Title on the Blockchain: A New Era in Real Estate Ownership

Figure 1: Benefits of blockchain technology, Source: Deloitte LLP

Cyberfraud and Proof-of-Reserves (PoR) Concept

Privacy and security have grown significantly vital as the industry grappled with the challenges of recent years, and remain among the significant issues to focus on in 2023. Despite the title industry's continuous efforts to increase awareness and preparedness in countering wire fraud attacks, criminals are constantly refining their tactics.

When email first came to life, many people believed it would be invincible to fraud. Of course, that was just wishful thinking. We now routinely deal with ransomware, compromised business emails, and hundreds of phishing attempts.

Similarly, new technologies can also fall victim to exploits by bad actors, especially when security measures have not yet matured or fully understood. As blockchain technology rapidly gains popularity as an immutable and tamper-proof platform, fraudsters are becoming more sophisticated in exploiting its vulnerabilities. In response, blockchain developers are working on implementing advanced security protocols such as multi-factor authentication and encryption to safeguard against unauthorized access.

After a catastrophic event that led to the downfall of specific crypto firms in 2022, developers in the industry were struck with the realization that customer funds' safety should be a top priority. To mitigate the risks associated with such incidents, they came up with a solution called the Proof-of-Reserves (PoR) concept. This groundbreaking development guarantees that all deposits are backed, ensuring customers' peace of mind.

This new development involves verifying the collateralization of digital assets held by crypto businesses and improving transparency for depositors through public attestations and independent audits. The use of PoR gives customers confidence that crypto companies are not at risk of a liquidity crisis and that their funds can be withdrawn at any time. Additionally, the implementation is also important in setting industry standards for regulators with the primary goal of protecting consumers.

To adhere to the concept, companies that keep customers' funds may release regular proof-of-reserves audit results or have a real-time track of reserves available on their website.

Proof of reserves uses a secure data structure called a Merkle tree (also known as a hash tree) to combine all customer balances into one total, without revealing any confidential data. Auditors can access the tamper-proof cryptographic fingerprint of the Merkle root to verify the balance information without being able to view any private information. By leveraging the same Merkle tree hashing mechanism as blockchain technology, data is kept secure and protected from any tampering or hacking.

In the context of title deed records on the blockchain, PoR can be used to ensure transparency and verification in title deed records on the blockchain. By implementing PoR on a title agency like Propy Title and Escrow Inc, the ownership of a property can be proven without disclosing personal or confidential information. PoR can confirm that the agency holds the title deed and verify property ownership without the need for third-party verification.

When it comes to title deed records on the blockchain, utilizing PoR can essentially enhance the degree of trust and transparency in the property buying and selling process. This facet can effectively diminish the possibility of fraudulent activities and guarantee that a property's ownership can be authenticated with complete confidence.

Artificial Intelligence (AI)

As PoR introduced a new way of verifying that customers’ funds are collateralized by certain businesses, 2023 gave rise to another technology that already started changing our life - artificial intelligence (AI). Artificial Intelligence is revolutionizing our lives by streamlining manual processes and driving the development of automated security systems. With AI, we can detect software bugs, recognize faces, and identify potential threats more efficiently than ever before.

The utilization of Artificial Intelligence has a notable potential to improve the precision and speed of managing title deed records on blockchain. AI-powered tools can streamline title searches, enhance accuracy, prevent fraud, provide predictive analytics, and automate workflow processes. AI can improve the accuracy of title searches and reduce errors, thereby mitigating the risks associated with title discrepancies:

• Automated data extraction and validation: AI systems can automatically extract important data such as property details, ownership information, and transaction history from documents, significantly reducing the manual labor required for inputting data into the blockchain. This results in greater accuracy.
• Fraud detection: AI algorithms can detect fraudulent activities by identifying patterns and anomalies in data, such as double-selling or falsified ownership documents, ultimately safeguarding the records' integrity.
• Smart contracts: The use of AI-powered smart contracts can automate the transfer of ownership and ensure that all parties involved abide by the agreement's terms and conditions, streamlining the process and lowering the risk of errors or disputes.
• Predictive analytics: AI algorithms can utilize historical data to conduct predictive analytics, identify trends, and forecast future property values. Consequently, investors and property buyers can make informed decisions based on market trends and projections.

Real-world assets (RWA) and non-fungible tokens (NFTs)

Real estate has long been considered a physical asset, with the ownership record being managed through traditional means such as paper deeds and county records. However, with the advent of digital technology and the adoption of e-recording in a majority (80%) of US counties, the ownership record has become a digital record. This has transformed real estate into a digital asset, with the physical part of the property remaining immovable and impossible to steal.

Web3, the next generation of the internet, is quickly becoming mainstream. The rise of non-fungible tokens (NFTs) has helped develop consumer trust in ownership on the blockchain. Real-world assets (RWA) are now becoming a trend in the blockchain space, and the real estate industry is no exception. With real estate being a stable $300T asset class, there is now a demand for risk-adjusted returns in decentralized finance (DeFi) using blockchain technology.

Companies can today represent the full ownership of a property using an NFT. One landmark event occurred for the first time in the U.S. with a Tampa property, which was reported by Fortune4. This innovation is revolutionizing the title industry in the US by enabling property ownership to be transferred with just two clicks and in just a few minutes, without the need for a long title closing process.

Propy's use of an NFT attached to an LLC to transfer ownership has created a virtual detachment from the county records. The transfer of ownership can now be done through a completely digital process, making it faster, more secure, and more efficient. This is a significant step towards digitizing the real estate industry and bringing it into the modern age.