The Implications of Tokenizing Real Estate on the Blockchain

As a partner in a real estate investment firm, the concept of tokenizing real estate is both intriguing and a source of exploration for what is possible in the future. The computerization of land titles and other documents has brought about improvements in this sector. In some countries around the world, like the Philippines for example, there were instances in the not-so-distant past where land title offices were burned at some City or Town Halls. It was reported that fake titles were then manufactured in connivance with corrupt local officials. There were even instances where the illegitimate seller would resell properties with a fake title without the actual owner's knowledge.

Right there are already two sources of potential fraud. One is you are unsure if the land title is legitimate. The other is that you don't know the paper trail of ownership transfers, hence there is no good way to determine the provenance of the land ownership.

Enter the blockchain. The promise of the blockchain is that all transactions, such as transfers of ownership, are recorded simultaneously and synchronized across several global servers, and are visible for all to see. If someone attempts to pass off a fake digital title, it would be detected by the system because most of the other servers do not have that fake digital title in their records. While it is possible to do a 51% majority attack on all servers, it is extremely hard and expensive and might not be worth it, and it can easily be detected especially if the blockchain is already very decentralized.

For example, if John has a piece of farmland that is tokenized on the blockchain, his ownership would be recorded as the latest status. Once he decides to sell the property to Alex, that new transfer transaction would be recorded on many servers globally. If John decides he wants to falsely resell that land again to Bill, the blockchain validators would detect that Alex is already the new owner and reject that transaction as false.

Contrast that with a traditional land title. Since Bill is not really aware of John's sale to Alex, he might fall for John's fraudulent scheme. With blockchain, the software code (which is audited and open for many to see) protects the new buyer. There is no need to solely trust a human person's inherent good nature. Blockchain allows the buyer and seller to interact directly without a trusted third party.

Another possibility that tokenizing opens up is the ability to fractionally own an expensive piece of property. While this is also possible with traditional centralized land titles, it is more cumbersome to do so. Fractional ownership allows a group of friends to buy a property together, but if one (or a couple) of them change their mind or need the money, it becomes easier to adjust the group ownership dynamically, as opposed to transferring a traditional land title. Every time the composition of group ownership changes, the latest status of the blockchain reflects this for all servers.

Down the road, using smart contracts can be automated to do things like disable keys for a person whose condominium rental agreement is no longer current. The new lessee would be able to exercise their right of entry to the property.

Real estate is often viewed as an illiquid asset class. It is hard to buy and hard to sell. However, tokenizing it on the blockchain can help unlock liquidity because it can be fractionalized. This makes it affordable for many people who could otherwise not afford to buy into a particular property, and it potentially creates more buyers and sellers.

It has to be stressed that blockchain will not totally eliminate fraud. It makes it harder for people with sinister motives to do their thing, simply because of its redundant transaction record-keeping property.