T. A.

PAI MANAGEMENT INSTITUTE

IT FOR BUSINESS

WHITEPAPER
APPLICATION OF BLOCKCHAIN IN COMMERCIAL REAL ESTATE

DATE: 2nd March 2020

FAS No: I1

NAME ROLL NO.

BHUMIKA MEHTA 19F213

PARTH SHARMA 19F232

TIRTH VIRA 19F257

TUHINA DAS 19F258

UTSAV BHANDULA 19F259

 APPLICATION OF BLOCKCHAIN IN COMMERCIAL REAL ESTATE

Technology description

As the fourth industrial revolution is approaching, blockchain is predicted to be one of the

most significant transformational technology in the pipeline. It might alter the business
processes of many industries like- finance, retail management, supply chain management,
real estate. Blockchain technology is defined as-

“A digital database containing information (such as records of financial transactions) that

can be simultaneously used and shared within a large decentralized, publicly accessible
network”.

“Blockchain is so profound it will do for trusted transactions what the

Internet did for information.”
- Ginni Rometty, President, Chairman and CEO of IBM,

Fintech Ideas Festival Keynote, 2017

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 APPLICATION OF BLOCKCHAIN IN COMMERCIAL REAL ESTATE

There are three unique features of blockchain technology-

Decentralized- There is Immutable- Blocks or Transparency- All the

no central authority which each unit of blockchain is data present on each
controls the digital unchangeable. Making block is encrypted using a
database. All transactions changes to even block will public and private key
recorded on the create a new block which which is unique to every
blockchain are based on a will be added to a individual on the chain.
P2P network and can be separate block in the
accessed by all the chain and will alert all the
computers on the blocks and hence the
network. systems on the network.

Working of blockchain
The building block of every blockchain is the cryptographic hash block.

A hash block consists of two parts- data and metadata.

• The data contains the information about the record. For example, if a blockchain is
used for maintaining multiple records of various real estate properties, then each
block will contain the data related to a particular property like the name of owner,
financial payments, etc.

• The metadata can be compared to the page of a book which has some information
about the book, like its title or page number at the footer. Similarly, each block
contains metadata which is information about the previous block, time stamp at
which the block was created.

The information in a block is encrypted using a hash function, which has the following
features -

Fixed output length - The input information can be of any length but the output is 256-
bit length. This is because the input is encrypted using the SHA 256 algorithm which
generates an encrypted string of fixed length for every input.

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 APPLICATION OF BLOCKCHAIN IN COMMERCIAL REAL ESTATE

Example-

Input-

Sai Madhura Gokul Apartment

Encrypted output-

A557E4355688644388916BAB18F821ED0CD16ACE4CC7841A0AF6F61698F45255

Input-

EB4BD64F7014F7D42E9D358035802242741B974E8DFCD37C59F9C21CE29D781E

Quick Computation- Hash function computes the encrypted output regardless of the
string length within a limited period of time.

Resistance to change (Collision resistance) - This property distinguishes the

cryptographically encrypted hash from an ordinary hash. Every input encrypted is different
from the other. A change in even a minute character will produce a significantly different
output. This property makes it easier to detect fraud and hack attempts.

Input – Bangalore

Output -
C5508DF96097559EBA53E0301AAF688926E0C3C6C5568883DEFCC6823B6C9E3F

Input- Bangalore

Encrypted output-

67C4DC95F30B00F2D9B654901A9F6F0C2A12DAEEC790F810D555CF4D9F2E3270

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 APPLICATION OF BLOCKCHAIN IN COMMERCIAL REAL ESTATE

Deterministic- The encrypted output may look like a random combination of characters
but it is actually tagged to a unique input. Hence, it is difficult for third party hackers to
intercept and interpret the meaning of the encryption.

Irreversible- Unlike a normal hash function used in data structures, it is very difficult to
reverse a cryptographic hash function.

Above mentioned are the unique features of a hash function which explains the process
of encrypting a single piece of data like the name of an individual or any single piece of
information. In case, we want to store huge volumes of data sequentially like, the details
of an insurance contract or any document, then we use linear chains and Merkel trees.

Linear chain using transitive hash function- Consider a single piece of data, like the
name of an individual which is encrypted using hash function and stored in a block. The
next block will have the details of the person like his address or his income details, but it
will also contain a hash pointer which will point to the contents of the previous block.
Hence, changing the content of previous block will change the hash function of that block,
while the hash pointer remains unchanged due to the property of collision resistance. This
is called a transitive hash function and it forms the backbone of blockchain technology.

