Blockchain and Real Estate

The Blockchain is a fairly recently developed technology that has the potential to revolutionize many different industries. The Blockchain, although still in its early development, is already being implemented across many different industries such as international money transfers, Supply chain management and logistics, Healthcare, and of course, Real Estate.

Companies like JP Morgan, Accenture, IBM, and Microsoft are all looking into how they can best leverage the Blockchain technology for their business. Even Facebook recently made David Marcus, former CEO of Paypal, in charge of “setting up a small group to explore how to best leverage blockchain across Facebook.”

A Brief history of The Blockchain
Attempts were made to create the Blockchain technology in the early 1990’s but it wasn’t until 2008 when a group or individual by the pseudonym Satoshi Nakamoto developed the first distributed blockchain and implemented the Cryptocurrency Bitcoin.

Bitcoin serves as a way to transact digital money without governments or third-party services like PayPal or banks. However, when it comes to the technology behind the digital currency, Bitcoin is just the beginning. Blockchain is the underlying technology that Bitcoin runs on, much in the same way that Facebook runs on the Internet. Bitcoin was the first application built on the Blockchain, but many more have come after and there are still many more on the way.

What is the Blockchain?
The Blockchain is an immutable, decentralized, digital ledger. That’s a mouthful, but let’s break down what that means. Think of it like this, It’s a digital database with some upgraded features. It can store information and keeps records in a way that makes sense for all parties, not just one that controls the data.

There are several key features that make the Blockchain such a significant advancement in technology. A few of the major ones include:

Increased security with decentralization and no central point of failure.
Triple entry accounting, thats verified each transaction across all the nodes using hashing algorithms in a “proof of work” concept to insure each transaction is authentic and valid.
Immutable, meaning no one can alter the data and create falsified information.
Digital ledger to eliminate paperwork, thus eliminating unnecessary intermediaries as well as making information easily accessible.
Time stamped transactions for real time data and elimination of fraud.
Ability for fractional ownership of assets
Blockchain’s application to Real Estate
So now the question becomes, “How does this apply to Real Estate?”

My answer is in three big ways:

Storing the data (including property records)
Processing transactions (including transfer of ownership and payment in cryptocurrency)
And lastly, Tokenization of assets
For now, i’ll just focus on one and two, I’ll talk more on the third in another post.

Storing the Data (Property Records)
To begin with, Blockchain can likely make the current system of keeping property records vastly more efficient and secure. Official records such as deeds, land rights, and mortgage documents are often kept in a paper format, and the conversion to digital storage is a labor intensive process. This makes it cumbersome to have to go in and look for records regarding properties. With the Blockchain, all of that information could be stored in the network and accessible at any given time, saving municipalities as well as Real Estate professionals both time and money.

Not only is it inconvenient, but the keeping physical records also makes the industry more vulnerable to fraud. There’s a reason why the U.S title insurance industry sees about $17 billion in revenue each year. Uploading property records to the blockchain can alleviate some of the problems associated with keeping physical records.

From a practical standpoint, the benefits are obvious. Because it’s digital, it’s easy to access and always at our disposal. Because its distributed, no central party or government entity can tamper with it or unscrupulous parties can falsify documents (more of an issue in less developed countries).

Public and private keys, a key element of cryptography and Blockchain, will be used to verify and transfer ownership. There have already been pilot programs in the U.S such as the one in Vermont, which has been testing the use of Blockchain for keeping property records.

Additionally, other countries like Sweden, the Ukraine, Georgia, and Dubai are all investing in and aggressively looking into keeping property records on the Blockchain. There already exist some Blockchain based service providers, such as Ubitquity, that specialize in storing property information on the Blockchain. Storing the data, however, will not be simple. There are some problems with scalability that are inherent to the Blockchain. This is why you wouldn’t upload the data to the Ethereum Blockchain itself, but rather a third party Blockchain provider. The process, according to Abhishek Singh, would something like this:

“Let’s consider that you want to upload a file on IPFS. IPFS would break the file into multiple pieces, sign it cryptographically, and store it on different computer nodes across the globe. It would return back a hash with which you can uniquely identify that file. You should now take this hash and store it on a Blockchain network like Ethereum. If you wish to retrieve this file, you need to first query the Ethereum network to pull out the hash. Once you get the hash, send a query to IPFS network and pass the retrieved hash. IPFS would then return the original file that was uploaded to the IPFS network. This ensures that the file you uploaded is secure, stored permanently, and cannot be tampered with. Storing the hash on Ethereum gives us the guarantee that whenever someone tries to download the hash, she would get back the exact same hash that was originally stored. This is guaranteed by the inherent nature of Blockchain. IPFS takes care of storing the actual file securely with the help of cryptography. IPFS takes care of the backup by storing it on multiple computer nodes.”

