Bitcoin smart contracts lay the foundation for tokenized real property

For people active in the real estate industry, new buzzwords seem to be appearing every day. Many have heard the word “blockchain”. Even more may have heard about “tokenizing real estate”, “smart contracts”, or “fractionalizing real estate”.

These buzzwords and catchphrases are used to paint an exciting picture of the future — a future where a farmer in Africa can use a smartphone to buy a piece of commercial property in Tokyo, where a smart home automatically pays its own utility bills, or at least a future where we don’t have to wait so long for the property management company to respond to our emails about leaky faucets.

The race is on to try to build the products and services that will make this future a reality. But few in this race are addressing the fundamental issue which blocks them from moving forward: the entire industry still runs on paper.

The internet revolution, thus far, has not really affected the way this industry works. All over the world, deeds continue to be written on paper and stored in file cabinets, and signatures are still hand-written with an ink pen. How can you “tokenize” real estate if all of the underlying systems and procedures still rely on paper?

Before anything else can be done, we first have to solve this difficult problem of “digitizing real estate”. This does not mean providing access to existing databases through a web browser, as many website already do today. Digitizing real estate means we store all important documents, such as deed, insurance, taxes, etc. in an unalterable electronic format.

The property we want to give the electronic documents is called “immutability”. Immutable electronic documents are much easier to access and share than paper documents, and they cannot be lost in a fire, nor be modified after war has torn apart the region where the land registry office exists.

With immutable electronic documents, the world of possibilities that was described by buzzwords opens up. The process of buying and selling property can become much more efficient. And we can use Bitcoin to do this.

With Bitcoin smart contracts, transactions can be completed at a distance and could even be automated. It will also become much easier to add significantly more detail to the existing property records. Land registry offices typically use a street address, street number, postal code, and often latitude and longitude to identity a property on deed documents. To further remove doubt about which property a document refers to, a reference to a three dimensional computer model of the land and the improvements on that land could be added. All of this additional data could help improve the quality of the title, and further help us to visualize the invisible link between the rights holder and the property.

How does this all work in practice? Elea Labs in Switzerland is working on an implementation which, if successful, could become a new global standard for how we buy, sell, manage, rent, insure, develop, and live in real estate.

On a fundamental level, real estate is all about contracts. And Elea Labs is planning to make these contracts “smart” by using Bitcoin; not only as a means of conveyance and payment but also as a tool for time stamping important documents. The Elea Labs project is a peer-to-peer network where users control data about the real estate they own, manage, and live in. There are no “tokens” to buy; users download the free software and start using it like they might use accounting or property management software.

This software can be incredibly powerful: simply flag your property “for sale”, and peers can discover it. Identities of property owners and managers are secured through notarized digital signatures to protect against fraud, and even transactions involving multiple parties and complex conditions can be completed from anywhere in the world using Bitcoin smart contracts. The data each peer has can also be valuable to insurance companies and banks, as it would help them write more accurate insurance policies and mortgages, or even offer these in the form of programmatic “smart” contracts.

With this and other projects now underway, we’re getting ever closer to having a solid foundation for realizing significant improvements in the real estate industry. The house closings and costs we usually have to deal with, the enormous costs we incur to determine a fair price, and many other real estate related pains points will hopefully soon be a relic of the past.

About the author — Justin Smith (CTO, Elea Labs)

Justin Smith is the CTO of Elea Labs AG in Zug, Switzerland. Elea Labs focuses on the research and development of cryptofinance systems in the context of the real estate industry and the broader financial industry, such as securities issuance and trading. Justin is also the founder and CEO of the X Wallet project. The X Wallet is an iOS wallet interface for the privacy-focused cryptocurrency Monero.

Why we will use Bitcoin Lightning for the Property DNA®

Let’s face it — most people in the world today learned about the fantastic innovative capabilities of blockchain technology thanks to one word — bitcoin.

But lest you think that this post will turn into some kind of soap-box rant on the incomparable advantages of the “one and only true blockchain” — rest assured — that isn’t the point.

When we set out to build Property DNA®and provide a foundation for the tokenisation of property and property data, we had a specific set of criteria in mind — and a clear vision of what we wanted to see emerge.

Scalability

How many buildings are there in the world? Neither you nor I have any idea…

But the vision we have for Property DNA® is that of a tool that can be used by anyone, for any property, anywhere. And let’s admit it — that’s pretty big!

Obviously scalability is of prime concern.

