It’s very obvious what the author wants to accomplish, but I would ask how smart contracts make this “super doable”?
>I could sell shares of my house such that they confer only ownership of the economic value of the house at time of exit (sale, my death, etc.) or the shares could be re-sold to someone else if the housing market here gets hotter, etc. but I maintain ownership of the right to occupy the house.
So assuming you create the asset backed tokens via smart contract...when you sell the house and pocket 100% of the proceeds (nothing personal, just hoping for the best and planning for the worst), how am I to enforce my asset backed token in court? What’s the jurisdiction? Where the house is or where I am (the injured is)? It would be very inconvenient for me to have to bring suit in your jurisdiction not mine. What if I sell the token and you don’t pay out the buyer am I joint and severally liable to the buyer?
Assuming there is standing and personal jurisdiction, how does the court know what type of ownership the token creates or created if any at all? You claim it’s an economic interest, but how is the court to decide the ownership/rights over say: fee simple, fee simple defesable, with condition subsequent, joint tenancy, tenancy in common?
Also, maybe the token is not enforceable because it violates the statute of frauds (real estate contracts must be in writing... is a smart contract/code/token a writing that’s satisfies the statute of frauds?), or does the smart contract violate the law of perpetuity?
It’s definately “super doable” to create a token on Ethereum via smart contract (I’ve made multiple tokens myself), but I think it’s anything but clear a asset back token can be created to represent ownership in real estate claiming it’s a simple economic interest without addressing a quagmire of legal issues and enforceability. Even then it’s all theory until it gets tested in the courts and precedent is set.
There are a few projects doing tokenisation of assets. The way it can be accomplished is by transferring the asset rights (in writing) to a foundation, which has it written in it's bylaws that it will transfer it back to a real person if a smart contract tells it to do so.
Our case is a bit simpler, because with regular items there is no requirement to have a written contract, but the model would work just as well for property.
We did a lot of legal research considering various models for handling this. One of the options that didn't work was tokens representing ownership rights - it would be too difficult because of the variety of international rights, and issues with handling inheritance/theft, and so on.
The details / terms of service / etc are still being ironed out by the legal team, but it seems so far that this concept should work well.
>which has it written in it's bylaws that it will transfer it back to a real person if a smart contract tells it to do so.
It all sounds good, but just because a smart contract tells a Foundation/business/individual to do something, does not mean they will act accordingly.
In other words it’s not a trustless system, in fact in your very example there is a legal entity (foundation) with a legal document (by-laws).
These types of transactions result in legal disputes regularly off blockchain, I just don’t see how smart contracts/tokens a. Fix that; or b. Even make it better/less likely.
Just an example, say a self driving car is owned by the foundation and it’s generating revenue by doing rides for hire, so you want to buy a % via token. What if the foundation fails to file its annual report and is now no longer in good standing with the state and is administratively dissolved? Now you’re in a position where a. You could be personally liable as an owner for any accident of the car (piercing the corporate veil since the foundation no longer exists and provides liability protection, assuming it ever did) and b. The car (like any other asset) can not be legally transferred out of a dissolved entity to another owner (meaning your liquidity is gone).
That’s a wild hypothetical just for fun, but the main one is the same as any other business transaction what if the foundation (seller) pockets the money from the sale of the asset and doesn’t pay the token holder. There are serious questions regarding how the courts will handle claims from token holders, as opposed to being a party to a written contract (which can still take wild swings in the courts).
It’s worth remembering that trust is not binary, and not the only criteria for a good system.
You can have a solution that requires trust and is better than a trustless one for a variety reasons. Also, within trust-requiring systems you have ones that are safe and less safe.
My current company, http://mattereum.com, is a smart contract legal services firm which focusses exactly on the problem of making smart contracts which transfer off-chain assets legally enforceable.
Real estate is a hard case, but by no means impossible, particularly if a custodian can hold the assets in the transaction. This approach is well understood.
Tokenization of these assets could make the resulting token a security. Licensing and regulations would then apply. We can help with that maze too.
> Real estate is a hard case, but by no means impossible, particularly if a custodian can hold the assets in the transaction. This approach is well understood.
