Revolutionizing* Real Estate with the Blockchain
Making it Easier to Sell is Just the Start * may contain actual revolution
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The Holy Grail of selling physical assets on the blockchain has always been real estate; it is the world’s most valuable asset class, but at the same time one of the trickiest to deal with because of all the legal apparatus that comes with it (more about that later).
Now, though, the innovative partnership between Mattereum and leading property consultants West London City Lets (WLCL) has succeeded in putting real estate on the blockchain.
The result has been the launch of the first real estate physical asset non-fungible token (NFT), for a prime beach-front property on England’s south coast by WLCL, listed on the NFT marketplace OpenSea for offers over £1.25M through their blockchain subsidiary Tokenized Properties. This is a first of its kind transaction and is set to revolutionise real estate deals, not just in the UK, but for customers worldwide by using Mattereum’s innovative Universal Bridge to create a market that is both efficient and transparent.
How does this work exactly? Well, the NFT is linked to a Mattereum Asset Passport (MAP) that stores relevant data for the property and is held on the blockchain. The MAP bundles together legal rights and warranties and is paired with Mattereum’s smart contract. This means that the required searches, title deed and reference media for due diligence are displayed accurately and transparently so that the NFT purchaser can sell on the property without the next purchaser needing to go through the process all over again.
What the NFT purchaser gets for their money is an interest in the property. If they wish to take full ownership of the property itself, they simply pay an extra pound, and full legal title is transferred to them, they can then do as they wish with the property and the NFT is burned. If they do not wish to do that and want to sell on their interest in the property instead, it can be done in moments, just like any other NFT transaction. Even if they do take full ownership of the property and burn the NFT, there is nothing to stop them coming back to Mattereum again at a future date and setting up a new NFT for the property to return it to the market. In fact, in a mature market for trading real estate on the blockchain, we’d expect that to be routine.
Suddenly property trading becomes swift, frictionless and efficient
Mortgages, fractionalisation and stablecoins
NFTs for property titles is pretty much a game changer, suddenly property trading becomes swift, frictionless and efficient instead of a three-month slog for every single transaction; but the implications of this are greater still. Once you start thinking about what this can do for DeFi, a whole bunch of further possibilities emerge — things like improving liquidity, collateralising, loans and mortgages, which may not sound all that revolutionary — you can go to a bank and get a loan.
But it’s not what you can get, it’s how you can get it; it’s not uncommon for real estate owners to need to talk to banks for two or three months to access liquidity, but once all the documentation is on the blockchain and there are warranties in the asset passport, it suddenly becomes possible to bypass all that and avoid the interminable delays.
The DeFi ecosystem is perfectly capable of financing mortgages and remortgages, and Mattereum expects DeFi financing of property deals to be a huge growth area in future.
It’s also possible to easily fractionalise properties by forming a Special Purpose Vehicle (SPV). You can then get a line of buyers willing to buy into these at a very advantageous price, then you can go to the liquidity provider and say, “Hey, would you lend us on those assets that you would be able to sell for those different prices?” It speeds the whole thing up.
When it comes to loans it’s also possible to have better competition in terms of things like rates using the blockchain, when you have real estate as collateral, with the potential for private people to offer loans within the DeFi ecosystem, as long as they can show they have the right backing in terms of money and security. It is even possible to use real estate to back a stablecoin, this is being done by TangibleDAO who use income-producing and tokenised residential properties as a source of both collateral and yield to back the USDR stablecoin.
The blockchain brings systemic transparency
The opacity of the real estate ecosystem has made it a source of corruption and pain for a long time. In 2008 mortgage backed securities basically destroyed the financial system because of their complete opacity — no one could figure out who had the mortgages and what the probability was that they were going to fail to repay them.
