Researcher from RMIT explains why startups will fail to fulfil their promises to disrupt real estate with blockchain.
Why have blockchain pilots in real estate abated somewhat? Those projects bump up against the fundamental inconsistency of blockchain and existing state system, and it seems they cannot confessed to this.
First, there is no such thing as the use of blockchain for real estate. There are plenty of different concepts and ideas, and as you will find below, some of them are useless. And when you consider probably the most ultimate idea — i.e., a title token — you understand that none of the existing projects could offer a complex solution to address issues with inheritance, lost private keys, co-ownership, delegation of rights and a bunch of legal issues that arise from blockchain immutability. The only scenario you can find is permissioned decentralized ledger technology (DLT), which is just yet another centralized technology — or blockchain with “smart” applications on top but which are centralized in their core design. These issues remain unnoticed in blockchainization buzz. Let’s go through known projects and bust their myths.
The first news of the use of blockchain for cadastral registry proliferated as a gospel in 2015 from Honduras with the help of Epigraph and Factom Inc. Being referred to by many enthusiasts for a long time, the project itself was never kicked off. And here we find the first fundamental constraint, though not a technological one:
Chromaway was founded in Sweden in 2014, giving hope of disrupting the old-fashioned centralized and bureaucratized real estate cadastre. In a YouTube demonstration in 2019, the team showed their centralized DLT platform, “Chromopolis” (which is not a blockchain like any other permissioned DLT platform), and revealed a lab prototype app for title deeds. The app requires government clerks and brokers to “bless” transactions between counterparties. And here is unveiled the second most significant misconception. In general, the problem of the architecture of such systems is that records have legal force only when they are stored in the closed governmental database, all peer-to-peer transactions on the blockchain between parties make no sense, as far the last word is on the side of the one who controls the central registry:
Without shifting from centralized to distributed architecture, any attempts of disruption turn into mimicking the existing system. In fact, nothing more happens than digitizing bureaucracy and middlemen. However, Chromaway teaches us another lesson: Over five years, the project did not succeed in introducing a working system at the state level but announces, from time to time, new phases of its development. The problem here is:
It must make extraordinary sense for changes, especially at the scale of a whole country. And it is clear that the Swedish government has no incentive to let go of its monopoly on political power over centralized cadastral registry. To add, Chromaway, during its initial coin offering (ICO) in August 2018, wrote in its white paper that it is going to develop the DLT network and will keep centralized control over it and promised to decentralize it in the future. It was also revealing that its white paper articulated no direct plans in real estate and cadastral registry. Therefore, it leaves little hope that the real estate revolution is coming from Chromaway.
Dhana, Bitfury and others
Bitland has been in Ghana since 2014, and the project has never delivered its objectives to “register land and real property ownership and use rights” using blockchain. Propy Inc., during its ICO in 2017, stated that its far-reaching plans were to disrupt the industry by eliminating third parties with a global real estate supermarket on the blockchain driven by smart contracts. However, its supermarket, at this stage, looks like yet another real estate broker’s platform that has no relation to any land title registry. And this is very convenient, as it can always say that it had never promised disruption at this phase. The demo of the project gives some hope for the future, though it is not accessible for public online registration.
REX, founded in the United States in 2016, promised a new multiple listing system (MLS) standard for real estate brokers, ending up with the Imbrex online ad listing protocol for brokers and landlords — and, if we forget about the high-level idea to get rid of the enormous amount of middlemen in real estate, it looks like a success.
Velox.re demonstrated in Cook County, Chicago how hashing on a blockchain could imitate a real cadastral entry but ceased its activities in this direction. Bitfury launched its centralized DLT based on the Exomun DLT framework in the Republic of Georgia and Ukraine. The project purposed to hash records of the real estate database on Exomun. Some professionals suppose that its impact at the security level of the government-owned land registry is inconspicuous. Notwithstanding, we need to give credit to Bitfury because it has never aimed to de-bureaucratize the domain and reduce middlemen.
How did the revolution come tumbling down?
To explain why the mentioned projects failed to revolutionize real estate (some did not even promise that, but many believed in it because they used the magic word “blockchain”), we should clarify the most important conceptual inconsistency of the blockchain and traditional legal system.
The last 2,000 years since Roman law appeared, people developed lots of legal doctrines to protect property rights. All of them have been based on an imperfect nature of people’s relationships and the need to fix problems when they arise. Blockchain appeared ill-prepared to deal with the theory of law and state — and actually, nobody designed the technology with these prerequisites. Or perhaps we should change the theory to fit the blockchain? Tough question, isn’t it?
High-level ideas recently discussed in the industry and academia do not answer the main question: How exactly can blockchain technology be applied? When these scenarios are analyzed, it becomes clear that there is no single use of blockchain for real estate but an array of bold ideas.
Anyway, in general, blockchain beyond cryptocurrency can be used to:
- Insert arbitrary user’s data (for example, hashes).
- Create tokens.
- Manage tokens with smart contract.
- Develop so-called decentralized applications (DApps).