The security with keeping record on the Blockchain
The core technology behind the the Blockchain is the fact that it’s actually a chain of blocks with each new block building off the last. Each new block is a confirmation the past transactions were authentic and valid. This makes it very difficult for hackers to try to hack the Blockchain because the system has been designed self regulate. As long as the honest nodes and blocks control over 51% of the CPU power, hackers won’t be able to crack it. This means a more secure system and, over time, we will see a transfer of the physical records to the Blockchain.

According to Lewis Cohen, a partner at Hogan Lovells,

“I do believe that in the fullness of time, we’ll see real estate in the U.S. all recorded and tracked in some distributed ledger system”
The use case for this
Keeping a blockchain registry will make it easier to locate and keep record of distressed and nuisance properties. Examples of this include properties that have been seized on tax liens, abandoned, and properties without good titles. All of which are all targets for fraud.

Keeping records on the Blockchain also has an enormous potential to democratize Real Estate, particularly in less developed countries. It will allow people to prove their ownership, and thus obtain creditworthiness and loans for new businesses.

By using public and private keys, verifying transaction across the nodes, and storing the data in the ledger can increase transparency and eliminate fraud across the board. The conversation about the use case of keeping property records on the Blockchain bleeds into the second major component, which is the transfer of ownership.

The Transfer of Ownership
The Blockchain technology will not only make the keeping of land records more efficient and secure, but it will also make the transaction of land ownership more efficient as well. This is where the triple entry accounting comes into play.

This technology enables each transaction to be verified across the nodes in the network and added to the Blockchain. The proof of work uses a hashing algorithm that proves each transaction valid. Because its decentralized, it uses an open source ledger so that anyone can see the transaction in the Blockchain. This verifies each transaction among all users, hence the triple entry, which makes it extremely difficult to commit fraud while still enabling transactions to occur without a central authority to approve it. This article, by Jonathan Hassel gives a great description to how it works behind the hood so to speak.

One concern that might come to people mind is that this could eliminate agents. If your an agent, I wouldn’t worry just yet, your job will still be necessary for sometime to come. (The Blockchain will likely help Agents by making them more efficient). Agents provide a great service for buyers and seller, and there are plenty of reasons why you should use an agent, but the methods they use to buy and sell will likely change for the better. Agents will be able to save time by having greater access to data and less cumbersome paperwork. It will remove overhead from the transaction process rather than removing the intermediaries themselves, which will only make a more streamlined process for the buyers and sellers as well as the agents.

It has been said that the Blockchain is the trust the Internet has been waiting for, and since most people search for Real Estate online now anyway, it will certainly be interesting and exciting to see how Blockchain will reshape how we consume Real Estate.

Smart Contracts to decrease transaction costs
Another big change to emerge from the blockchain technology are the Smart Contracts. There’s another technology called Ethereum that utilizes is very similar to Bitcoin, but builds on it with the development of Smart contracts.

This Image from Blockgeeks is a great representation of how Smart Contract might work in a Real Estate Transaction

Smart contracts are computer programmable contracts that execute automatically when a certain defined criteria is met. They work in a similar way to a vending machine. When you put in your money and select what item you want, the order of fulfilled automatically without someone on the other end pulling the strings. The technology is preprogrammed to fulfill the order when the requirements are met, thus making the process of buying food automated to a degree. (Think if you had to pay someone to sit there and hold all the drinks and food, it’d be massively inefficient).

This will affect Real Estate because using smart contracts will enable buyers and sellers to become to connected in a way that will dramatically decrease transaction costs, increase transaction speed, and protect sellers from nefarious buyers. It’s yet to be seen exactly how this will happen, but there are already some promising examples.

One such example is a Swedish company called Chromway. Their use of smart contracts breaks complex transactions into code and they’ve already partnered with a couple banks to be able to issue assets on the blockchain. With Smart Contracts, there’s in incredible potential to make real estate transactions more streamline.

If done right, the Blockchain technology has the potential to make certain processes in the Real Estate market more transparent, efficient, cost effective, and generally better overall.