing, to creating liquidity, to creating the ability to hypothecate these assets, and to aggregate debt, and so on and so forth. That was where our head was. And what we realized is that none of the primitives were in place to handle that. And so the first challenge was,
00:23:15
Speaker
we didn't realize that what it is, what the actual thing is had not been defined. And so we pivoted to a really intense, really thorough from the origin approach to tokenizing the asset as a base layer. That was one of the primary challenges. Beyond that, there was the resistance of people to interact with this technology.
00:23:41
Speaker
a guy in my gym, probably yesterday, I think it was, literally said to me, isn't it illegal? Isn't what you're doing illegal? Because there's this idea that the blockchain and tokenization is the same thing as crypto, or it's the same thing as securitization or fractionalization, and it's really not. So it's been a huge challenge to educate
00:24:00
Speaker
our customers and the public on what tokenization really is and its base layer, iterating back from all of those second and third order activities that you could do once something is tokenized. That's been a huge learning process because it's required that we enunciate this much, much, much better.
00:24:20
Speaker
And it's required that we go out and actually gain support from stakeholders, government in particular. I mean, I think that for most people, the idea of making the government client zero for blockchain, for this type of an architecture three or four years ago would have just been insane. And in fact, not a lot of people really approached it this way, if any, particularly not in the exact way that we're doing it.
00:24:49
Speaker
And so the first challenge was realizing, look, we need the government to record on-chain, period. We're never going to get really strong tokenization, and we're never going to achieve liquidity. We're never going to achieve the efficiencies that could be achieved in this market without the government involved as a meaningful participant in this ecosystem.
00:25:14
Speaker
So going out, educating senators and congressmen, meeting with local governments, local mayors and representatives, people up and down the entire process of data creation and movement in this ecosystem, that was a tremendous challenge, hugely time consuming.
00:25:33
Speaker
to kind of get that ball rolling. But now that we have and we've created a toehold, we've been able to kind of bring this process into a streamlined format and really get people up to speed, get them interested, and get them comfortable with this technology very, very, very quickly. And so that's just been a
00:25:53
Speaker
It's been a hero's journey for us for the past several years, but I'm happy to say, I think we're there. We're speaking to people at all levels of government about this, and they get it, and they understand why this is important, and they now understand that tokenization is not crypto, it's not securitization, and it's not fractionalization.
00:26:13
Speaker
That's huge and I definitely feel you on that because the reactions of people can be mixed. I feel like when you are talking to the group of people that gets it, that they know that blockchain is not the same thing as crypto, you can definitely see this wide possibility of use cases and just this general openness, whereas
00:26:32
Speaker
I believe that even though there has been a lot of progress made, as you were mentioning, and there's this openness and governments are collaborating on one side, but I also think that we still have a lot of work and just ground to continue covering and educating senators, congressmen and just stakeholders in general.
00:26:50
Speaker
people level down the whole process of data creation, data management, that, okay, this is blockchain, this is the core of the technology, and it's just so much more than crypto. Because as you said, even if it's something so casual, like a gym interaction, or when somebody asks, oh, what do you do? And then they give you the side eye when you tell them you're in blockchain. But you may not be even
00:27:13
Speaker
even trading. You can be on blockchain and not really be into the thing that people think about when they first hear blockchain or web3.
00:27:23
Speaker
I'm happy to hear that a lot of progress has been made. I'm glad to hear these things they are sharing with us about all the stuff that balcony is doing and all the collaborations with government. So it's encouraging. But at the same time, I think there's still a lot of stuff to continue doing, which is why we do what we do. So as we wrap up, just one final question for you.
00:27:44
Speaker
What key message would you like our listeners to remember about Balcony's vision about its contribution to the evolution of Web through Regulation and real estate tokenization? What should we be on the lookout for? Yeah, I mean, I'm very proud of how we've approached this. We've been, I think, incredibly thoughtful about doing things that don't hurt the ecosystem, whether that ecosystem is Web 3 or real estate or governments.
00:28:11
Speaker
We're not interested in disintermediation. We're not interested in breaking the broken inefficient system. Real estate is actually a pretty efficient industry, regardless of what all the people in Silicon Valley will tell you. It's a wildly efficient industry, but it has its inefficiencies like anything. What we're trying to do is iterate towards greater efficiency.
00:28:37
Speaker
in this tokenization. And one of the key things that we didn't discuss, which I think is absolutely critical, is the security that we're providing for these assets.
Securing Real Estate Records with Blockchain NFTs
00:28:45
Speaker
Right now, the ownership records for these assets are highly, highly, highly insecure.
00:28:51
Speaker
And the distance between how we secure the records relative to property ownership, which is the largest asset class in the country and in the world, and generally speaking, people's primary asset, most Americans primary asset is real estate is generally their home. And it's not secured. It really isn't. So the distance between how we're doing that, and how we're securing the records associated with an NFT of an ape
00:29:21
Speaker
is just laughable. I mean, it's just, it's unbelievable. We're using the highest level of technology, of encryption and security to secure JPEGs. And we're using 40 year old technology most of the time to secure the records that determine your ownership of real estate. And so, you know, I just find this to be hilarious and unacceptable.
00:29:49
Speaker
And so Balcony is fixing that, right? We're securing these assets in a way that is provable in a way that is immutable across nodes. We're making them virtually indestructible. We're making the interaction with those assets clear and obvious with version control and human readability.
00:30:07
Speaker
And we're bringing in the government as a stakeholder so that you can rely to a much much much higher degree on the validity of the data. That you're interacting with and i think that's safer system i think that's more intelligent system i think operationally it's certainly going to be.
00:30:26
Speaker
a much more streamlined process with interoperability between these governments. And I think what we're setting the stage for is really the tokenization of all asset classes by being able to prove it out here with real estate in a way that is really convincing, really convincing and I think profound. So real estate as both the largest asset class and really one of the more complicated asset classes attacking this
00:30:53
Speaker
and making sure that there's government support and government use of these technologies, I think, I hope, is going to shift the conversation in the United States about how do we use these technologies. And hopefully, instead of hearing long diatribes from senators and members of Congress about how evil and scary this technology is, hopefully they'll realize this technology is absolutely crucial
00:31:19
Speaker
to the well-being of this country. It's crucial to securing these records. It's crucial for creating a base layer that is efficient and it's verifiable to describe all the things in this country, starting with real estate.
00:31:33
Speaker
Of course, and the security aspect is fundamental, and we could go on, but thank you so much for this, John. I really had a great time hearing more about what you guys are doing in Balcony, from blockchain architecture to government collaborations. And I would like to extend my gratitude to you once again to the entire Balcony team for shedding light on the intersection of these three things, blockchain, real estate, and policy. And thank you so much for joining us in the I Will Explains Who to Daddy. I'll see you next time.
00:32:04
Speaker
We hope you enjoyed our Hootenanny. Thank you for listening. For more Hootful and hype-free resources, visit www.owlexplanes.com. There, you will find articles, quizzes, practical explainers, suggested reading materials, and lots more. Also, follow us on Twitter and LinkedIn to continue wising up on blockchain and Web3. That's all for now on Owl Explains. Until next time!