So perhaps we could use an entity that is experienced in holding real estate assets that have outstanding obligations against them... like a bank? And then, instead of using cryptocurrencies that burn more electricity to service my "tokenized-crypto-mortgage" on my house than my actual house, I could get a "traditional mortgage"!
Hold my beer, I'm going to issue an ICO for this idea.
Do you think banks exist for free? What are the costs of maintaining a system of banks capable of acting as a trusted custodian in such a transaction, covering every jurisdiction the globe over? Have you amortized the cost of aircraft carriers, diplomats, social and class mobility, the set of externalities that ultimately end up reconciled through war and collapse?
We're trying to build a more stable system here. Cryptocurrencies are way cheaper in the long run. Some people have learned this the easy way, most will learn it the hard way.
> Do you think banks exist for free? What are the costs of maintaining a system of banks capable of acting as a trusted custodian in such a transaction, covering every jurisdiction the globe over? Have you amortized the cost of aircraft carriers, diplomats, social and class mobility, the set of externalities that ultimately end up reconciled through war and collapse?
Whew, thank god Bitcoin got rid of all the aircraft carriers. And class mobility, I was wondering how to solve income inequality, but who knew it was as simple as Blockchain! Blockchain! Blockchain!
Can you show me where I said the aircraft carriers need to be gotten rid of? Can you show me where I even mentioned income inequality, let alone said it should be gotten rid of?
Your glib reply of 'lol, banks already do this, why do we need to put it on the blockchain' just assumed that banks exist without external costs. And now I'm supposed to get rid of all the external costs you don't know exist? Get an imagination, or beat up on a different straw man.
So you're saying that society as a whole would be better off simply using banks? Given that the external costs of banks have already been paid, and we can save a ton of energy by not flooding the etulip market with speculation.
> What are the costs of maintaining a system of banks capable of acting as a trusted custodian in such a transaction, covering every jurisdiction the globe over
Transaction for transaction the banking system is orders of magnitude cheaper.
> Have you amortized the cost of aircraft carriers, diplomats, social and class mobility, the set of externalities that ultimately end up reconciled through war and collapse
This is totally absurd. Bitcoin has no impact on the existence of aircraft carriers, diplomats, and social/class mobility. The class mobility line is particularly laughable as it pertains to a technology that would enshrine early adopters as defacto oligarchs.
Hey Will Brown, I'm curious about the implementation of creating a token on Ethereum. Have you written anything about that?
And I completely agree about the courts needing to decide. A bizarre idea - should we generate a lawsuit as performance art? To establish precedence? That's a scary world if it's possible.
I haven’t written anything myself, but I can point you to https://beta.proofdashboard.com it’s the platform I used to experiment, first creating tokens for free on their blockchain and then on the Ethereum blockchain when I felt comfortable with Ethereum wallets/smart contracts/exchanges.
Funny enough I believe the initial iteration of Proofsuite was specifically to subdivide real estate with asset backed tokens, but they launched with a great number of tools to create your own tokens. I would also recommend their YouTube videos/tutorials.
As to generating a lawsuit for performance art...the short answer is: do not do that. If there is a real and actual controversy that is one thing, but - and I can’t stress this enough - consult a lawyer. Playing fast and loose with the courts can result in dismissal of cases with prejudice and even court ordered sanctions. There is probably room for anyone who has purchased an asset backed token to file a declaratory judgement, basically where the court determines the legal rights of the parties without an actual order or award of damages - still you would want to consult an attorney in your jurisdiction first.
Why doesn't he create a company with 100 shares that owns the house, transfer the house into the companies ownership, then just sell shares in the company?
I don't understand:
- How someone would value the 'tokens' he is selling on his house unless they came and looked at the house.
- How the 'owners' of his tokens could preserve their investment. He might just decide to trash the place since he sold most of it for 'liquidity'.
- Why he wouldn't then just sell the house and take all the money for himself. He'd have sold it twice! How's some crypto geek in Russia who bought his house token going to make a claim on that money?
Yes, there's absolutely no reason to use tokens here. It doesn't solve any the problems with the idea, of which there are several.
If you want to invest in the residential real estate sector the best way to do that is invest in a REIT that owns a portfolio of houses and rents them out. Not buy some shady smart contract token that may or may not entitle you to anything at all legally speaking and has god-only-knows what tax consequences.
