Application of Blockchain in Real Estate Industry

Application of Blockchain in Real Estate Industry

Prepared by: 

Dheeraj Sinha

MBA (Finance), Texas Tech University

Contact Details 

                                                  Mail ID: wiz.dksinha@gmail.com                                        

  Twitter: @wizdksinha

                                      LinkedIn: https://www.linkedin.com/in/dheeraj-sinha-mba-bba54713                                                                

1         Contents

2      Introduction

3      Real Estate Industry – Now

4      Use of Blockchain in Real Estate Industry

5      New Workflow – Leveraging Blockchain in Real Estate Industry

6      Roles and benefits of different stakeholders in Blockchain Enabled Real 

        Estate Industry

7      Challenges Ahead in implementing Blockchain in Real Estate Industry
7.1       Mining & Distributed Consensus:
7.2       Scalability:
7.3       Technological knowhow:
7.4       Regulation

8      References

2         Introduction

 Blockchain technology, in recent past, has gathered a lot of attention because of its peer to peer network mechanism which is very secure and has capability of processing transactions faster with no control by a central authority. Many studies have been conducted recently in the blockchain world to study the feasibility of using distributed consensus mechanism and cryptographic hashing techniques like – Collision free, hiding mechanism and puzzle friendliness used by bitcoin blockchain technique that could be used in different applications. Real Estate Industry is one of the examples where it could be implemented.

This paper is an endeavor to put forward a high level proposal in what stages of the real estate workflow especially buying and selling a property, the blockchain could be used and how.

3         Real Estate Industry – Now

Real Estate property sales and purchase, in the present industry has different phases were buyer and sellers meets their agents separately. The property is being put for sale. Buyer looks at the property through her agent. If buyer likes the property, the negotiations are being done with the mediation of their agents. After the contract is accepted between buyer and seller, money is being put in an escrow account in a financial institution.

                                         Gist of the matter is at every stage, there are intermediaries involved which results into cumbersome posting, clearing, and settling transactions. Below flowchart depicts how does the buyer and seller interacts with different intermediaries in the different stages.

 

Real Estate Industry - Now

  

4         Use of Blockchain in Real Estate Industry

Figure shown below shows the stages where blockchain could be leveraged in the real estate industry.

The notion of smart contracts could be used to speed up the process that could eliminate dependency consequently resulting in lower transaction cost, increased information-sharing, and the elimination of the need for trusted third-party intermediaries

             Smart Contracts: Before that we need to understand how to implement smart contract, one needs to understand what smart contract is.

Smart contracts are programmable contracts run on the blockchain that gets executed or triggered with the consent  between two parties once pre-determined conditions  have been satisfies, without involving a middleman.          

                                 The blockchain can serve as public history of transactions that would expose only proof of the transaction’s existence while safeguarding the stakeholder’s identities and sensitive personal data. Thanks to the application of cryptocurrency techniques like hashing, digital signatures and other salient features that makes these records irreversible, hence preventing fraud, abuse, and manipulation of prior transactions.

                                            According to one of the reports of World Economic Forum, smart contracts are secured in the blockchain as “self-executing contractual states”, which eliminate the risk of relying on others to follow through on their commitments.

      Contacts and legal services increasingly tied to code linked to the blockchain, may be used as unbreakable escrow or programmable designed smart contracts that has increased transparency.

    In the figure shown below, blockchain could be used at 4 different stages where it can remove the dependency of third party intermediaries like record keepers, asset custodians, notaries, and certain government agency functions and foster faster processing self-executable programmable transaction.

• Blockchain could be used to eliminate the transaction cost/fee to be paid to the buyer &seller agents, banks and other intermediaries. It could also minimize the turnaround time and cost involved in engaging them.
• Transaction when initiated as Genesis block in the blockchain could be used to serve an escrow account. A Genesis block is the first transaction block that has been created as a transaction in the blockchain. Further section will explain how it could be used.
• Blockchain could eliminate the manual initiation process for buyer to raise a loan process with lender ( or Bank)
• Foster further negotiation using blockchain in the closing procedure process.