Using the throughput capacity and reach of Lightning, we can scale up or down as much as needed. So if every property owner using Property DNA® decided to record data at the same time, there would be no problem at all.

And if just one needed to connect — that would be fine too.

Trust

One cornerstone of the foundation we are building with Property DNA® is trust. When data is entered into the application, stored and verified — it creates trust, transparency and hopefully brings people closer together, for the benefit of everyone.

Now many blockchain protocols claim to address “the trust issue” and true enough — blockchain technology at its core promises to enable trustless transactions between parties who do not know each other.

But let’s be honest — there is trust…and then there is trust.

It is one thing to believe in the power of a decentralised network of validation and it is another to commit wholeheartedly to putting your entire system of data validation and value transfer in the hands of a community of developers and supporters. Here a proven track record is paramount.

So while there may be different options on the current blockchain scene which could potentially serve our needs, we have chosen to use the bitcoin blockchain because:

a) it has stood the test of time

b) its structural weaknesses (if any) are significantly less than other well-known protocols

As we build the Property DNA® we are dedicated to build a bridge of trust between the different players in the real estate ecosystem, opening up new economies and breaking down data silos — it is absolutely essential that we be able to offer a tool that users can trust 100% — and that won’t be exploited by amateurs or disrupted by hackers.

Beyond this high level of trust among network participants, we want to foster a trustworthy bond between owners and tenants as well. Such a bond requires commitment — even in monetary form — from both sides to enable things like automatic crypto payments for rent, incentives for tenants who do repairs themselves and crowd-funded renovation.

Stability

Part of establishing trust and creating a trustworthy network is maintaining stability.

Just think about how you would feel about your electricity if it went off every couple of hours, even for a minute or two. Not very stable, right?

Because property owners will be using the DNA at their discretion — generating reports, adding data, making transactions at any time of day or night — we need our technology to be reliable and stable at all times.

The bitcoin blockchain has not only continued to operate smoothly despite growing demand, the improvements brought about by the Lightning network have created even more reason to believe in its reliability.

Global free market philosophy

And finally, there is philosophy.

Our long experience in the real estate market has given us deep insights into its workings, both good and bad. Like many markets, it has its dominant players, its smaller ones along with vested interests and inefficiencies. Even in countries where free market economics are long established, there are always conflicts of interest and a frequent lack of transparency that help certain market players maintain their positions.

The advent of crypto finance technology has enabled a level of decentralisation that has rarely (if ever) been seen in the world thus far.

And it all started with bitcoin.

So in keeping true to the spirit of this original movement of independent thought, of democratisation and “coined freedom” (to quote Fyodor Dostoyevsky), we choose to build on bitcoin technology.

Because our goal with the Property DNA® is to enable smaller property owners, individual property managers, to foster a network, not only among real estate owners and managers in small localities, but all across countries and continents.

This network effect will empower them to be able to do things they have never been able to do before:

  • get real-time updates on their costs
  • create seamless relationships with their tenants
  • get a fair, unbiased appraisal of their property’s value, based on hard data

By leveraging the strength of the bitcoin blockchain and the improvements on its basis provided by Lightning — we will keep true to the goal of a truly people-centered technology that enables participation by literally anyone who wishes to.


Our focus is unlocking ALL the true potential in the buildings where you live and work — and most of all on making blockchain & crypto “real”…!

Selling real estate with the Property DNA® [Case Study]

While it may be clear to us what the advantages are of having a PROPERTY DNA® — that might not be true for everyone.

For this reason, we present the first in our series of PROPERTY DNA® Case Studies — “The PROPERTY DNA® in Action” to illustrate how we believe it will fundamentally transform the real estate industry.


So, let’s imagine Amy is trying to sell the apartment building she owns, which includes 10 apartments and a small restaurant on the ground floor. Let’s take a look at what exactly she has to do.

1.Valuation

Of course the first challenge that Amy faces is valuing the building she wants to sell.

Amy is confident that she can sell it for € 9.2 Million, but in order to actually sell the property, she needs to have it valued by a third party.

She hires two of the big five valuation companies in her country.

Company A offers to carry out the valuation for € 3.500.– and the other for € 2.800. — .

Company A estimates the value of the house to be € 7.6 Million and company B at € 8.5 Million. Since the range is so high, Amy decided to get a third opinion (costing her an additional € 3.200.–) which yielded a valuation of € 8.2 Million. Now this means that Amy has spent a total of € 9.500.– (and five months of time) in order to get a valuation to sell the property.