And today’s financial crisis can be seen as just the consequences of the response to that finally catching up with us. The original Satoshi white paper that started Bitcoin actually references the 2008 financial crisis and the bailouts. Satoshi understood that there was a problem with financial system stability in real estate right from the very beginning of the blockchain, and that what he was proposing could be a solution to all that. The blockchain brings systemic transparency, you can see who has what, and what the securities are made up of and make it possible to avoid all that mess. There are now companies like Milo or Figure that are willing to provide mortgages with NFTs as collateral too, and dealing with mortgages on the blockchain makes the whole thing much safer and more trustworthy.
The blockchain can drive a whole new way of thinking about land ownership and our responsibilities towards the planet
So, now all these things become possible, that adds a whole extra dimension to putting real estate on the blockchain, but it doesn’t have to end there, there is potential for using the blockchain to drive a whole new way of thinking about land ownership and our responsibilities towards the planet. To understand exactly how that could work, we need to think about what gives us real estate ownership, and I apologise in advance if this seems like a large diversion, because it is, but it is necessary, so bear with me, it’s not going to be dull though, it involves both wolves and the Holy Roman Emperor.
Part 2: The Deeper Magic from Before the Dawn of Time
First the wolves; owning real estate can be seen as the earliest form of “ownership” there is. It predates humans. In its earliest form it’s something like a bear defending its cave, you want the cave, you fight the bear, one on one conflict to defend a patch of land; then there’s wolves. They run in packs and if you look at how packs divide the land up, you find each pack has a territory with pretty clearly defined borders and conflict only occurs when one pack crosses into another’s territory — so that’s evolved from the simple territoriality of the bear and its cave to something like an agreement between packs about who owns which patch and it works out pretty clear cut; here’s a map showing the movements of wolves tracked by radio collar in Voyageurs National Park in Minnesota where they settle out into distinct territories.
So, humans work a bit like the wolves, individuals or groups of people have a patch of real estate, and they fight each other to decide where the line between them is drawn, except humans have some form of government and that government sets property ownership laws. This means that in a property dispute, instead of the two people having a fight, they take it to the law and put their case for where they believe the property line ought to be and the government comes down on one side or the other and resolves the dispute without violence (mostly). The two party fight is now a three party fight, and one of those parties is the state. Zoom out from that and you get nation states bordered by other nation states each with national sovereignty, and when these come into conflict, there is the international community and alliances that try and provide checks and balances, and on top of all that, these days, the UN. It’s all intended to try and stabilize the borders between nations by having third parties come in on one side or the other if a dispute starts.
This system of national borders is, of course, the Westphalia system of nations which came out of the Peace of Westphalia in 1648. This was the treaty that ended the 30 Year’s War (one of the longest and most destructive conflicts in European history) and which came up with an agreed way of defining national boundaries which did not need the Holy Roman Emperor to make the final decision (because, by 1648, there were protestant countries who weren’t inclined to listen to a Catholic Emperor). All of which is supposed to work to resolve territorial disputes and ultimately decide who owns a piece of land.
Sometimes, of course it fails, and there is war, just as on a personal level, someone having a boundary dispute with their next door neighbour will go round and smack them in the face.
Land law is ancient, gnarly, hard and weird
Ultimately, what this means is that there’s an ancient, layered system of real estate rights in place that governs everything from the borders of your country to the fence around your back garden, and the rights people have and how disputes are resolved is based on where they live, Germans get their disputes resolved in Germany, the English in England, and the Scots in Scotland (Scotland operates on a completely different legal system to England and Wales, despite being in the UK, so property law is different there; it also explains why in England witches were hanged but in Scotland, burned, but I digress). The result of all this is that land law is about the oldest law there is, and in most countries with a degree of antiquity, elements of their land law go back 1000 years or more.
In England, the pattern of land ownership recorded in the Domesday Book in the late 11th century is still reflected in the division of land today, in the Netherlands, they have deeds 900 years old written on parchment in old Dutch scanned into the national property rights database. As a result, land law is incredibly site specific because each country has its own history of how it did land in antiquity and most of those land deeds still apply at some level. Buy a house in the UK dating back to the 19th century or earlier and you’ll probably find the deeds still have clauses banning you running a tannery on the premises, or boiling down horses for glue. This means land law is inherently very strange because it is very old, very local and therefore extremely diverse. It’s not like copyright law, for example, which has a lot of global harmonisation because the law is relatively young and the rights are harmonised as nations link their laws up to international treaties.
