Blockchain technology has got the secretive world of computer cryptography paving the way for a groundbreaking new wave of services and businesses.Big banks of the City and Wall Street have started making it a reality for the Financial sector through the R3 Cordia project. It has a huge potential for an array of applications to fundamentally change the Financial sector, as well as how the property industry operates in the UK and globally.

The problem is that no one understands it. Let me explain a little bit more.

Blockchain: What it is and what it does

The blockchain is a digital infrastructure for services and applications to be built around the existing technology which will give previously unattainable levels of security, speed and transparency to movement of data and assets. It has the ability to refine and evolve how the industry operates at each and every formal and informal level.

A blockchain is a system of constantly synchronised ledgers, similar to a a traditional bookkeeper’s role of maintaining and updating a ledger. However, transaction history and information is maintained by all the collective users, rather than a single central bookkeeper.

The principle being that:

each user has a copy of the ledger
a change in one ledger is broadcast across all ledgers
updates are made simultaneously to all ledgers as each new ‘block’ is added to the ‘chain’

A ‘block’ is made up of all changes that have happened within a period of time. The time of updates depends on the network being used. The time is not set, but rather is the time taken to solve a mathematical equation to secure the network and therefore verify all changes made. Once a ‘block’ of changes has been made, it is added to the ‘chain’ of previously verified ‘blocks’. Thus the ‘blockchain’.

The blockchain is irrefutable. Once an updated ‘block’ has been accepted into the ‘chain’ then it is stored forever and cannot be changed. It may be changed later on, however there will always be the record of each change that has occurred.

This allows for an audit trail to be kept on any asset which can be linked to the blockchain through a digital code or ‘passport’, similar to having a serial number on a banknote or on a passport. The ‘passport’ could be linked to a diamond (Everledger Blockchain), providing identification of citizens for Government services (Guardtime Blockchain used in Estonia), Land Registry (Factom Blockchain in Honduras), and a growing number of applications in both the private and public sectors.

The result is asset movement and a security of data movement with a very low marginal costs in terms of time and money, due to the removal of third parties. A good quote I read while delving into this explains it in clear terms:

“If the internet brought us near instant communication, then the blockchain brings us near instant digital asset transfer, asset movement and security of data movement.”

To fully understand how a blockchain works, you will require a deep understanding of cryptographic hash functions and hashing algorithms. Huh?

These are complex mathematical equations, so you are forgiven if you don’t understand it. Don’t worry, you don’t really fully need to. Just as you don’t really need to fully understanding how Google search engine algorithms work ‘under the hood’.

Rather, be secure in that the network is implausibly hard to tamper and cannot be changed once a block has been added to the chain, nor when a transfer is verified by the rest of the network.
Here’s my breakdown of how the blockchain works in terms more easily swallowed:

The security of transactions on the blockchain is made through the ability for the two parties involved to solve a complex mathematical equation, in order to create a line for secure and private communication or transaction between the two parties, while still being on a public network.

The equation is made up of two numbers, which are called (remember this to impress your friends) a public key and a private key. The public key is broadcast to the entire network, whereas the private key is associated to one of the users and is hidden to the network. Because the private key is linked to the user that is in the transaction, it is part of the equation that is eventually solved in order to create a secure line of transaction. The value of both keys must be known to ‘unlock’ a secure line, since one half of the equation is broadcast to the world there.

So to make this analogy a physical one: an outsider may see the ‘lock’, the public key and a huge pile of keys in which the required private key is hidden. The outsider has no option but to wade through and try every single key in the lock until they find the right one. Whereas the genuine party will have a the same information as the outsider but also has a piece of string attached to the private key and can ease it out from the pile and open the lock at the first attempt.

In essence, the secure line is hidden behind hundreds and hundreds of other false equations which are broadcast to the network at the same time, hiding the genuine line behind a number of equations so large it is hidden in randomness. In the case of Bitcoin, there are 2^256 possible equations created in each transaction. It’s like trying to find a single grain of sand in the entire Sahara Desert. In short, it’s pretty tamper-proof.
Okay, the trickiest part is over. Let’s move on.

A blockchain can also have a different number of states, depending on the level of control that the users have. The Bitcoin network is an example of a public and non permissioned blockchain. Anyone may use and transact on the network, as there are no requirements that users must attain to in order to start using the network.

On the other hand there are private ledgers, in which users must have met pre-set criteria in order to use the network. Think of this as having to provide details of identity, address, and income prior to receiving a loan from a bank. The criteria for entry can be set up by the owners of the blockchain. Permissioned blockchains typically make use of digital signatures.

A digital signature is, well, just that.

It is the member of the network having formally ‘signed off’ on an action made to the blockchain. These are permissioned blockchains, since they require a ‘permission’ in order to make changes.

A permissioned blockchain may have one or many owners, who must reach a consensus between the trusted actors in charge of the permissioned blockchain, prior to the rest of the network being updated. This increases the transparency and trust in the system when the author of changes are linked to an identity of an user.

