Blockchain-based real estate

During a session titled, «How Blockchain May Change the Future of Real Estate», John L. Heithaus­, principal of Heithaus PropertiesHeithaus, noted blockchain is making «substantive changes» in many other industries, including financial services, healthcare and homeland security. Now, he said, it’s the real estate industry’s turn, according to a recent article on Blockchain-based real estate.

Let us here take one step back and explore one example of how a blockchain-based real estate market may be materialized and how this could potentially change, disrupt and/or replace this ancient market.

The real estate market is the largest asset class in the world. The current settlement and reconciliation processes in this market is cumbersome, time consuming and often expensive. Hence, there are several reasons why adding smart contracts and security tokens may enhance both security and transaction speed, and create new possibilities.

The settlement of real estate typically involves a broker who ensures the trust, and makes sure funds are not transferred from the escrow account before the contract is signed by all parties. The broker also verifies that the seller actually owns the property being transacted. In most countries properties are registered by the government, and getting a hold of the original documents can be both costly and difficult. In undeveloped countries, such registers are often rare or non-existing, typically causing tremendous trouble for the alleged owners. Given these observations, it seems reasonable to assume that the use of blockchain technology could decrease the cost of verification, and also add new features. The cost of verification would be close to zero, and the process of settlement could save several percentages (of often substantial amounts).

Even though many factors concerning the execution of the settlement could be programmed in a smart contract, the so-called “last mile problem” is the main challenge. The last mile problem is the disconnect between online and offline activities. Solving this problem involves building a bridge between the offline events and the online recordings of those events during the verification of a transaction in a way that ensures an accurate accounting in the blockchain. In this Harvard Business Review article, Professor Christian Catalini and Professor Catherine Tucker further unpack the last mile problem and illustrate how the usefulness of technology still relies on trusted intermediaries to bridge this “last mile”. For any blockchain-based real estate project to succeed it is crucial that the information is recorded correctly on the blockchain, and that the necessary entities contribute to certify and validate the entire process. Hence, the question becomes whether brokers will be willing to contribute in eventually making themselves more or less obsolete in the future. It seems plausible to assume the market will allow such a transition as there will always be some brokers who are willing to help. Such brokers may gain a significant advantage, at least short-term, and others would be forced to follow. Hopefully, most governments would embrace such transparency.

One solution to the “last mile problem” could be that there would be a gradual process, were those sellers and buyers attracted to using a blockchain solution would need to collect and use the current value-chain to verify all necessary data that would be put on the blockchain, and in the smart contract. For simplicity, ownership would be considered verified when all relevant parties agreed on it, but in most developed countries this information would probably need to be approved by a registrar, or someone given the authority to verify such transactions (e.g., a broker). At the moment a registrar validates the transfer of the property title a new permanent block is created, making it official and irreversible. From this moment on, having represented real estate on the blockchain would be value-chain replacing, as future settlement and reconciliation would be very cheap, and open the door to new market possibilities.

This blockchain solution would target both individuals and businesses, and except for employing privacy features through the technology Zero-Knowledge Scalable Transparent ARguments of Knowledge (zk-STARKs), it would a permissionless blockchain with a token reflecting the value of the asset. As ownership of properties are often disputed, another important incentive for implementing a blockchain-based real estate market is to add censorship resistance. Run on the Ethereum blockchain, such a project could allow for the tokenization of the property, and the owner could sell these tokens on an exchange. All token holders would enter a multi-signature smart contract. Such a smart contract would ensure that future decisions reflected the degree of ownership. The security of the blockchain would depend on the Ethereum blockchain, and the tokens would be specific for every property.

In terms of adding new attributes to this market, tokenizing of real estate would allow for fractional ownership. This could drastically lower the barrier for investing in properties, and allow global citizens to own fractions of properties worldwide. In addition, assigning smart contracts in the settlement process would save substantial amounts in this market by cutting off middlemen and limiting the possibility for fraud.

In the beginning, a blockchain-based real estate project will likely result in existing services and activities becoming more efficient. In terms of extensive margins, representing real estate on the blockchain will (for instance) open new possibilities of self-executing smart contracts and fractional ownership facilitated by tokenization of property. Main competitors to this project would most likely be other blockchain-based real estate projects with other solutions to the smart contracts, the last mile problem, the token distribution, and/or displaying different features concerning privacy or security. Competing enterprises could try to get an advantage by getting access to the official records of ownership, thereby attempting to reduce the cost in transferring verified information from the real world to the digital representation. They could also try to cooperate with banks or lenders directly, such that the smart contract automatically initiates regular loan repayments to the mortgage lender.

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