Gibraltar Property Insights Smart Contracts
Potential use of blockchain in real estate development
Property transactions have traditionally involved a large amount of paperwork and documentation, however with the rise of a new digital age and the emergence of new technologies, such as blockchain and smart contracts, there is a potential for revolution in the way that real estate development contracts are entered into and transacted.
What is blockchain and how does it work?
Blockchain is a decentralised, distributed and public digital ledger that duplicates and distributes transactions across a network of computers participating in the blockchain. The system allows for the recording of transactions and related data in multiple places at the same time.
The decentralised nature of the technology means that the ledger is stored on numerous electronic devices which are connected through a “peer to peer” system. Every transaction in the ledger is authorised by the owner’s digital signature, which authenticates the transaction and safeguards it from tampering. Each transaction is independently verified, time-stamped and added to the ledger. Once recorded, the data is extremely difficult to alter or manipulate.
What are smart contracts and how do they work?
A smart contract is translated from natural language to computer code, it is essentially a self-executing contract. The parties will agree to the terms of the contract and those terms are then embedded into the lines of code which form the contract. As the terms of the contract are executed on a blockchain (being stored in a distributed ledger) the terms cannot be altered.
The contract self-executes when the obligations under the contract have been performed. These actions could include registering a vehicle, sending notifications or releasing funds to the appropriate parties.
Within a smart contract there can be as many conditions precedent as needed to satisfy the parties to the agreement, that the agreement will be completed satisfactorily.
How we could apply the use of blockchain and smart contracts in real estate development
The typical process of a real estate development can be summarised as follows;
1. acquisition of land by the developer;
2. the developer enters into a construction type agreement with the constructor to construct the development;
3. the development then goes onto the market which allows customers to purchase a property by first entering into a reservation agreement and paying the agreed fee;
4. purchasers make payments to the developer depending on the stage of the development of that property; and
5. once the development is built the contractor hands the development back to the developer who then sells the underleases to those who have purchased the property.
The traditional method of conducting this process requires numerous parties and large amounts of paperwork being drafted, signed and executed. With the use of blockchain and smart contracts this process could be streamlined and simplified.
To put this into practice, when the developer acquires the land there could be a corresponding smart contract which would self-execute and subsequently give effect to the contract between the developer and constructor. This technology could also be used when performing the contract between the developer and purchaser. For example, once the development has been built, the contract could self-execute and initiate the payment from the purchaser, to the developer, without further documentation or delay.
In regard to the steps above, blockchain and smart contracts would allow for the entire process to be self-executing and automated, resulting in a sort of domino effect in the sense that once one contract has been performed, the subsequent contract would be initiated and entered into.
Advantages and disadvantages of the use of blockchain and smart contracts in real estate development
Speed and efficiency: with the use of smart contracts, transaction finalisation, which traditionally takes weeks or months, would be sped up, resulting in a much faster and streamlined process to execute the documents and initiate proceedings.
Improved transparency and trust: smart contracts cannot be altered, or manipulated, by anyone once stored and as a result are secured.
Autonomy: smart contracts work on a set of predefined rules that will make decisions in the chain, doing away with the need for third party agents such as brokers or agents. The use of smart contracts in this regard would result in neutrality and automation within the transactions.
Difficult to change: the fact that it is not possible to alter a smart contract which has been registered in the blockchain, could be viewed as a disadvantage of using this system. The set of conditions contained within the contract may no longer be desired later on, or the parties may wish to waive some terms or agree to other terms, which would prove to be a difficult and unnecessarily tedious process. Additionally, it may be hard for the contract to cater for unexpected events.
Underlying loopholes: pre-programmed conditions are the key and central aspect to the execution of smart contracts. If any condition of the contract is breached and a remedy is sought, the pre-programmed execution of the contract must be terminated and altered as the contract will no longer have been fulfilled. Therefore, putting an end to the contract and ensuring that the rest of the contract does not self-execute may pose a challenge.
Scalability and complexity limitations: most smart contract creation platforms currently levy a fee for transactions on the platform. This cost is usually dependent on the lines of code required to execute the contract. This essentially means that with increased complexity comes increased costs. It may also not be easy for new users to grasp the concept or interact with the technology.
Blockchain and smart contracts could provide a faster, more efficient and streamlined approach to the traditional way in which real estate development have usually been carried out. The use of blockchain technology, and the automated nature of smart contracts has the potential to truly develop and modernise the current way real estate development contracts are handled.
However, the question remains as to whether the use of these new technologies can accommodate the complex nature of property transactions and whether the advantages out-weigh the disadvantages of overhauling the current process and procedure, in favour of a journey down a new, technology-based, path.