Also:
I'm not really interested in having capital tied up in real-estate, but a lot of people are. And it makes sense as a middle ground investment - more conservative than stocks or crypto, but more aggressive than bonds or CD's.
Furthermore, does a shareholder then get a say in how the house's value-impacting decisions are managed?
Adding a deck, adding solar, painting it purple, or hooking up to public water, just for some examples. Do the shareholders vote on what the tenant/shareholder can do? Isn't this a lot like an HOA?
I suppose he could do all of these things, depending on how the contract is written. Some of these problems occur with real contacts, too. A smart contact just gets rid of a subset of the issues relating to money transfer and escrow.
Smart contracts don't actually make that “super doable”, because the underlying events and property are off-chain with no way for a smart contract to either react to or direct them. It's also doable without smart contracts: form a corporation where you are the sole initial shareholder, sell the property to the corporation while reserving yourself a life estate, and then privately sell as much of the stock as you wish. It's heavily regulated, since you are dealing with both real estate and securities laws, but it's doable, ad smart contracts don't avoid the complexity because ultimately you still need to deal with all the meatspace legal issues.
OTOH, the really big problem with the idea is separating decision-making about the property (which drastically impacts future value) from financial interest in future value. Your aren't investing in the property market, you are investing in the person managing the property, and people who aren't suckers aren't going to want to do that at arm's length without due diligence on the individual and some oversight of their management of the property. (And the ones that are suckers are going to get fleeced quickly and then not be available to invest.)
Super interesting idea, and I have some cash I might be able to spend towards it. But can you ensure the following will be enforced by your smart contract?
1. Tenant agrees to upkeep property, including mowing of lawns, plumbing, electrical, structural.
2. Tenant agrees not to sell, sublet, or abandon the house.
3. Tenant agrees not to do anything illegal that might cause the forfeiture of the house by law.
4. Tenant will give me a key to the property and house, so I can check in on it from time to time.
I probably have some other requirements for the tenant. But I'm super interested in how this might be accomplished via a smart contract.
Looking forward to conducting this via this newfangled smart contract mechanism.
When the level of discourse surrounding "blockchain technologies" boils down to the following, it makes you wonder how long it is until you wake up to find the bubble has popped:
"Someone who wants to own a % of a real estate asset in this city could just buy a % share of mine.
Smart contracts via crypto make this super doable."
where is the authority of ownership?... as in, if someone else or group of people own tokens, where's the authority that will back them up if they want to force residency on the property?... if you take your tokens to the police, will they help you evict someone?... no. until there's common authority somewhere, tokens are useless for ownership of physical property.
There are so many risks associated with owning the shares of single house in a specific place, now including the risk of badly written smart contract where a hacker can get all of your shares, or all shares could be locked up.
It might be interesting to see this concept used for a distributed housing collective. A group of homeowners across the country pool the value of their houses to buffer against economic downturns in any particular market.
I'm no real estate expert, but I can confidently say this is a very poor idea. Or more specifically, this will turn out poorly for anyone except the person who collects all the cryptocurrency and runs away.
What else to expect from a person who thinks he has invented the concept of a financial institution buying a property to rent it. Except he made the terms convenient for himself. Lunatics.
What happens when you refuse to do any repairs/upkeep and the house goes to pot over 10 years? What happens when you don't maintain insurance coverage and you burn it down? Etc.
Putting aside the fact that REITs are already a thing, there's a fundamental misconception here:
I'm not really interested in having capital tied
up in real-estate, but a lot of people are.
Nobody wants their capital "tied up", they want it performing.
The reason real estate is such a popular (and often successful ) investment is because of 3 factors:
- income (via rent)
- leverage (via a mortgage)
- appreciation (via time and luck)
Leverage is made possible because the income from a property can cover some or all of the cost of the interest on the loan, meaning that all that's tied up is the downpayment, so the appreciation enjoys a multiplier effect (say 5x if you put 20% down). Offering a contract that only allows the investor to participate in the appreciation without any leverage or income just doesn't make sense (for the investor).
This is an interesting idea. I believe this already happens with real estate but I can't find what it is called.