Figure 1. Linear Transitive Hash Function

Merkle Trees- Suppose, we want to store voluminous data like financial transaction
records of a group of users, then we club them under a structure known as a Merkle
Structure, which has various interconnected levels of blocks. Changing the information of

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 APPLICATION OF BLOCKCHAIN IN COMMERCIAL REAL ESTATE

one block will change the information of subsequent levels, thus informing the user of
data tampering.

Figure 2. Merkle Trees

Smart contracts are automated contracts which are self-executing with specific
instructions written on its code that get executed when certain conditions are made. These
are self-executing contracts with the terms of the agreement between buyer and seller
directly written into lines of code. It is a mechanism involving digital assets and two or
more parties, where they put their assets in and these are redistributed according to a
formula based on certain data that is not known at the time the contract initiation. If the
first set of instructions are done then execute the next function and after that the next
one and keep on repeating until you reach the end of the contract. Each step taken acts
like a trigger for the next step to execute itself. Smart contracts created on a blockchain
makes the contracts immutable and transparent. These help in trusted transactions and
agreements to be carried out among anonymous parties without the need for a central
authority or external enforcement mechanism. It offers a real estate transactions
management solution by the introduction of a universal, distributed ledger.

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 APPLICATION OF BLOCKCHAIN IN COMMERCIAL REAL ESTATE

Industry Description
Globally real estate is a $217 trillion industry. Yet, it is also one of the most complex
industries due to the various stakeholders involved like the property owners, investors,
jurisdictional and legal frameworks. These factors increase the complexity of transactions
involved in commercial real estate. Considered as one of the most illiquid assets in the
world, the real estate is plagued with several problems as follows-

• High entry costs

• Lack of capital
• Red tape involved in the transfer of ownership of property rights
• Risks of fraud
• High transactional costs
• Cross border transactions
All these factors combined make real estate one of the most inefficient asset classes in
the world. But some of these inefficiencies if addressed by blockchain can help increase
the liquidity of CRE market.

Blockchain can help in reinventing the real estate industry by making the transactions in
real estate more transparent and easier. Some of the possible use cases of blockchain in
real estate are-

1. Blockchain makes it easier for the 4. Due to the smart contracts, there
governments to keep a track of the will be huge reduction in the use of
ownership of lands by different paper documents to maintain a
stakeholders. history of land deeds and
2. There can also be ease of movement of ownership between
transaction brought about by different stakeholders.
cryptocurrencies which use 5. The data stored in a blockchain is
blockchain technology. immutable and fraud resistant.
3. One possible revolutionary Hence, tampering with the real
transformation which can be estate records stored in blockchain
brought about by blockchain is will be virtually impossible.
tokenization or securitization of real
estate assets.

Now, we discuss two use cases of blockchain in real estate –

Smart Contracts and Tokenization.

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 APPLICATION OF BLOCKCHAIN IN COMMERCIAL REAL ESTATE

Working of Smart Contracts

The block of a Blockchain contains assets and contract terms coded. This is then
distributed and copied multiple times between the nodes of the platform. After the trigger,
the contract is performed in accordance with the contract terms. The implementation of
the commitments is checked automatically. Cryptocurrency and smart contracts, can
eliminate the need for trusted third parties to facilitate real estate transactions.