 

Real Estate - Scope of Blockchain

5         New Workflow – Leveraging Blockchain in Real Estate Industry

The figure below shows how blockchain could be implemented and leveraged for real estate industry.

                When buyer likes the property listed by the seller, sales contract is accepted. This is the initiation point for the genesis block to start for the smart contract for the transaction.

                    The smart contracts that needs to be initiated should involve the signature from buyer and the seller so that when both the party agrees to the terms (or sign the contract), smart contract gets executed successfully. In order to implement that, one of the blockchain capabilities that could be implemented is “multisig” OR “split keys”. A mutisig blockchain transaction involving buyer and seller could be used to create an address that could be completed only when both the parties involved sign it. This transaction when initiated as genesis should also involve escrow amount in the blockchain. There could be different means (e.g. bitcoin, fiat currencies etc. which is a different discussion point) of realizing it once the transaction is completed. This escrow amount will remain valid till the transaction is valid. Logic could be programmed in the blockchain transaction using “lock time” to deal with the escrow amount after a fixed duration of time agreed during the transaction.

     Once the inspection is completed and closing procedure is initiated, the blockchain will be signed by both the buyer and seller to complete the transaction. Once the transaction is completed, it could be sent to the peer network of real estate blockchain database so that all the other nodes can be notified about it.

      A subsequent trigger notification goes to the bank of the closing procedure about the closing deal so that the loan amount could disbursement could be initiated to be sent to the seller. A similar notification goes to the buyer that the bank has been notified about the disbursement. Also, notification needs to be sent to the seller and the seller agents to hand over the keys to the buyer.

        All the evidences for the agreement contract could still be part of the transaction in the blockchain and available to the public keeping the personal and sensitive data hidden.

   Buyer and Seller agents as Miner/Nodes: Once buyer receives the keys and seller receives the cash from the bank, seller and buyer agents can behave as miner so that they can get the transaction fees by mining it. Once the seller agents and buyer agents finds a proof-of-work, it broadcasts the block to all nodes, transaction fee should be transferred to their respective addresses.

This is an open area which needs more research to consider how it cold leverage from other blockchain. For example, all the nodes are competing to confirm transactions by solving the mathematical puzzle in the bitcoin blockchain. All the transaction in bitcoin are confirmed through a shared consensus system, and usually requires several independent confirmations for the transaction to go through. This process guarantees random distribution and makes tampering very difficult.

                

                     

Blockchain Enabled Real Estate Industry

                

6         Roles and benefits of different stakeholders in Blockchain Enabled Real Estate Industry

Use of blockchain will have win-win situation for the stakeholders involved.

The real estate transaction involved via blockchain will be hassle free for buyer and seller because it will reduce the transaction fee incurred via central authorities, different third party intermediaries.

It will also reduce turn- around time for completing the transaction. The blockchain would greatly secure the transaction and make it even transparent. The blockchain transaction would also reduce the hassle of maintaining the paperwork thus fostering healthy environment.

Property of time stamping and hashing technique in the blockchain can be used to encrypt the intellectual property of document safeguarding the ownership identity without revealing the inherent sensitive proprietary data and could also be used to verify people’s identity.

 

7         Challenges Ahead in implementing Blockchain in Real Estate Industry

7.1      Mining & Distributed Consensus:

One of the salient features of Bitcoin blockchain is distributed consensus where all the nodes compete to solve the mathematical puzzle to provide proof of work on any new transaction. In order to implement the smart contract to enable distributed consensus, it will initially be difficult to get the nodes to create a distributed consensus to make them keep invested either in terms of transaction fee or mining fee.

7.2      Scalability:

If the number of transactions increase, the problem for the blockchain would be keep up with the transaction so that it can accommodate all the transaction efficiently

7.3      Technological knowhow:

 All the parties involved needs to be educated about how things work in the blockchain enabled real estate industry ecosystem.