Another problem I could see coming up, if you do not get the full benefit of making improvements to your house, you will have less incentive to make improvements to your home. You would also have to figure out how to grant permission to make any improvements as investors would want to make sure any changes to the house would increase the value. If you needed a new water heater, who would pay for it? Could you convince the investors to buy into a high efficiency heater, even if it did not add any value to the house over a regular heater?
> I'm not really interested in having capital tied up in real-estate....I want to live in my house and not be kicked out by a third party owner, but I don't want my assets tied up in it....I want to sell shares of my house.
This article would be more compelling if he explored (or at least mentioned) the existing mechanisms for leveraging his home's value (e.g. cash out refinance and HELOCs) and why they don't meet his needs. Instead, he wants to sell fractional ownership and control of his home?
I would like to get some (10%-20%) equity out of my house. Not with a loan against it but selling equity. I looked around some and this company[1] facilitates exactly this scenario. Unfortunately when I called them a few months ago they said they take 25% of the upside value and pay you only 10% of the house value. The majority owners still have to pay for/do all the maintenance. This seems like too much of a giveaway and is for people who need cash, but for some reason can't git a home equity loan.
It seems that the blockcoin space has decided that it can be used as a workaround for many financial rules, similar to how Uber/Lyft could work because calling a limo was legal and technology finally made calling a limo like hailing a cab.
I am not deep into the ICOs and blockchain tech but am quite interested in working in this space. I live and own a home in the Bay Area to possibly use as a test bed and have programming experience. I'd enjoy chatting over coffee with someone with similar interests. Username at gmail for contact.
The hard part is getting the government to acknowldege the blockchain tokens as actual ownership.
And then they'd also have to agree to honor all stolen tokens. Cryptocurrency really doesn't work unless you let the blockchain be the final arbiter of ownership, which means it would theoretically be possible to steal someone's home.
If he tokenizes his house and then a russian hacks his laptop and steals all his tokens, what happens then? Will he move out and send his keys to moscow?
Ownership ledgers are significant because they have a legal basis and state enforcement to back them up.
I don't think anyone here realizes what this would do to a property. This sort of encumberment, splitting ownership between possibly hundreds of people, is a huge headache. Try getting a proper mortgage when you have dozens of owners. See what happens when one of those owners goes into bankruptcy proceedings and that piece of your property gets tied up. And as an investor, get ready for a city/state to come after you should the primary owner walk away and stop paying taxes. And let us not forget the laws in many countries that require interests in land to be registered.
The only way to do this practically would be to put ownership of the property into a corporation and sell shares in that corp. But that gets you out of the personal property market, no more owner-occupier status for mortgages or insurance.
I think the greatest barrier here is in verifying the real world house price at exit on the blockchain. I, as an investor, would have to trust someone to verify this for me. At which point it may as well not be on the blockchain.
The problem I see is that ownership on the blockchain isn't going to be honored by the legal system (similar to deeds, liens, land title, etc), whereas a corporate entity with shares sold would be.
I'm sure you could use legal instruments to make the legal system honor the blockchain, but at that point what value is the blockchain providing? More importantly this is venturing into the realm of securities and futures, which is highly regulated.
I stand corrected when scoped to Delaware corporate entity law.
"Not just any blockchain-based ledger, however, will suffice. For one, electronic corporate records must be capable of being converted into legible paper form within a reasonable time. Second, like all other Delaware stock ledgers, a blockchain ledger must be able to (i) be used to prepare a list of stockholders entitled to vote, (ii) record information required by the DGCL to be maintained in the ledger and (iii) record transfers of stock pursuant to Article 8 of the Delaware Uniform Commercial Code."
So a blockchain or distributed ledger technology can be used, but it could just as easily be done using a relational database or paper records.
Basically all the comments are about how this can’t be done, which aren’t super helpful. What if they created a smart contract that held a signed pdf of the title deed (turning over the property to the token-holders) in the event of default? The OP could then pay a fixed amount each month into the contract to compensate the token holders. If the OP fails to meet his monthly obligations (or whatever they are), the executed title gets sent to the token holders. As long as he pays them, they can’t access it. Thoughts?