However, there is a loss of anonymity, allowing control of the network to be the hands of a few, similar to existing banks. A permissioned blockchain can be either private or public, meaning it may or may not require pre-set criteria of entry.

It shows there are a number of different ways for blockchains to be built in order to incorporate different services, markets and users.

Smart Contracts Taking Over

Smart contracts are linked to the blockchain since it further removes the necessity of third parties.

A smart contract is a legal business contract, written in computer code, and therefore able to validate and enforce the outcome through code. It is easy to consider the use of a smart contract through an escrow account. If a there is a willing seller and buyer, then they can both preset the requirements for the contract prior to the transfer of the asset.

The smart contract acts as an impartial ‘checklist’ that makes sure both parties have upheld the requirements of the contract, before allowing the contract to execute and transfers assets simultaneously.

Say, for example, that the seller requires the buyer to place £150,000, proof of identity and proof of conveyancing into the escrow, and the buyer requires the seller to upload the title deeds. Once both parties have completed the requirements, the transfer of the asset, money and documents occurs simultaneously. This would vastly reduce the time and cost of completing the buying and selling once all documentation is completed, with no time lags between completion of the checklist and transaction. As well as this, the entire process is easily audited and traceable, if there is a need to in the future.

A smart contract can be used for multifaceted arrangements, from investment decision-making processes, real-time indexing and compliance checklists. These are only a few examples of how smart contracts can begin to be incorporated into the Real Estate industry. The ability to pull relevant information from a blockchain, in order to populate a smart contract, would massively reduce the time and cost of drafting and collecting all aspects usually required for a contract to be completed. Examples of information required to populate a contract could be: identities of parties, time-limits, legal clauses and breakdown of events.

Predicting the Future: Home and Abroad

For the UK market, a blockchain system would more likely be centred on improving the speed and cost reduction of processes related to property management and investment. And, again more likely, prior to Government uptake of blockchains as a means to provide services to citizens (similar to Guardtime) if that is ever the case. This could replace the current means of transferring property ownership, which, as we all know, requires many third parties, time, patience and costs.

Whilst a blockchain system would not replace the requirements needed to be fulfilled prior to property changing hands, it would allow all actors to work through a seemingly centralised system.

Where there are already established companies and markets (i.e. the UK) there is more scope to employ a decentralised blockchain.

As it better suits current practices, and rather than throwing out the entire existing model, it’s more of an evolution, trimming the fat of marginal costs. A decentralised system has many focal points, with actors relaying information to those points. However, unlike a centralised system, all these focal points are linked.

So, a property company may have many avenues of services directed towards the focus of the company, yet be constantly linked to the Land Registry, mortgage/lending services, and identification on buyers and sellers. This means that there would be very little slowdown in the process of collating all the relevant parts required for a property to change ownership. Moreover, the audit trail is created, so where there is slowdown or blockages, you can pick up the phone and tell them to pull their finger out!

As explained earlier, the role of smart contracts can have a major impact on how permissions and the legal entitlements of property are recorded. Since a smart contract is self-populating (nothing particularly new), but is also linked to a blockchain, and therefore able to be validated simultaneously, the role of fact checkers and lawyers may be one of the first professions that are reduced by blockchain and automation of services. However, general admin is probably going to take the brunt of job losses or redirection.
The question in developed markets is, when will this occur?

Due to the associated costs of Real Estate, there must come a tipping point when the cost of implementing a blockchain type system is going to outweigh the costs of current practices.

There is huge speculation on when this will occur, and it is up to you to begin considering this (if you want sleepless nights). There is a general consensus that blockchains are 10 years away from realistic implementation. Yet the trend of technology technology is only continuing to be exponential. The best strategy may be to keep your ear to the ground, especially for telling signs in conveyancing and M&As.

Developing markets can benefit from a blockchain by giving security, through proof of ownership, tenure or stake on a piece of land. There is currently a push to provide a blockchain based Land Registry, which would fulfil many of these goals. Those in Honduras with the Factom blockchain and more recently in Sweden too.

From an international investor perspective, it could vastly improve the ability to buy in different territories when they can be sure of ownership and transfer. The rise of blockchain systems can improve the ability for communities and individuals to be entitled to a fair share of the benefits of international investment without less risk of corruption or coercion.

The rise of emerging markets will greatly benefit from a blockchain system where both parties, whether investors, occupiers, owners or developers, can have a complete and thorough understanding of the asset, with an audit trail of ownership, valuations, legal attachments and survey reports.

As investment firms in the UK are looking into emerging markets, it makes sense that a blockchain system should be implemented as a means to best regulate, predict and define these markets.
So what does this all mean for the property industry?

There are blockchain adopters and sceptics as there are with any new disruptive technology. As yet the potential of blockchain has a louder bark than its current bite, and this should always be considered. However, once the technology is more widely understood, and people begin creating specific services making use of blockchains, then an explosion of efficiency could be seen across the entire industry, from the house-buyer market to the largest of international investors.