Title on the Blockchain: A New Era in Real Estate Ownership
Once upon a time, there was a time when real estate, one of the oldest and most significant sectors globally, was consumed by tiresome paperwork and red tape. The registration of titles and property transactions were hindered by extensive processing periods, administrative mistakes, and deceitful activities. The process was tediously slow, unclear, and cost a fortune. In this era, physical deeds and title searches were the standard, while digital records were sporadic and untrustworthy.
But then, a new technology emerged that promised to transform the way real estate transactions were recorded and managed: blockchain. With its decentralized, tamper-proof, and immutable nature blockchain provides a solution to these problems and ushers in a new era of real estate ownership.
The interest in blockchain originated with Bitcoin and cryptocurrencies. This is why the financial services sector was among the first to begin utilizing this technology. However, the potential of blockchain technology goes beyond just cryptocurrencies. One of the sectors that can benefit greatly from it is real estate.
One of the most promising applications of blockchain technology in the real estate sector is the use of blockchain-based smart contracts for settlement. A blockchain-based title registry provides a tamper-proof and immutable record of ownership, which greatly reduces the risk of fraudulent property titles. This gives property owners and investors greater confidence in the integrity of the real estate market, leading to increased investment and economic growth.
Benefits of blockchain-powered records
A blockchain-powered deed records not only decreases fraudulent activities but also simplifies the entire process of property transfers. Property transfers can be a daunting task, which requires a lot of time, effort, and money. Nevertheless, with a blockchain-powered title registry, the transfer process becomes effortless, as ownership records are quickly accessible and authentic. This effectively enhances the trust between buyers and sellers and minimizes the probability of disputes. As a result, it reduces the bureaucratic burden on both property owners and governments.
Errors in ownership records can lead to disputes and legal battles, which can be expensive and time-consuming. With blockchain-powered title records, errors could be quickly and easily identified and corrected, reducing the likelihood of disputes and legal battles.
At first, many were skeptical of the new technology. They had grown accustomed to the slow and bureaucratic process of title registration and were hesitant to adopt something so different. But gradually, as they saw the benefits of a title registry on blockchain, they began to embrace the new technology.
One of the most significant improvements was in the area of security. With traditional title registration systems, fraud and forgery were rampant. Unscrupulous actors could easily alter documents or create fake ones, leading to, as mentioned, costly legal battles and even property loss. But with a title registry on blockchain, every transaction is recorded on a decentralized, tamper-proof ledger, making it nearly impossible for anyone to manipulate the records.
The increased transparency of the blockchain was another significant improvement. Before, parties would have to go through an arduous process to verify ownership and access records. But with blockchain, all parties could access and verify information in real-time improving overall trust in the system. Transparency and openness in public documents and decisions foster trust in government agencies and the welfare society. As a result, everyone can trust that the person in possession of the original document and capable of recreating the verification records is telling the truth.
According to a report by the American Bar Association1, matters related to property deeds make up about 60% of all civil cases in the United States. These cases can involve disputes over property ownership, boundaries, liens, and other issues related to real estate. The prevalence of these cases highlights the need for increased transparency and security in real estate transactions, which can be addressed by the use of blockchain technology.
The speed and efficiency of blockchain are also transformative. What used to take days or weeks to complete could now be done in a matter of minutes. Automated verification of ownership and other relevant information make the process smoother, reducing the need for manual paperwork. Blockchain enables the use of smart contracts, which are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. This automates the real estate transaction process, such as property transfers and payments, making the process faster and more efficient.
The industry has experienced a widespread impact due to the various enhancements made.
According to a report by MarketsandMarkets2, the global blockchain in real estate market size was valued at USD 96.4 million in 2021 and is projected to reach USD 4,481.2 million by 2026.
Blockchain's transparency, security, and immutability in real estate transactions are the reason for the 79.5% from 2021 to 2026 compound annual growth rate (CAGR).
The financial benefits are immense, as the need for intermediaries such as banks and lawyers has been considerably reduced. With the system now more accessible, even those who lack access to conventional banking and legal systems can take part in real estate transactions.
This can lead to significant cost savings for buyers and sellers. According to a report by Deloitte3, the implementation of blockchain technology in the real estate industry could reduce transaction costs by up to 30%.
This can help to reduce the financial inclusion gap and create more opportunities for individuals and communities that have been traditionally underserved.
Founder and CEO of Propy
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.
One of the main hurdles in implementing blockchain is the human factor. This innovation disrupts the typical roles and tasks in the real estate market, requiring changes in organization, processes, and methods for adapting to its technological opportunities. Such changes could pose a challenge.
Based on the insights outlined above, we are convinced that the use of blockchain in real estate can and already is positively impacting by offering standardization of practices, efficiency, and transparency. Additionally, this technology promotes knowledge-sharing across organizations that have traditionally been less inclined to do so.
1 Michael J. Van Zandt, 2022). “How to Avoid Title Fraud on Your Property”. [Online] American Bat Association. Available at: https://www.americanbar.org/groups/senior_lawyers/publications/voice_of_experience/2022/october-2022/how-to-avoid-title-fraud/ . [Accessed May 20, 2023].
2 2023. “Blockchain Market by Component (Platforms and Services), Provider (Application, Middleware, and Infrastructure), Type (Public, Private, and Hybrid), Organization Size(SMEs and Large Organizations), Application, and Region - Global Forecast to 2027, Global Size”. [Online] Market And Markets. Available at: https://www.marketsandmarkets.com/Market-Reports/blockchain-technology-market-90100890.html [Accessed May 20, 2023].
3 Surabhi Kejriwal & Saurabh Mahajan, 2017. “Blockchain and real estate Mining unexplored terrain”. [Online] Deloitte. Available at: https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/real-estate/deloitte-nl-fsi-re-blockchain-in-re.pdf . [Accessed May 20, 2023].
4 MARCO QUIROZ-GUTIERREZ, 2022. “Someone just bought a Florida home for $653,000 through an NFT sale”. [Online] Fortune. Available at: https://fortune.com/2022/02/12/nft-florida-home-sale-ether-crypto/ [Accessed May 20, 2023].