Land law is ancient, gnarly, hard and weird, and that’s what controls the world’s most valuable asset class.
Part 3: A New Global Real Estate Settlement Rail
So, what Mattereum have done to sell real estate as a physical asset NFT is to put the NFT on top of this stack of law that goes all the way back to those wolves and their territory, which takes this enormous ancient pre-human machinery about territoriality and gets it down to a digital token that uses brand new technology to transfer the ownership of the land. To do this we have a Special Purpose Vehicle (SPV) that owns the land. Special Purpose Vehicles are single-function companies which typically exist to own or share ownership of a single asset, usually something like real estate or a painting.
The physical asset NFT legally locks onto the SPV, and the SPV legally locks onto the real estate register and the real estate register locks onto the law, ancient and modern.
That law then plugs into the kind of globalized Westphalian equilibrium that was ratified when the UN formed, and all of that reflects thousands of years of disputes over real estate that the Westphalian system was set up to avoid in the future. The end result of which is a Physical Asset NFT that has the power to legally transfer the ownership of the land anywhere in the world when it is sold and the purchaser takes up the interest in it. This now works without the buyer and seller having to wade through the old, weird processes of a thousand years of property law, specific to the particular country where the land is, every time it is traded. The result is a fast and simple way of buying and selling land on the blockchain that at the same time conforms to all that property law.
Finally, all this ties in with one of those recent bits of globally harmonised law, the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention. This means that if there is any dispute relating to the property and its sale, there’s a mechanism for resolving that dispute and that the outcome is legally valid in all 170 countries that are signatories to the Convention, again without having to get entangled in hyperlocal property law.
We are literally driving a thousand year old (or older) global legal equilibrium institution using Ethereum!
Part 4: Decolonising Real Estate
Now we have an NFT through which a property can be sold; yes, it is a great way of handling all that ancient legal machinery, but it’s also laying the foundations for the next generation of property law. How is that? Looking back at all this history of property law, it does seem as if law based on land with maps, boundaries, straight lines and owners, verified by a state register is objectively real and the only way doing it.
But in cultures like Greece, though, the state register isn’t an accurate record of who actually owns the land. They don’t use the state register in the villages because many people dissemble about who owns what for tax reasons. Transferring land means paying taxes. So they make an informal agreement, where you give me 50 grand in cash, and I give you the bottom 20 acres of my farm, and nobody will write this deal down because if they do that, then they have to pay taxes. Because they have to pay taxes for the government to know that the thing happened for them to deal with any dispute, they do dispute resolution at the village level. They don’t want the government to know and they don’t want to pay the government for doing the dispute resolution. To buy land in Greece, you have to go and talk to the locals to figure out what the real ownership situation is, because if you buy it from somebody that the locals don’t consider owns it, you’re going to have real problems even if you have legal title, you will not be able to use the land, so the system kind of breaks down there, ownership is down to local knowledge, community consent and personal negotiation.
In fact, it is a quirk of fate that the world basically uses a system that is of European origin; in the Ottoman Empire, it wasn’t where you lived that defined your rights, it was your religion. There were courts for christians who resolved matters between christians, for jews that dealt with their matters, and for muslims, which dealt with matters between muslims, or between muslims and members of the other faiths. If the Battle of Vienna in 1683 had gone the other way, the Ottoman approach to property law could have become the prevalent system.
A key reason the Ottoman system was so different was that a big chunk of their empire was desert inhabited by nomads who did not stay in one place and so having their legal status tied to a patch of physical real estate was pretty useless. One result being that nations within the empire were not as important as they were in the west, so after the First World War when the empire fell and western powers divided it up into countries their way, the resulting borders planted the seeds for decades of conflict as they cut across all kinds of accepted traditional territories wandered by the nomads.
