The Double Spending Problem in Real Estate Transactions
Before Bitcoin, digital cash had only been possible through trusted 3rd parties to confirm transactions. The other solution which has become a much discussed topic today, would allow value to be transferred peer to peer without relying on centralized 3rd parties.This has brought excitement across many industries to digitize business processes and enable decentralized secondary market trades through peer to peer transactions. In this brief article, we look at how Web3 can solve a problem which threatens virtually every real estate transaction.
Before 2008, many cryptocurrencies had been tested using the same mechanism used by Title Registries in tracking title deeds today. In creating Bitcoin, the double spending problem was tackled by a distributed ledger which we’ve come to know as the blockchain. The distributed ledger tracks ownership of units of value owned by all the participants on a network in a transparent manner which can be verified by anyone and a history of every single transaction that has happened on the network is kept on a public ledger. To keep this article fairly short, we won’t go further into explaining the backbone of Bitcoin, we’ll dive right into what this means for Real Estate transactions.
Given a scenario where a real estate transaction is about to take place in which the seller whom we will call Alice and the buyer Bob while this transaction will be mediated by a property broker, Party A. In a normal transaction, the broker, party A will present the seller, Alice with a signed offer from Bob. Should the seller agree with the price, the agreement of sale is concluded and Bob authorizes the release of funds to Alice. However, from the time that Bob releases the funds, title registries around the world take from weeks and in some cases up to a year to transfer ownership of title deeds from Alice to Bob who is now the new owner of the recently transacted property. There are indeed some blatant flaws to this model of settling ownership on on immovable property, we are going to focus on the more inherent one of double spending.
How could we possibly ensure that Alice, the seller, does not sign multiple agreements of sale on the same piece of property with multiple susceptible buyers during the time in which the title registry is processing ownership transfer from Alice to Bob. This is quite feasible because a seller can employ multiple unknowing property brokers using replicated copies of the original title deed. This poses a great liability to the property broker if Alice, the seller was a bad actor as depicted in the diagram below.
As illustrated by the diagram above, if there is a double spend, only one of the two susceptible buyers will end up without a title deed to their name, only the first buyer to announce the transaction to the title registry will end up with a deed to their name. When this happens, much of the blame will be accounted for by the property broker through legal fees, even if they weren’t totally aware that the seller was signing multiple agreements with other brokers and buyers.
We’re leveraging Web3 to build a next-generation real estate marketplace that will increase buyer confidence and decrease broker liability by accompanying paper title deeds with a corresponding unique digital copy using the ERC 721 Standard for issuing non-fungible tokens. The digital copy representing the primary title deeds kept by the title deeds office can be traded peer to peer through our decentralized application. It is virtually impossible to create an exact copy of an existing digital copy under the ERC 721 Standard, think Crtyptokitties :), therefore ruling out the possibility of a double spend once Alice has signed over the digital copy to Bob. You are welcome to join our telegram chat if you have any questions.
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