7.4      Regulation:

Real Estate Industry is one of the government regulated industry that involves federal and state laws governing it. There are many parties involved. In order to overhaul the industry to the tunes of blockchain, the government and the technology needs to work hand in hand to implement it successfully. The new technology implementation may have to face lot of resistance from different stakeholders not supporting it. The technology implementation will incur a lot of cost to the industry.

8         References

1.      World Economic Forum Report Slide 24: http://www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf#page=24

Crypto-Currency and Blockchain

Hi Everyone,

Like many of us I am also a bitcoin and blockchain enthusiast and am learning it myself to solve the mysteries.
I can be followed on twitter @wizdksinha

As I am going through books and sites where all the information related to blockchain and bitcoin has been provided, I reckon this great technological breakthrough is needed to be understood by those not with technology experience or software experience as well. This is my endeavor to break these jargons into simple english. There still are few terms which would need some study.
 As I am taking  help from different websites and tutorials to explain these terms, I am providing references as well. Please go through those if you want to study this in detail. Please leave your comments as well if you think there is room for improvement.

Cryptography and its application on Blockchain 

Before trying to understand what bitcoin is all about. Let us try to understand what makes it more secure now then what it was earlier. The word is cryptography. Bitcoin and other blockchain use  uses hash functions and signature mechanisms of cryptographic technique that makes it secure than ever before. Let us try to understand the concepts used in cryptocurrencies like bitcoin and other blockchain in simple words than going into the nitty gritty. To know more about that in detail, please refer other sources.  

Cryptographic hash function is  mathematical hash function with the following three properties:  

•   Its input can be any string of any size.  
•   It produces a fixed size output from Blockchain perspective.                               
• It's concrete, we will assume a 256-bit output size. However, our discussion holds true for any output size as long as it is sufficiently large.  
• It is efficiently computable. Intuitively this means that for a given input string, you can figure  

Property 1: Collision- Free: It is infeasible to find x and y such that x!= y and H(x) = H(y) where x and y are arbitrary inputs and H(x) and H(y) are hash functions of x and y                         

Since inputs can be of any size and output is of definitive size, let us say 256 bits for our discussion sake. there is a possibility that few inputs may have the same output. Even though this is possible, it is practically extremely difficult that we may find these collision.  

To put things into perspective, as explained in Lecture 1 — Intro to Crypto and Cryptocurrencies video by Princeton University professor Ed Felten(link),  if a computer calculates 10,000 hashes per second, it would take more than 1027 years to calculate 2128 hashes! For another way of thinking about this, we can say that, if every computer ever made by humanity was computing since the beginning of the entire universe, up to now, the odds that they would have found a collision is still infinitesimally small. So small that it’s way less than the odds that the Earth will be destroyed by a giant meteor in the next two seconds." 

So, it may be concluded that even though collision exists it is very difficult to find these collisions. 

        Now this concept will help us find the application in a way that if the hashes are being used as the address for a  message, each message will have a distinct/unique hash function and it is practically infeasible to  trace a message back to 2 different inputs.  

Property 2: Hiding 

If there is a hash function such as H(x) where x is a message and H(x) is a hash of x, it is not feasible to find x. 

Hash functions by itself are mathematical protocol which is difficult to invert. As mentioned in Bitcoinmining.com ,hiding property of hash function is  designed to be hard to invert (so-called one-way or pre-image resistant property). You can compute y from x cheaply y=H(x) but it's very hard to find x given only y. A full hash inversion has a known computationally infeasible brute-force running time, being O(2^k) where k is the hash size e.g.  SHA256, k=256, and if a pre-image was found anyone could very efficiently verify it by computing one hash. 

To apply the hiding property in the blockchain, we can take a random (let's say x ) 256- bit number.Then we create a hash of this number say H(x) and concatenate this number with another message say n such that Y =H( x | n) so that it is even more difficult to find x back. 

Now if this message needs to be sent to another person who should be able to read this message should be provided with x and n such that if she does the same process of concatenating the hash of x with n should get the same value i.e. (H (x | n)