Should we put Real Estate on a Blockchain?
It is fairly common to hear people saying;
‘‘No, I don’t like Bitcoin, but blockchain technology is interesting.’’
So, could blockchain technology revolutionise Real Estate? In this blog post I will put forward a counterargument; that a blockchain’s *only* use case is to create a scarce digital money, and it would be a folly to build Real Estate its own one.
A blockchain is a series of databases linked chronologically, but really we don’t need any deep technical understanding of ‘what’ it is or ‘how’ it works — any more than we need to understand what http:// stands for to send an email.
Instead, let’s ask ‘why’.
Why were cryptographers in the 1990s and 2000s motivated to work on creating an independent digital money, and why was ‘blockchain’ the innovation that meant that Bitcoin worked where DigiCash, B-Money, E-gold and others had failed.
When we have answered the ‘why’ for Bitcoin, we will see it was to solve a problem unique to money and that this ‘why’ does not apply to physical assets like Real Estate.
Let’s begin by addressing two popular misconceptions towards this ‘why’.
Misconception 1: Cheaper, Faster Transactions
The first misconception is that the blockchain cuts out the slow and expensive middleman.
This was not the problem with modern money; we already had very cheap, near-instant, electronic payment with Mastercard and PayPal.
Blockchain fees are comparatively higher and transactions comparatively slower. Because they require many computers to process transactions it is necessarily more expensive and slower than having one ‘trusted third party’ maintain a single central database. Sometimes it’s better to imagine that instead of cutting out the middleman, blockchain has hundreds and thousands of them, all demanding fees for expending computing energy and requiring more time to reach consensus.
What would happen if we took Real Estate information, such as freehold and leasehold titles, off the single database held centrally at the Land Registry, and recorded it on a blockchain? Because there are now many computers maintaining the database, it would slow down transaction times and increase costs.
“Ah!”, some say, “but what if we have a so-called ‘permissioned’ blockchain, with only one, or a limited, set of computers maintaining things, in this way we can bring those computational costs back down”.
Ok, fine, so now we’ve brought costs/speed back in line with the efficiencies of a single entity maintaining a single, normal database. So again, let’s ask ourselves, ‘why’ are we adopting a blockchain?
Misconception 2: Immutability
The second popular misconception is that a blockchain is an ‘oracle’; a magical device through which we can store data immutably and which will never be wrong.
But a blockchain wasn’t designed to solve this problem either; bitcoin is natively digital. It exists only within its own walled garden; it’s a digital asset in its own digital protocol.
Think how would we get the ‘true’ information about the our Real Estate’ into the blockchain? Or imagine what would happen if we allowed anyone to add information and we have no central authority? Imagine what happens if the digital title is stolen, does the real estate now belong to the thief? What if the digital title is lost, can it be re-issued, and if so, by whom? We introduce new problems if we use a decentrally-managed blockchain for the purpose of recording information about real-world physical things.
A blockchain cannot usefully link a physical asset to a digital title without a central authority.
But, do we trust this central authority? There are parts of the world where people suffer under political instability, corruption, or weak property rights. What is really stopping the ‘permissioned user’ from winding back the blockchain to rewrite history, or to reassign and redistribute property.
The problems of improving auditability and immutability are not solved with a blockchain.
Whether we have a distributed system or retain a single, central authority in charge of linking the physical to the digital, the information stored on a blockchain is not really any more true or immutable than it was when this single, central authority stored the information in an old-fashioned database.
So, what is the problem that blockchain is a solution for?
Digital Scarcity
In Nick Szabo’s seminal essay on The Origins of Money, he describes how proto-money, like shells and beads, what he calls ‘collectibles’, were chosen for their scarcity — things that had an ‘unforgeable costliness’ to produce, and so, stored value through time.
Gold, being the scarcest of all collectibles, with the lowest flow of new supply compared to the existing stock, eventually outcompeted all others and became universally adopted as money.
Over the course of the 20th century governments around the world severed our moneys’ pegs to gold, so losing their natural scarcity. Pounds, Dollars and Yen became trivial to print digitally. Like melting ice cubes, the value of savings held in unbacked paper currencies do not last long, and this debasement carries downstream many negative consequences for both individuals and society.
Satoshi Nakamoto (after inventing Bitcoin and its blockchain) wrote about his motivations;
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
“A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990’s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system.”
The purpose then of blockchain, at least according to its inventor, was to make a digital money scarce.
Physical Scarcity
We could in theory put ownership information about gold ‘onto a blockchain’ — but it would do nothing to limit the gold supply because the physical world already does that — gold is scarce because it’s only made inside astronomically rare supernovae collisions. Gold would not become any more scarce just by recording its ownership on a blockchain-style database.
Real Estate is also scarce because of restrictions on new supply through its inherent physical characteristics. Real Estate continues to function as a store of value through time because of these real-world natural constraints; it does not suffer from modern money’s problem of having to ‘trust’ a central party not to over-inflate supply and wick away value over time.
Conclusion — Cost/Benefit of a Blockchain
A blockchain is just a series of databases linked chronologically, it’s not really that interesting. There’s no technical reason why we couldn't store information about anything ‘on a blockchain’ from oranges to Picasso paintings. These ideas have not taken off as they don’t solve a problem.
The point of a blockchain is to credibly ensure the scarcity of a digital money. It was a solution to a problem that was unique to money, and a problem that just does not apply to things like Real Estate, where their own inherent-physicality controls their scarcity.
The solution came with costs; a blockchain is computationally inefficient and so transacting directly on a blockchain has higher fees and it needs longer to reach consensus between the various nodes than with a more efficient central payments processor like a PayPal. These costs mean it is not suitable for anything expect where you are trying to capture the benefit of creating scarcity — and scarcity is only a useful property of money.
If we pause and ask ‘why’ are we doing this, then we should conclude that it would be a folly to build Real Estate (or anything else that isn’t trying to be a scarce digital money) its own a blockchain.
