Blockchain and Smart Contracts - The Future of Real Estate
By now, I would imagine that everyone has heard of Bitcoin - it has been in the news being put forward as the future of value reserves (i.e. digital gold - which I personally think is true), or a Ponzi scheme, depending on who you ask. Bitcoin works on blockchain technology. Blockchain is, in its essence, a system of a distributed ledgers (i.e. data) that store a record of something being true. That record cannot be changed by anyone unless the “owner” of the record provides a secret encryption key to the blockchain and all of the “nodes” (i.e. in the case of Bitcoin, the Miners) that store the ledger mathematically agree that the transaction is valid by solving the encryption key. It has a very high level of security due to this consensus model. This is very simplified, but will suffice for our purposes.
Blockchains have evolved since Bitcoin was launched in 2009. Newer blockchains incorporate what are called “Smart Contracts”. A Smart Contract is essentially a piece of code that cannot be changed by any single person (i.e. similar to how the distributed ledger of Bitcoin cannot be changed) and tells the blockchain to perform a certain action when conditions are met. Let’s look at an example:
Mary wants to transfer $100.00 to Frank and Frank wants to receive the same from Mary.
Mary provides the Smart Contract with $100.00 of Ethereum, and the smart contract requires a delivery address from Frank before the value will be sent. Frank provides his address and the Smart Contract delivers the money.
Seems very straight forward, doesn’t it? But let’s look deeper at what occurred here.
Mary and Frank just transferred value between them without the use of any “trusted” third party. There was no bank, no lawyers using trust conditions, no escrow agent. Nothing. Mary and Frank used a Smart Contract and a blockchain. The Smart Contract received the money from Mary, with the condition that it would not be transferred to Frank until Frank inputs an address. The Smart Contract acted as the escrow agent, and waited to complete the transaction until all conditions were met. The Smart Contract then wrote the transaction to the distributed ledger on the blockchain and the transaction has become irreversible.
How does this relate to Real Estate?
This involves another blockchain concept called “tokenization”. Tokens on a blockchain are a “cryptocurrency” of a blockchain - and each blockchain can have multiple tokens. Land Titles could become tokens on a blockchain, or more particularly, what are called Non-Fungible Tokens (NFTs). An NFT is essentially a wholly unique token (no other token in the world is the same) that one can own - in our example, you would own the NFT for your land (i.e. a token that relates only to the land you own and no other land in existence). Remember, your NFT would be written onto the blockchain as being owned by you, and would be protected from being interacted with by your secret encryption key and the consensus model we discussed above. This would eliminate the vast majority of title frauds that can occur under the current system. Stay with me, we are getting to the interesting part.
Let’s say Mary wants to sell her house to Frank. Mary would enter her encryption key into the “Real Estate Transfer” Smart Contract (i.e. sign the Smart Contract), and would lodge her land Token to it on the condition that Frank lodges the value of $350,000.00 worth of Ethereum (Ethereum is just an example of a cryptocurrency). The Smart Contract would wait to make any transfers of value until all conditions were met. Once Frank deposits his $350,000.00, the Smart Contract would execute the transfer to the Blockchain and the real estate transaction would be complete. You could literally buy or sell a house as quickly as you buy a coffee. No more banks, no more lawyers, no more expensive land titles bureaucracy or transfer fees.
The astute reader will say, ‘but wait, what about mortgages and interest discharges etc.?’. Well, that could all be handled by Smart Contracts as well, and could be done as automatically as the above. Say Mary’s house had a mortgage on it (from a traditional bank). When Mary places her land token into the Smart Contract, the Smart Contract will already know that Mary’s land token is subject to a mortgage (this was written to the blockchain when Mary bought the house). The Smart Contract will also know how much Mary still owes, and where the mortgage payout should be directed when a sale is made. When Mary and Frank complete the transaction, Mary’s mortgage payout is removed from purchase price and sent to the wallet address of the bank and the mortgage is discharged automatically.
Smart Contracts are “trustless” and do not require human interaction.
The applications of this technology are endless in the legal sphere and I am excited to see how are system will adapt over the next decade.
