How to Build Tamper-Proof Titles with Blockchain Technology

By Peter Kirby / March 16th, 2016

A home mortgage in Honduras charges 18 percent interest on a 10-year note. That’s like having a credit card on your house.

Why so costly? Because the banking system in Honduras doesn’t trust that you will continue to own your house. Imagine if someone could steal your home by making a few changes to a database. Imagine that your family could lose everything because a few bureaucrats with high-level access to the land registry could kick you out. Or if one day you woke up and didn’t actually own the things you had paid for.

This is reality for most of the world. National land registries in developing countries are notoriously corrupt, and rife with fraud and negligence. The World Bank and other international organizations have spent billions trying to correct the problem, but the flaw at its core remains the same: Absolute centralization corrupts absolutely.

Addressing the Title Corruption Problem
The blockchain offers a promising opportunity for new solutions. The blockchain is essentially a shared database, distributed across the globe on thousands of computers, with no central authority. Anyone can write a data to the blockchain—but once written, the data can never be unwritten. The mathematical proof can’t be fooled. Trust the math, not the people.

So in theory, we can attach all of the land titles of the world to blockchain entries and they become permanently tamper-proof and immutable. Just like a Bitcoin transaction, there’d be no way to “double spend” a home.

Except that it’s not quite that straightforward.

First, we have the major limitation of Bitcoin: the network doesn’t have enough capacity. Seven transactions per second means the blocks in the blockchain aren’t big enough to hold all the title data in the world. If we increase the block size, the volume of the network grows to become unwieldy, and could overwhelm the applications that depend on it.

Second, we have the “double-spend-a-skyscraper problem.” What happens when the value of a single asset on a network becomes more valuable than the whole network? Now we’ve created both a reason to attack the network and an even more compelling reason to attack the single transaction that contains the skyscraper.

Third, we have a core privacy issue. If every property record becomes public, transparent and easy to move without recourse, we’ve created a very good incentive to kidnap and hold people hostage for their property. Especially when transfer of your home is as easy as a few clicks on a wallet.

Capacity, Security and Privacy
The challenges of a blockchain title-recording solution are far from insurmountable. Fundamentally, title issues are a record-keeping problem. The goal isn’t to tokenize houses. The goal is to create permanent, immutable audit trails for all land title records. This can be done in three simple ways.

One: Title and record management should be handled using document management software run by a central property institute. The software should have multi-signature access control and cold-storage back-ups.
It would track every change, and store a log file in the blockchain. Unauthorized changes could be safely reversed.

Two: All title chains should have an immutable blockchain audit trail. So every easement, every lien, every change in ownership is hashed, timestamped and stored in a unique chain. If a property is incorrectly changed, the audit trail helps revert to the previous state of the database. But, because it’s a hash, it’s impossible to use the entry to go backward and recreate the documents. The private data stays private.

The data layer would vastly extend the capacity of the blockchain, making it possible to create millions of entries and large numbers of unique property chains.

Three: All process steps should also be tracked and given a blockchain audit trail. The digital signature of the attorney who submits the file would be captured and recorded. The ID of the user who types in the legal description would be logged and recorded. The final results are recorded. This way, you use the power of the blockchain to prevent the “garbage in equals garbage out” problem of all record-keeping systems. Errors can be identified and corrected in real time and bad actors have a permanent record of fraudulent behavior. Sunlight is the best disinfectant.

The key insight is this: 6 Unique instruments like loans, real estate and fixed income products don’t fit simply into a coin-shaped solution. They’re audit and record-keeping problems, not movement of digital asset problems. Though the blockchain is a powerful tool for auditing and record keeping, the core limitations require additional tools to be built on top of the blockchain to solve record-keeping problems.

The good news is: Innovative solutions that combine the capacity and flexibility of document management software with the encrypted security of the blockchain will allow us to build more accountable and transparent instrument-recording systems, and keep them honest. In math we trust.

By Peter Kirby

CEO, Factom

Peter Kirby is the Chief Executive Officer of Factom. A seasoned entrepreneur, Kirby has spent the past 15 years involved in numerous successful early-stage tech companies. As a leader in the blockchain space, Peter has led multi-million dollar operations and was the driving force behind delivering major products to market. Peter earned his degree in biochemistry from Lehigh University in Bethlehem, PA and an MBA in Entrepreneurship from the Acton School of Business in Austin, TX, where he graduated Summa Cum Laude.