Figure 3. Flowchart of smart contracts

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 APPLICATION OF BLOCKCHAIN IN COMMERCIAL REAL ESTATE
Benefits of smart contracts
1. Automatic Signatures - A smart
contract with e-sign agreements
obligate both parties to follow terms
set in the contract.
2. Property ownership – This can be
managed with Smart Contracts.
Digital content ownership can be
established easily and manipulated
in a transparent way with smart
contracts. For example, upon the
primary owner’s death, a Digital
Will can automatically trigger the
contract execution in favour of a
primary beneficiary.
3. Leasing transactions - Big
challenges in their leasing
transactions can be reduced using
blockchain technology, making it
difficult for frauds to take place. The
decentralised platform used for
contract execution will create a set
of complete and traceable records.
It means that any transaction
between parties can be audited.
4. It Reduces the risk of breach and
fraud - For example, a seller and a
buyer agree to transfer title as the
agreement with Rs 100,000 in
digital currency. The money
exchange between the seller and
buyer would trigger the automatic
transmittal of a coin or digital
certificate that represents the title
to the buyer, the title transfer will
be immediately recorded in a block
on the blockchain.
5. Keep a record of transactions - All
agreements via smart contracts are
stored in chronological order in the
blockchain and can be accessed
along with the complete audit trail.
This creates uniform financial data
across organisations, improving
financial reporting and reducing
auditing costs.
6. Land Title Recording – This will
reduce frauds, improved transaction
transparency and efficiency, and
strengthened confidence in identity.
Additionally, it will also speed up
land registration, and be a simpler
process, providing an open
approach to data.
7. Trust – It helps in generating
confidence in their execution with
its transparent, autonomous, and
secure nature removing possibility
of manipulation, bias, or error.
8. It will speed up real estate
transactions. At present, real estate
transactions can take months on
end, and that is because of the vast
amount of bureaucracy,
middlemen, and lack of
transparency that is needed to go
through. The data regarding the
property can be saved as a hash file
within the blockchain.
9. Smart contracts can prevent
property fraud. The digital
ownership of property, documents,
and contracts can be directly linked
to the blockchain. It is impossible
for it to be tampered with or altered.
Currently in India, the governments
of Andhra Pradesh and Telangana
are using the blockchain technology
to fight against property fraud.
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Figure 4. Buyer Seller interaction process for a smart contract
 APPLICATION OF BLOCKCHAIN IN COMMERCIAL REAL ESTATE

Tokenization in Real Estate

Tokenization is also known as securitization of real estate assets. Tokenization would allow
the owner of real estate to sell parts of his property to several interested investors. These
investors would pay the property owner in terms of cryptocurrency like Ethereum or
Bitcoin and each transaction would be recorded on the blockchain. Tokenization could help
in increasing the liquidity of real estate market by facilitating ease in cross border financial
transactions.

The logic behind tokenization is as follows- The owner would sell a single piece of his
property to various interested parties, who would each become a part owner of the
property. They could buy the property at cheap rates and depending on the market
conditions, would sell it on secondary markets. This follows the same logic as stock market
and derivatives trading. Blockchain will facilitate the ease of transfer and also, will enable
the owner to maintain a clear record.

Use of blockchain in tokenization

Tokenization using block chain involves Proof of Asset, which is similar to Proof of Work
Protocol used in cryptocurrency. There are four steps as follows-

1. Initial Contract
2. Validation
3. Legal
4. Proposal

Figure 5. Flowchart of Tokenization process

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 APPLICATION OF BLOCKCHAIN IN COMMERCIAL REAL ESTATE

Initial Contract- A crypto equivalent of an Validation- Data verification to maintain

asset known as a smart asset is created.
The details of the underlying real asset
like, the names of the owner and various
details are entered. This digitization is
similar to the details of a product as
shown on an e commerce website. A
unique ID is assigned to the asset so that
it can be linked to IoT sensors. This data
is recorded in blockchain.
trust between the investors and property
owners is done using IoT and External
Oracles. IoT sensors placed throughout
the property would constantly inform the
buyers about the condition of the property
and if any deterioration occurs. The
External Oracles would validate data
present on blockchain. Thus, the two main
outcomes of this step would be-

• Validation of the details present in smart contract using IoT and External Oracles
• Recording the verification of data on blockchain
Legal and proposal conditions- They can be written on the smart contract according to the
judicial restrictions.

Implementation Challenges
• Lack of Internal Awareness - The major hindrance to Blockchain adoption being lack
of awareness.

• Integration and data security challenges.

• Ensuring that the data is ‘dispute free’ - The business data at the time of blockchain
implementation has to be the single-source of truth. The entity governing the
recordkeeping of land records has to make sure that all instances of land records
are dispute free. Clear land titling has been a contentious issue globally, and more
so in India, leading to a lack of large-scale initiatives globally, despite this being an
intuitive use case for blockchain implementation. Chandigarh has the work done to
ensure that every piece of land has a unique ID and is mapped for ownership
(including change of ownerships) had made it ideal to pursue a project for land
records using blockchain. The Government of Telangana has taken similar steps.

• Requirement of the asset being tracked to be represented digitally - It requires

changes in the traditional process before blockchain can be deployed, which may
cause the involved stakeholders to be reluctant to participate.

