Blockchain in Real Estate

Today, as computer-based property recording systems are prevalent in our cities but roll out at a snail’s pace in rural areas (often hindered by strained municipal budgets), and e-signatures are little used (due to legitimate fears of fraud), arguably the real estate closing process has lagged in its use of computer aided technology. Yet other aspects of real estate ownership have been transformed by the internet: smart home technology to remotely control heating and lighting and monitor security;

Now add to our brave new world blockchain, a cloud-based decentralized ledger system that could offer speed, economy and improved security for real estate transactions. Will the real estate transaction industry avoid or embrace it? What is blockchain? Blockchain is best-known as the technology behind bitcoin, however bitcoin is not blockchain. Bitcoin is an implementation of blockchain technology. Blockchain is a data structure that allows for a digital ledger of transactions to be shared among a distributed network of computers. It uses cryptography to allow each participant on the network to manipulate the ledger in a secure way without the need for a central authority such as a bank or trade association. Using algorithms, the system can verify if a transaction will be approved and added to the blockchain and once it is on the blockchain it is extremely difficult to change or remove that transaction. A blockchain can be an open system or a system restricted to permissive users. There can be private blockchains (for ownership records or business transactions, for instance) and public blockchains (for public municipal data, real estate records etc.). Funds can be transferred by wires automatically authorized by the blockchain or via bitcoin or other virtual currency. Transparent, secure, frictionless payment is touted as one of blockchain’s many benefits. How does a blockchain differ from a record kept by a financing institution or a government agency? In a blockchain, there is no third-party intermediary verifying the veracity of the transaction. Rather it is verified by “nodes.” A “node” is a transaction between computers. Each node contains the history of a transaction down to the “genesis block” or beginning block. Once a command is made to execute a transaction, the node will trace through the history of the blockchain all the way to the genesis block to confirm that the new transacting party is “cleared” to join the block. The new block can then be added to the chain, which creates an indelible and transparent record of transactions. How is a blockchain transaction more secure than any other transaction? In theory, blockchain is tamper-proof because it is decentralized and not controlled by one party. All the nodes maintaining the same database will be involved in verifying the transaction which is a check on the veracity of the system. The system is analogous to creating a unique digital fingerprint (or “hash”) for each transaction that is stored in the database by each member of the blockchain. The hash is validated by algorithms and only can be changed if the utilized consensus mechanism verifies that the transaction is legitimate. This assures secure and authenticated transactions. Is blockchain inviolable? Time will tell.