> Basically all the comments are about how this can’t be done, which aren’t super helpful
Because it very obviously cannot be done.
> in the event of default
How does the contract know a default occurred? The answer is that some entity or individual has to be trusted to input that information into the contract, at which point the smart contract aspect becomes totally useless (and in fact, demonstrably worse than a centralized solution).
I disagree that it very obviously cannot be done. It may carry more risk for the token holders than an REIT but I see no technical reason why it couldn’t be done.
As long as the payment is made in ether (or tokens) directly to the contract wallet address the contract will immediately ‘know’ whether or not a payment has occurred. You can easily write a smart contract to require a payment of X ether every Y days. You could even make the contract payment requirements dynamic based on the home’s value over time (ie it could scrape data about other sales in the area from Zillow etc). If the owner misses a payment, perhaps that triggers an email warning, with appropriate escalation thereafter (reminders, phone calls etc). If the owner misses a prenegotiated number of payments, then the contract considers it a default and automatically releases the documentation.
I think the harder problem is if the owner defaults, and a % of the home’s ownership transfers to the token-holders, what then? Presumably they would be minority owners, so they could not force a sale.
> You could even make the contract payment requirements dynamic based on the home’s value over time (ie it could scrape data about other sales in the area from Zillow etc
What computer runs the scraper? How do I know I can trust the response of this computer? What if the scraper gets banned or breaks?
> If the owner misses a prenegotiated number of payments, then the contract considers it a default and automatically releases the documentation.
How do the token holders know the documentation they will receive upon default will be legit?
How is the relationship between tokens and ownership stake enforced?
What does it mean for multiple token holders to each receive a copy of the executed deed?
>What computer runs the scraper? How do I know I can trust the response of this computer? What if the scraper gets banned or breaks?
Housing price data is publicly-available and pretty easy to verify at no cost. Anyone considering investing in real estate presumably has access to this info already.
>How do the token holders know the documentation they will receive upon default will be legit?
That's a risk with any type of transaction, but easy to verify with a good lawyer. With boilerplate docs the cost of verification goes down with each incremental transaction, i.e. once your lawyer signs off on the docs for your first deal, you can feel reasonably confident making a 2nd deal on the same paper.
>How is the relationship between tokens and ownership stake enforced?
Token holders would only receive an ownership stake if the buyer defaults. Up until that point they are just creditors. Basically this is a mortgage, but it bypasses a long foreclosure process which is better for the lenders/investors.
>What does it mean for multiple token holders to each receive a copy of the executed deed?
There already is precedent for homes to have multiple owners. Depending upon the desired number of lenders/investors, a shell company may need to be created, but again that is relatively straightforward.
> Housing price data is publicly-available and pretty easy to verify at no cost. Anyone considering investing in real estate presumably has access to this info already.
That doesn't answer the question of how I know I can trust the computer that feeds housing price data into the contract. What if it cuts the prices by 10% before feeding them into the contract?
> That's a risk with any type of transaction, but easy to verify with a good lawyer
You have no way to ensure that what the lawyer verifies is what the contract will release upon default.
> Token holders would only receive an ownership stake if the buyer defaults
That doesn't answer the question of how the ownership stake is enforced. If the default occurs, the token holders will have to go to court to figure it all out which eliminates the usefulness of the contract.
> There already is precedent for homes to have multiple owners. Depending upon the desired number of lenders/investors, a shell company may need to be created, but again that is relatively straightforward.
If my ownership stake is codified through the existing legal system what use is the smart contract? It doesn't matter what the smart contract does if I've already established myself as a partial owner via a shell corporation.
I think a lot of your questions are more related to how eth smart contracts work. Apologies if I'm misunderstanding. It's easy to verify that the deployed code of an eth smart contract matches the open source code using the Bytecode of the deployed contract. Etherscan offers contract verification, as do many other sources.
>That doesn't answer the question of how I know I can trust the computer that feeds housing price data into the contract. What if it cuts the prices by 10% before feeding them into the contract?
You can read the state of a contract for free, so you would be able to see whatever the 'price' was at any given moment. It would obviously be on you to do your DD and confirm that the price is accurate.
>You have no way to ensure that what the lawyer verifies is what the contract will release upon default.