For nomads, what was valuable about land was that there was good pasture here in the spring, water there in the height of summer, shelter over there when it snows in winter and so on, it is what the land provides that gives it its value, not where it is, and land that is valuable to nomads in summer isn’t in winter, so it made sense for the law to be about the people, not the place.
The Westphalian system is a horrible fit for this kind of way of looking at the land, which also makes it a horrible fit for dealing with the reality of environmental damage, climate change, overpopulation and all that. It’s hundreds of years old and pre-scientific and is fundamentally unsuited to dealing with anything like that.
Any scientifically rigorous definition of the land has to include the ecosystem if you have valuable fertile land beside a river, then someone dams the river upstream so that everything below the dam dries up and dies, your fertile land suddenly isn’t fertile anymore and it is worth a fraction of what it was before, and that is true for a river and its irrigation channels, as it is for rainfall patterns. There’s no patch of farmland in the world that is equally valuable if it has ten times as much rain or a 10th as much rain. So, because we built this pre-scientific model of land and what makes it valuable, our data representations are inadequate for representing the scientific reality of what it is that actually makes the land valuable, for capturing the environmental dimension; it treats the ecology as an externality. Now, though, if you are selling the land using a Mattereum Physical Asset NFT, it comes with a Mattereum Asset Passport (MAP) and that really changes what you can do about documenting the ecological value of the land.
Much of the dispute resolution could be done inside the SPV, without needing to involve the government
Going back to all the stuff we were saying earlier about Westphalia, about the Greeks and the Ottomans, the one thread that links how they all deal with land is that ownership of the land is about dispute resolution, whether that is done through a government land register, local agreement or a court that is based on your religion. Whichever way you are doing things, somewhere there is a way to resolve who does what with a patch of land, whether it is where you put your garden fence or which group of nomads gets to water their flocks at a particular oasis in July.
Now, if the ownership of the land is linked to a Physical Asset NFT that can transfer the ownership of an SPV that is the owner of the land on a government register, the SPV can, for example, issue leases or other user rights on the land. Much of the dispute resolution between different users of the land could then be done inside the SPV, without needing to involve the government, or indeed, anyone else. Private land management arrangements, on the blockchain. But still backed by the entire international legal stack so they are fully enforceable under law.
Land management agreements which have the full force of law that run dramatically ahead of the nation state
Creating positive political change with improved land rights
So imagine we take 100,000 acres of rainforest, we have it inside of a single SPV. Everybody on that land is a contractual tenant of the SPV including being able to do things like purchase 1000 year leases or something like that, so they’re de facto owners. But then the dispute resolution for the vast majority of the stuff is contained by arbitration clauses in the contracts, and this happens within the ruleset defined by the SPV and documented in the MAP that comes with the NFT. We can’t remove existing restrictions from the nation state or the international law level on land transactions by using these kinds of rule-making SPVs, but we can add new restrictions as matters of contract law.
So when the environmental law for managing a patch of land is insufficient, we can add new restrictive covenants in a way that forces correct management of the land for the current tenants or the future ones. This is how we basically build the possibility of land management agreements which have the full force of law that run dramatically ahead of the nation state legislation on environmental management. We do it through the physical asset NFT and its associated MAP which governs the way the SPV functions.
The prototype for this is systems like veganism. There is a whole certification machinery to say that food is vegan, and that certification machinery largely runs outside of the nation state. Some of the vegan certification machinery has become nation state legal certifications over time. But imagine if you had a way of specifying the rules for managing land that said, right, this land is rewilded land, and we manage it with absolutely zero extractive agriculture, and you’re not allowed to sell this land to anybody that will not take on a legal obligation to maintain that, and it becomes a restrictive covenant for environmental management. And this is how we can make what effectively acts like new law for land right the way up the governance stack. We’re trashing the entire world because we don’t say that the rain is as much of the value of the land, or the river irrigation is as intrinsic to the value of the land as its physical location. As a result, we’ve got people wrecking other people’s rainfall patterns with no legal liability attached. By looking at the ownership of the land in this different way we can do something about that, and without having to make governments change the law, because there are a lot of governments and they take forever to change anything and we don’t have that long. Landowners can start to enable the world to make the change here and now by using the warranties in the MAPs to govern the SPVs.