• Integration with existing and usually complex legacy systems will be a real
challenge for large corporations. Most of the use cases so far have been limited to
specific parts of businesses, as corporations figure out their blockchain strategy.

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• Using technology to regulate - RegTech Under the common law system, the
traditional contract is said to be executed when there is a meeting of minds between
two clearly identifiable parties for consideration, i.e. exchange of something of
value. The contract may be either oral (unless explicitly forbidden by any law) or
written. Blockchain technology has allowed for framing and deployment of ‘smart
contracts’ at scale.

• Legal challenges, such Initial cost of implementation - Most of the initial blockchain
implementations will be in the form of private or permissioned blockchain networks.
The initial infrastructure cost of such a system, which unlike in a public blockchain
could have been crowdsourced, has to be borne by the business itself. The high
cost of computing and development has to come from the institution itself, and so
will be the ongoing maintenance requirement. Quantifying this cost element and
putting in place a clear system for defraying the same both for the pilot as well as
scale up version would need to be done upfront.

• Human resource constraints - Any emerging technology, in its early years of

adoption, requires evangelists / champions across business functions, especially at
the top. In addition, technical expertise is needed to ensure implementation. The
requisite numbers for both are in short supply at present in India. Lack of regulatory
uncertainties is further discouraging people from venturing in this sector.

• Establishing ownership over land - Ownership to land can come through inheritance,
gift, purchase, and relinquishment. In India, property ownership is primarily
documented through a registered sale deed in case of a purchase of a land property.
Other documents which establish ownership include property tax receipts, survey
documents, etc. However, while entering into a transaction, the onus is on the
purchaser to verify the credentials and ownership status of the seller. As the sale
deed is a mere record of transfer of property, and is not a government guaranteed
title to property, it can always be subject to challenge. b) Poor maintenance of land
records: Government authorities such as Registrars, Patwaris and Revenue Offices
maintain records of property ownership and transfer, especially those of land.

• High amount of litigation - Several discrepancies and disputes pertaining to land

records and ownership are pending before various judicial and administrative
forums.

• A synchronicity of information - Registers held by different agencies are updated at

different times in the land transfer process – leading to a lack of clarity in
ownerships status and cumbersome tasks for the citizen.

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Conclusion and future roadmap

There are some Myths associated with Blockchain. Some of these are:

• Block chain is Bitcoin - Bitcoin is one cryptocurrency application of blockchain. This

technology can be used for the configuration of many other applications.

• Blockchain is better than traditional databases – There are several trade-offs along
with the advantages that blockchain has. For some traditional databases often still
perform better. Blockchain is valuable in environments where participants can’t
trade directly or lack an intermediary.

• Blockchain is tamper proof – The data structure is appending only, so data can’t
be removed. Blockchain could be tampered with if >50% of the network-computing
power is controlled and all previous transactions are rewritten—which is impractical.

With-time, the value of blockchain will shift from driving cost reduction to enabling entirely
new business models and revenue streams.

Creation of a distributed, secure digital identity is a value-able use case of blockchain for
both consumer identity, the commercial know-your-customer process—and the services
associated with it. However, this will be a long-term possibility due to the current feasibility
constraints. It will take three to five years for the implementation of this use case. The
lack of common standards and clear regulations is a major limitation for large scale
implementation of blockchain applications.

The present immaturity of this technology is a limitation to its current viability. In reality,
the technical configurations in which the speed, security, and storage can be selected to
make most use cases commercially viable. For example, the health records in Estonia are
still in databases are not stored on blockchain, but blockchain is used to identify, connect,
and monitor these health records as well as who can access and alter them. These trade-
offs show the use of traditional databases at this stage, but the constraints are diminishing
as the technology rapidly develops. There are increased switching costs due to the
immaturity of this technology. The Assets must be able to be digitized which helps in the
feasibility of improving record keeping or transacting via blockchain.

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References

https://vocal.media/theChain/applications-of-blockchain-outside-of-financial-services

https://www.newgenapps.com/blog/non-financial-use-cases-of-blockchain

https://gomedici.com/30-non-financial-use-cases-of-blockchain-technology-infographic

https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-
dcfs-blockchain-in-cre-the-future-is-here.pdf

https://www.ibm.com/blockchain/for-business

https://www.ibm.com/blockchain/industries

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