2. Due diligence

To be able to sell her apartment building, Amy must also invest a chunk of change into doing a red flag due diligence followed by a technical, legal and commercial due diligence.

This costs her € 86’000.– (1%) and takes between 6 to 9 months of time and effort.

3. Brokerage fees

Amy’s broker Tim is certain that he can sell the house for € 9 Million — a number which makes Amy happy.

Amy and Tim agreed to a success fee of 2.5% (a very conservative number if you consider an average of 6–7% for the USA and some European countries). Since Tim was able to sell the house for € 8.6 Million, Amy pays him a success fee of € 215.000. — .

Total Cost

All together transaction cost summed up to € 310’500.– (or 3.6%, excl. notary and many other costs).

A dangerous range

One special point to take note of here — Amy got three different valuations from three different agents. This range, and the time and money it cost her to get them, is a serious road-block in the process of selling her house.

Now it should be noted — before we explore the efficiencies that the PROPERTY DNA® brings — that these numbers are not just our opinion.

After an extensive field research, a well-known and independently-acting consumer protection company was able to prove that professional valuations in Switzerland differ by around 20%.

That means it will likely be that you will end up selling your house at a price between € 800’000 and € 1’200’000/.

The reasons

Why is valuing a property so difficult?

In general because there is a lot of manual and multilateral work involved in delivering benchmarking and valuations. This is due to different factors:

  • data models that are based on hedonic calculation
  • missing or complex access to high-quality data sets
  • often excel-based and therefore corrupt data
  • lack of standardized accounting tables
  • conflicts of interest → sellers tends to get higher valuations than buyers

A Better Way with PROPERTY DNA®

Obviously, there has to be a better way.

If we agree that inconsistent valuations and a lengthy, cumbersome due diligence process are key stumbling blocks in the path towards a successful sale — then let’s consider what the PROPERTY DNA® can do to fix this.

DUE DILIGENCE

Because the PROPERTY DNA® provides an “at-a-glance” picture of the property, all the data which Amy needs for the due-diligence process is held in one place. This data has already verified with numerous 3rd-party service providers (e.g. notaries, service providers etc.) with all the necessary documentation.

Also — because Amy has completed the DNA and “minted” it (tying the relevant data to a secure, immutable record on the blockchain) — this data can be trusted and is tamper-proof.

In essence, Amy has completed the due-diligence process (or a large part of it) already.

Now she won’t have to wait 6 to 9 months for all the necessary information to be checked and verified.

VALUATION

As mentioned above, the main problem with the process of valuing a building to sell, is the wide range of estimates that are returned. Obviously, when third-parties are involved, opinions — and more importantly, data — can vary widely.

But what if higher-quality data were available to all? And what if it wasn’t just contained in the proprietary servers of some third-party service provider (making it hard to verify and totally untransparent)?

The PROPERTY DNA® solves this problem in two ways:

  1. Users of the Pro version of the DNA can access reliable benchmarking data (provided by our partner ImmoCompass) which allows them to quickly get a view of the market and make educated decisions.
  2. On a wider scale, the verified data contained in the complete, “minted” DNA can be exchanged (anonymously) among peers for independent verification of market valuations — without the need for third-party validators.

Tokenized property sales

The scenario outlined above clearly shows how the PROPERTY DNA® can be of benefit when dealing with the pain points in the traditional process of selling a property.

This in addition to the fact that both buyer and seller (in particular the seller) benefit from greater transparency and reduced risk thanks to more accurate valuations.

Just imagine if Amy had only been able to get € 7.6 million for the property — a price much lower than expected and one which she was unprepared for because the valuations she received were wildly inaccurate.

Most importantly, however, the PROPERTY DNA® also lays the foundation for NEW POSSIBILITIES for the sale of real estate.

In the not-so-distant future, we may very well see the market altered by the opportunity for fractionalized ownership — shared profits among multiple owners and much more.

In this case, the slow, outdated processes of valuation and due-diligence will become even more cumbersome.

But using the PROPERTY DNA® to create a basis of trust — a “digital ID” for property — there will less of a need for intermediaries to take care of things — causing property owners weeks and months of waiting.

That’s why we believe the PROPERTY DNA® can enable dramatic innovation in real estate.


Our focus is unlocking ALL the true potential in the buildings where you live and work — and most of all on making blockchain & crypto “real”…!