Indigenous Land Law and the New Buffalo Commons
One revolutionary proposal of this kind is the Poppers’ Buffalo Commons proposal which envisages turning the American prairies into a vast open range for buffalo. The buffalo would return to their traditional migration patterns, and a percentage of them would be culled every year. The harvest would be sold, and the profits split among the people that had put their land into the scheme. Buffalo are smart: they evolved to cope with some drought, some changing weather patterns. They evolved not to crop the grass too low and kill it. They’ve survived everything for 5 to 10 million years and might be the best chance the midwestern states of Montana, Wyoming, Colorado, Oklahoma, New Mexico, Texas, North Dakota, South Dakota, Nebraska, and Kansas have of surviving climate change. A scheme like this is exactly the kind of proposal that the blockchain could support. Track the donations of land into the system, track the animals, track the harvests each year. Run transparent markets so that the land-donors are 100% sure they are getting their due. A huge amount of the endeavour could be run on contract law and permanent blockchain records of who did what and when, aligned with satellite data and other ways of keeping score.
We can get to sustainability by adding new restrictive covenants to land and tracking them in the property rights databases
It’s not just schemes like the Buffalo Commons that blockchain-based land registries could empower. Imagine an indigenous group which owns some part of its traditional lands, but does not have all the governance powers they would wish for regarding the environmental and other management of these lands. It may be possible to implement some or all of the traditional land management norms of the culture using SPVs and contract laws, and adding these restrictions on top of the land ownership norms — a way of extending environmental protection in advance of that which is mandated by national governments.
To create this kind of structure, a group of landowners would pool their titles inside of a single company (an SPV) and then the SPV would add restrictive covenants on the land titles. The blockchain is then used for tracking who currently owns what plots, and provides a mechanism for exerting stronger local control on the land. Anyone buying land there would have to uphold the restrictive covenants, and that would hold true all the way up the governance stack — because any dispute that occurred would be handled under international arbitration law. Depending on the local legal framework, land ownership could be restricted to the traditional owners of that land.
This is a delicate area, and the struggles for control of land between colonists and the colonized are extremely subtle, complex and bitter, and are being fought all over the world every single day. There is no technological silver bullet for these issues, but a combination of good lawyering and good technology might put new tools into the hands of land rights activists.
Almost every aspect of land ownership can be reshaped by appropriate use of contract law, with the blockchain to keep records clear and demonstrate fair dealing on every level. Existing restrictions from nation state and international law cannot be removed but nearly all of our problems in environmental land management come from too little law not too much. Just as the vegans had to add new contractual restrictions to food (“contains no animal products”), we can get to sustainability by adding new restrictive covenants to land and tracking them in the property rights databases.
Indigenous peoples have lost entire continents to settlers, but as the world seeks new ways to manage land to protect the ecological balance of the entire planet, the traditional ways in which people managed agriculture, settlement and forestry may turn out to be the only long term sustainable models that exist.
Changing the world without needing to change the minds of governments
The Mattereum Universal Bridge can take any kind of real estate over to the blockchain, and enable it to be managed in a radically different way that has the potential to take ecological value, climate change and many other dimensions of the place into account that the current system just can’t, and to do it within the framework of existing law. We are changing the world without needing to change the minds of governments. If this sounds like something that has direct relevance to your needs and interests, please do not hesitate to get in touch.
To contact Mattereum https://mattereum.com/contact-us/
Mattereum and the circular economy https://mattereum.com/circular-economy/