Best Principals and Practices for Using Blockchain for Real Estate Title

By Ragnar Lifthrasir,

Founder of the International Blockchain Real Estate Association and CEO of velox.RE

Real estate is mired in fragmented technology and data, and burdened with third parties. There is no industry whose transactional architecture maps to blockchain’s architecture more than real estate. Blockchain, and Bitcoin specifically, facilitates the payment, transfer, management, and recording of assets on a trust–minimized, peer to peer, secure, open source network.

When we can secure the most important functionality of a financial network by computer science rather than by the traditional accountants, regulators, investigators, police, and lawyers, we go from a system that is manual, local, and of inconsistent security to one that is automated, global, and much more secure…

- Nick Szabo, “Money, blockchains, and social scalability

Using blockchain for real estate title is an exciting focus for many companies, entrepreneurs, investors, and even governments. Because I see mistakes being made in these efforts, I will share my best principles and practices for blockchain title applications. (These views are strictly my own, and do not necessarily reflect those of the International Blockchain Real Estate Association).

1. Know the problems you’re trying to solve

Without prior experience in real estate, many blockchain entrepreneurs are using blockchain as a solution without knowing the problem. The real estate industry faces multiple pain points caused by fragmentation and centralization. Those are the two underlying problems blockchain should seek to solve for title.

Technology is fragmented across different protocols and companies. People are fragmented across different roles and organizations. Technology is centralized in proprietary and non-interoperable software applications. Data is centralized by third parties.

Existing Real Estate Ecosystem - velox.RE

For property title, fragmentation and centralization result in three pain points: fraud, insecure or inaccessible property data, and the expense and friction of third parties.

2. When applying blockchain, don’t repeat the problems you’re trying to solve

Although this might seem obvious, the choice of blockchain and specific implementation of it can easily result in fragmentation and centralization. For example, using a private blockchain repeats the problem of centralization.

3. Know your jurisdiction’s title system

How blockchain is implemented depends on the land title system in each legal jurisdiction. There are two systems.

Land Title Systems - velox.RE

Deed Registration is the system in the United States. It is easier to integrate a blockchain application because the property conveyance is performed peer to peer, between buyer and seller. My company velox.RE will soon begin to issue blockchain deeds in all 50 states, which property owners can immediately use to transfer their property. The government is not involved in the conveyance, but rather, having the authoritative copy of the conveyance occurring, should the new owner choose to submit it to them.

In contrast, in the Title Registration system, the property conveyance is not performed directly between buyer and seller, but rather, by a government official. One solution is to have a (Bitcoin) multisignature transaction, with one private key held by the government, and one by the property owner.

 

4. Conveyance vs registry

The goal of a blockchain title system should be to first convey (transfer) the property using blockchain, with a “copy” of that transfer being the registry of the ownership. This can be the blockchain itself or could be a regular paper record. Unfortunately, most pilot programs are doing it backwards, first transferring ownership using traditional methods, followed by inserting a transaction identifier into a blockchain transaction. This is putting the cart before the horse. It misses the greatest strength of blockchain, transferring a (digital) asset with a public, distributed network instead of a human with a stamp.

5. Charity is an unsustainable system, use capitalism

Many are trying to create a blockchain title system that relies on sponsorship by non-profits or hoping for government funding. The former is economically unsustainable and the former is extremely challenging. Instead, a property transfer system that uses blockchain should have economic incentives that will allow for-profit companies to adopt it.

 6. Pick the best blockchain

In my upcoming white paper, I spend several chapters evaluating blockchains for real estate, based on ten objective criterion:

1.    Real estate functionality

2.    Decentralization

3.    Stability

4.    Track record and future survivability

5.    Liquidity, market capitalization and price of cryptocurrency

6.    Native currency and payment system

7.    Community

8.    Permissionless and open source

9.    Proof of work

10. Immutability

In this article I don’t have the space to present the data for each of these, but I can share the conclusions. For private blockchains:

Summary of Private Blockchains - velox.RE

After concluding that private blockchains were not appropriate, I compared public blockchains, quickly narrowing the choice between Bitcoin and the two Ethereum blockchains:

Bitcoin Versus Ethereum - velox.RE

Because Bitcoin best met the ten criterion, I chose it for velox.RE and why I recommend it for real estate applications, especially title. Again, my white paper goes into great depth on supporting data for my conclusion.

Bitcoin has been running for eight years with no downtime, has more processing power dedicated to it than the largest supercomputer in the world and has a simple scripting language with the smallest attack vector.

- Adam Back, Co-founder and CEO of Blockstream and inventor of Hashcash

Conclusion

Digitizing real estate assets with blockchain has far reaching implications, some that will be realized immediately and other over several years. These include lowered dependency on third parties, greater liquidity, increased ownership transparency, decreased fraud, shorter escrow periods, and lower closing costs. Using the principles and practices I have presented will increase the likelihood of success. 

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Ragnar

I'm an entrepreneur, advisor, and public speaker in the application of Bitcoin / Blockchain to real estate. I have 10 years of real estate experience including development, title insurance, and investing. I bought my first bitcoins in 2012. I founded the non-profit International Blockchain Real Estate Association (IBREA) in 2013. My nascent startup, velox.RE, will bring transparency and liquidity to real estate transactions.