Hashing cadastral records
First of all, this is not about disrupting bureaucracy but about information technology security. And the use of studied pilots in Georgia and Ukraine with Bitfury is questionable. The real estate registries in both countries remained centralized and closed. If the cadastral database with title records is not open — and whatever hash value thereof is inserted in the blockchain/DLT — then it does not secure the record itself. The reason why is that the record can still be tampered with while it stays in someone’s hands. When the record is tampered with, the hash from such a fake record can also be published on the blockchain as well — and then revealed as legitimate. Moreover, in these pilots, so-called “blockchains” appeared not to be a blockchain but a centralized and closed DLT, known as Exonum.
Even if we consider here the use of a real public blockchain, we will have another problem: How do we know which record is authorized? Transactions on the blockchain are pseudonymous and uncensored — so, anyone can make any records, including fake ones. We need a layer of authentication. Someone centrally will identify and authorize state-owned blockchain addresses, from which records are published. And then, another centralized, off-chain system will track the blockchain to filter and collect a white list of correct hashes, which are considered to be made by authorized clerks. Having such a level of centralization, this approach can barely compete in terms of security with existing governmental databases.
Hashing records of deeds
Let’s say a buyer and seller came to an agreement expressed in an electronic file, its hash was published on the blockchain, and we consider it as a deed.
The first issue is the authentication of the parties: How do we know that it was Alice and Bob who hashed this record in the blockchain? We can use here something that we know as Public Key Infrastructure (PKI) with trust ID services. This means they will deal with a trusted third party that creates and manages digital identities: Certificate Authorities (CA) or Trust Service Providers (TSP) in the U.S. and European Union respectively (other counties replicate these models). For example, in the EU, this system is well-developed (see, for example, Estonian e-Residency) and allows remote authentication of users; however, this is very regulated and bureaucratized.
One may ask: What if Alice and Bob identify themselves without trusted third parties? Yes, they can deal remotely if they trust their remote identities. The problem is that the government does not trust them. No government will allow anonymous and fake IDs because of two main reasons: money laundering and terrorism financing.
But if conventional PKI is used, then why do we need blockchain at all? The parties will remotely sign the e-deed with their digital signatures, issued by CA/TSP. If you trust the cryptography of blockchain, then there is no reason not to trust PKI, which is based on the same.
Besides technological discussion, here appears a legal issue: How is it possible to acknowledge an e-deed? A town clerk (a notary, a registrar, a title company or whoever is responsible for that in a certain state) must also apply its digital signature. For many countries, such a deed would be so innovative that it would require new regulations. Therefore, when startups promise to disrupt real estate and forget to mention that they need to change the legislation, they are cheating or are just premature.
Even though we legitimized electronic contracts, there is still the system of a state-owned database. So, you end up with the registration of this deed that is made by a town clerk (notary, title company, etc.). So where is the advantage of the blockchain? Therefore, not shallow but significant changes are required in the whole paradigm.
Smart contracts with title tokens
While the idea is very broad, let’s shrink it to a typical, possible scenario. One party has a token that represents a land title, and another party has some cryptocurrency.
The smart contract is designed to perform an atomic transaction — i.e., to exchange the token for an agreed amount of cryptocurrency. In this scenario, a notary is excluded (or who is meant to acknowledge the deed in any particular jurisdiction) and the deed, therefore, is not legitimate.
The second, while titles/deeds live in the central state database this transaction has no legal meaning. This token, as per law, represents nothing, even if the parties want it to be a title. It is clear that new regulations are required to legitimize these relations.
If we assume the government recognized title tokens and such transactions, then what must happen when the landlord dies and does not leave the private key to anyone? Or, if the owner simply loses the key? What if the transaction is disputed by someone whose rights were violated? What if the private key was taken as a result of a crime? How will custody represent rights of a disabled person? Or, how can a judge split the land between divorced spouses? And this is just a small list of possible legal issues that will bump up against the immutability of records and strong cryptography, which won’t allow anyone but the owner of the private key to have access.
Should we consider all transactions always valid, no matter what happens? Then, the landlord and the successors lose their property when the key is lost, and the court ruling to reinstate someone’s title will be useless, as it cannot be enforced.
Reissue a new token? Then, what if the lost key is found or the defeated party in a lawsuit still uses its private key, actuating a transaction with the old token? We will have two tokens that represent one title. Collision with double spending of the same real estate is inevitable. Then what?
Okay, let’s allow anything to happen on the blockchain but treat all these transactions only as evidence, as a source of facts whether they are lawful or not. We will then develop a separate title/deed registry in which we will write a consummation and strike out thereof when something goes wrong.
But don’t we already have such a registry in each country, with regulations and instructions on any possible situation — what we call bureaucracy? Didn’t we want to get rid of that?
It’s clear that people do not like tedious legal procedures, as they cause high transactional costs. We see that disrupting projects should entail legislative changes and true reforms, but for that to happen, a mature concept is required. We will talk about a possible scenario in upcoming publications.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.