How smart contracts could be key to blockchain adoption in real estate
The real estate industry could represent the perfect testing ground for blockchain technologies, due to its arcane record-keeping practices, high transaction costs, and varying laws which slow the process of buying and selling real estate.
While blockchain technology can be used to address record keeping, another important capability could be unlocked with the adoption of smart contracts. Doing so would enable the execution of transactions without human intervention. A number of startups are looking to establish a beachhead in this nascent market, but security issues around smart contracts still need to be addressed.
In this article, we’ll look at some of the ways blockchain is being used in real estate transactions today and review how smart contracts work. We’ll conclude with an examination of recently discovered security issues in some smart contracts.
Blockchain for real estate record keeping
While blockchain is still in the early stages of adoption, multiple startups are staking a claim in the real estate sector.
One company, Ubiquity, offers a record-keeping software-as-a-service for real estate transactions. The company serves local governments, title companies, and other organizations that need to manage real estate transaction information. Among others, they are currently working with the Land Records Bureau in Brazil on a pilot project.
The blockchain-based service offers several advantages to customers, including the security of a tamper-proof record of transactions, a recognized single source of definitive documents about a transaction, and a reduced risk of fraud due to forged documents.
Buyers and sellers of real estate are also making use of the blockchain. Propy, for example, is designed to facilitate cross-border sales transactions. The service lists real estate for sale, and when a buyer makes an offer, Propy triggers a workflow that includes executing title searches, disclosures, sales agreements, and other steps in the sales process. All documents are then recorded in the Ethereum blockchain.
Propy also handles the financial transaction, allowing buyers to pay for property in either bitcoin or US dollars.
Finally, blockchain is making its way into real estate leasing market. Deloitte and the city of Rotterdam in the Netherlands are implementing a blockchain application for managing lease documents. In a future version, the application is expected to also manage payments.
Blockchain applications are moving beyond the kinds of document-recording services offered by Ubiquity and Propy to include mechanisms for executing contractual agreements, which are known as smart contracts.
How smart contracts work
Smart contracts, which are programs run on a blockchain like Ethereum, have the potential to reduce the need for intermediaries in many real estate transactions.
The industry is in the early stages of adopting blockchain applications for documenting real estate transactions, but already there are more than a million smart contracts on the Ethereum blockchain, according to a recent study.
The code used in a smart contract is stored on the blockchain, and when executed the state of the program or contract also gets stored on the blockchain. This provides an immutable contract and the ability to represent the effects of the execution of the contract in a transparent way.
Today developers are working on limited types of smart contracts, which could include collecting rent on leases at regular intervals. That said, there are significant shortcomings that must be addressed before they see widespread adoption.
Although smart contracts sound like typical software applications, there are some important differences. Because smart contracts are immutable, they cannot be patched or updated like other software. The code can also be difficult to test, especially when the smart contract invokes services outside of the blockchain platform. And like other software services, security vulnerabilities can be found in smart contracts.
Smart contract vulnerabilities
A recent study found three broad categories of vulnerabilities in Ethereum smart contracts. Some contracts can lock funds indefinitely. At the other end of the spectrum, there is a risk that contracts can leak funds to unauthorized parties. In other cases, coding or configuration errors have led to problems with executing contracts or allowing a non-owner to become the owner of a contract.
As a result, the security of smart contracts must be improved. Computer scientists have developed formal verification methods that can prove some programs are error free. These should be applied to smart contracts. Finally, platforms for executing smart contracts must be designed with an eye toward multiple layers of defense.
Smart contracts need to be verifiably correct and implemented on secure platforms. Only then they will they make significant in roads into the real estate industry.