Transacting Real Property Implementation

In Transacting Real Estate Title using Blockchain Technology I wrote that the system proposed for managing real estate title may be implemented as peer-to-peer software. What would such a software look like? We would need a flexible design that is aligned with the Unix Philosophy: highly specialized modules which are interoperable. This way we can add or remove capabilities easily, without causing significant disruptions to the system.

If we follow this design philosophy when we architect our system, we'll have a system which is easy to maintain, easy to test and debug, and easy to build on. This would give us the stability and reliability performance that you would expect from a computer system that you are using to manage trillions of dollars worth of assets. Fortunately there are already similar systems which have been proven to handle large amounts of value, such as Bitcoin and Monero, from which we can draw architectural inspiration.

Here's a high level look at how our real property system might be architected:

Fig. 1. System Overview

We're trying to translate customs and procedures into computer software, so we need to involve a number of different tools and techniques. The task might seem simple: keep record of who owns what real property, make sure that record can only be changed under the appropriate circumstances, and make that record publicly available. But when we examine the problem further we find that we need to consider identity management, the mutability of records, and the availability of records. Until now, this is done almost entirely by humans.

When designing the architecture of a software system, we must start wtih top level requirements. We might be missing a number of requirements too, but we're not yet aware of it. Unless all of the requirements are fulfilled the system will be useless, as it won't match the existing capabilities of most civil and common law property systems. If this standardized electronic legal system doesn't offer at least the same capabilities as the existing paper system, why would anyone go to the trouble of trying something new?

Daemon

The daemon is the centerpiece of our system, acting as a hub which coordinates communication between important components, such as an LMDB database, a bitcoin wallet containing information about your bitcoin, a property wallet containing information about your real property, a graphical user interface (GUI), and the outside network.

The daemon is an application which runs locally on your laptop or desktop computer, and synchronizes your local property wallet to the current state of the global property P2P ledger. When you update an important record, such as a title deed or title insurance document, the daemon would help you record this update in a way that is pushed to the network and becomes permanent.

API

The daemon exposes an Application Programming Interface, allowing external applications to read and write to certain parts of your local database. This is important for a number of activities, such as:

Most users are very comfortable with using their smartphone for simple actions. While there isn't much legal case history yet, signatures created on mobile devices with multifactor authentication (something the user knows + something the user has) should be considered just as valid as traditional "chicken scratch" with ink and paper. Unlike signatures created by hand, digital signatures are nearly impossible to forge.

Fig. 2. Tools for an investor in rental properties.

For security and privacy, these mobile apps can connect directly to the user's workstation. Or, these apps can access and decrypt the last known state of the workstation from the cloud. This is very much like Monero, where data are downloaded from a persistent P2P network and decrypted on the user's device.

Document Timestamping

When an important document is created or revised, a hash of that document needs to be created and published. This acts as a receipt, or proof, that the document has been altered. This, along with permanent publication of the documents on a distributed network and identity verification makes it difficult to commit fraud.

How is the document timestamped? The SHA256 hash is included as a dummy output in a bitcoin transaction. The best tool for the job is probably the Open Timestamps project, which is also using the Bitcoin blockchain.

Backups

Backing up important data is a common practice, and that backup becomes increasingly more important as that data becomes more valuable. A title deed to a USD 30'000'000 beach front property with your name on it is probably more important to protect than the gif you found on Telegram this morning.

Since we are dealing with such important documents, we want to ensure they will always be available anytime you have an internet connection: on demand, and under any conditions. This means we don't want to rely on a data custodian who we would have to pay to backup our data for us. Instead, we'll want to use something like the free and open source Interplanetary File System (IPFS). We can tweak this protocol and create our own application-specific IPFS network, which should provide just as much security as the global IPFS network but with dramatically improved speed. The downside to this approach is our software application will require more local disk storage.

Identity

What can we do to prevent someone from installing this software, then claiming they own property that they really don't? We need to establish a system where participants are able to properly identify themselves. We can do this by using a notary public. A notary is a trusted third party, often certified by some legally recognized institution, who can validate signatures. They check your identification document(s), watches you and your counterparty sign a document, then place their signature or stamp of approval on the same document. This process ensures that neither party can later claim that they did not sign the document.

This signing process doesn't have to be done on paper, it can be done digitally. And with the internet, we don't need to be geographically co-located with our counter-party, we only need to be co-located with our notary. If our notary can ensure our business partner's notary is legitimate, then we can trust our business partner's signature. This is simply a web of trust (WOT), which has been in use successfully for many decades.

To make this process easier, we can use a simple mobile application for an iOS or Android smartphone that allows us to sign contracts. We would go to the notary with our app on our phone, show a government ID, and the notary can watch us sign a digital contract. This app can connect to our daemon over the system's API, making it very easy to quickly and securely sign rental contracts, purchase agreements, etc.

P2P Network

Another interesting benefit from networking these instances is that you can expose some data to the public network which is useful at a certain time. This could make it really easy to buy and sell property- click a box that says "for sale" and important data about your property would be made publicly available. Like blockchain explorers, third parties would likely create property explorers to curate and display the data they collect from the network.

You might choose expose some data to a bank or insurer, which may then be able to make you a better offer on a mortgage or insurance policy. With bitcoin payment channels, it is possible to create incentives which would allow a market for this data to form.

Data

Common corporate real estate solutions such as SAP (warning: javascript) and Costar are the primitive ancestors of our proposed system. These are simple permissioned databases which lack interoperability and modern capabilities - and organizations pay dearly to license them. The quality of the data entered into these systems is high, but the value of this data doesn't have a price tag on it- so it's impossible to know just how valuable your data is, and whether or not you are making best use of it.

As an alternative to SAP, Costar, and similar proprietary solutions with traditional licensing models, we can (and should) create a free, open source (FOSS) real property software which offers similar database features. This is a traditional "FOSS alternative" approach, just like Libre Office to Microsoft Office, GIMP to Adobe Photoshop, etc. These projects rely on donations to keep their development going. The price difference alone is sometimes enough to get users to ditch a proprietary solution. But we can offer much more powerful features than these database solutions, and we wouldn't need to run this project off of donations.

Financial incentives can be very effective in shaping behavior. We can use bitcoin, a programmable money, not only as an integrated means of conveyance for smart contracts in real property transactions (a small fee could be added to transactions to support this project), but also to encourage creation and sharing of high quality data.

What would this data sharing value-transfer landscape look like? For some organizations, data sharing would take a business-to-business focus, where you're looking to share some of your data with other organizations that can help you in some way. Maybe a consultancy is willing to pay you monthly for your rental income data for an industry performance report they are planning to publish. Or you could pay a competitor directly to see how well one of their properties is performing.

This would be a simple process: you'd select which datasets you are willing to share (if any), and the price that you're willing to accept in order to allow strangers to see that data. The entire process is automated from there- you wouldn't have to do anything but open up your bitcoin wallet and watch the money flow in. You could stop sharing this data at any time. How would this be possible? With bitcoin payment channels.

Bitcoin payment channels behave a little bit like a debit card: you pay something to open the account, and you pay to close it. The bank may hide this "account opening and closing" cost from depositors, but it's still there. The difference with bitcoin is that if anything goes wrong while that payment channel is open, you can close it and you are guaranteed to get your remaining funds back. That's *not* what happens at a bank- if there's ever a problem with your credit or debit card activities, the bank can just take any money you have there to solve the problem. Here's an illustration:

Fig. 3. Payment Channels

Transfers happening within the payment channel have a marginal cost near zero. This incentive arrangement means that data buyers will probably highly evolved specialists, such as consulting firms or tax authorities(!), rather than the curious neighbor down the street.

There is an important caveat: because anyone can use this software, there is a risk of people trying to pollute the system with low or poor quality data for reasons which we might not fully understand. We need to create incentives which discourage bad actors, and encourage and support good actors. We can't guarantee we can keep bad actors out completely, but we can make sure that bad actors must pay, and pay dearly, to behave badly. The best way to do this is to require that all digital user signatures are notarized, and all data is signed before it can be made available for sale. Legitimate users would do this anyway, as it is required for signing any smart contract, and illegitimate users won't go to the trouble.