Yes you do, see first comment above.
>If the default occurs, the token holders will have to go to court to figure it all out.
Not all defaults will necessarily lead to litigation. The parties would only need to go to court if the owner did not abide by the terms of the contract. In any traditional foreclosure lots of money and time is spent on legal proceedings.
>If my ownership stake is codified through the existing legal system what use is the smart contract?
You would only need to use the existing legal system in the event of default or breach, which would hopefully be rare. The contract eliminates middlemen. The token also gives investors/lenders significantly more liquidity, which is desirable.
> It would obviously be on you to do your DD and confirm that the price is accurate.
Due diligence is irrelevant. The point is that a smart contract cannot run a scraper, it must outsource that work to another computer living outside the blockchain; that computer is a blackbox thats behavior could change at any time.
> It's easy to verify that the deployed code of an eth smart contract matches the open source code using the Bytecode of the deployed contract
The code is not the issue. If all documents are available from the beginning then the smart contract is not doing anything useful. A smart contract cannot execute a deed automatically so it serves no purpose that could not otherwise be achieved using centralized software systems.
> Not all defaults will necessarily lead to litigation. The parties would only need to go to court if the owner did not abide by the terms of the contract
The entire purpose of a contract is that people very often fail to meet the terms of the agreement. If you're relying on the legal system to adjudicate smart contract disputes then the smart contract is literally no different from a traditional legal contract except that it is written in unnecessarily inefficient blockchain code instead of legalese.
> The token also gives investors/lenders significantly more liquidity
The tokens provide no liquidity because the legal system does not recognize them as real, you might as well print out PGP signed IOUs on index cards for all those tokens are worth.
Sure it can. It would be expensive and slow, but certainly possible.
Yes, an off-chain scraper could change its behavior. I don’t know why it would be in the interest of the company offering this service to do that, but sure. As I said before, you could view the output of this scraper anytime from within the contract itself (either through the company’s front end, or a 3rd party blockchain browser). If it looked lower than the publicly-available average, you would know there was a problem.
>a smart contract cannot execute a deed automatically
Sure it can
>serves no purpose that could not otherwise be achieved using centralized software systems
You argue against yourself here. Your issue with the off-chain scraper is one of trust- ‘how do I know it won’t change its behavior?’ I ask you the same question: how do I know a centralized server will not change my contract, or delete it?
With a distributed smart contract, you can be sure that if you audit the deployed code, it cannot be changed without your knowledge.
>no different from a traditional legal contract
The contract is really more of a trustless escrow system. It holds the legal contract for all parties securely, and ensures that no single bad-actor can change it.
>The tokens provide no liquidity
You don’t know that. If enough projects got funded this way-big if- lenders could buy, sell trade their positions.
> Sure it can. It would be expensive and slow, but certainly possible.
Forgive my imprecision, when I said "a smart contract cannot run a scraper" I meant to suggest that it is prohibitively slow, expensive and impractical to do so, like if I said "a macbook cannot render the motion picture Frozen".
> Sure it can
You are conspicuously lacking an explanation of how a smart contract can execute a deed. Still, even if it could, the point is that decentralization is totally useless in this venture. We could envision the exact same scenario you described with centralized software operated by a neutral party and a written contract that spells out identical terms.
> You argue against yourself here. Your issue with the off-chain scraper is one of trust- ‘how do I know it won’t change its behavior?’ I ask you the same question: how do I know a centralized server will not change my contract, or delete it?
You're misunderstanding. I'm not arguing against myself, what I'm trying to explain is that the smart contract doesn't solve the problem of trust because the only thing that matters (who the court says is right) works exactly the same whether you're dealing with a smart contract or a real one.
> With a distributed smart contract, you can be sure that if you audit the deployed code, it cannot be changed without your knowledge.
This is not a benefit, this is just another problem that has to be solved, all you've done is replace a lawyer with a software analyst (who retains a lawyer for when they OK a smart contract that gets hacked), except it's also slow and expensive for the sake of decentralization.
> The contract is really more of a trustless escrow system. It holds the legal contract for all parties securely, and ensures that no single bad-actor can change it.
Centralized escrow systems already do this job fine. There is no lack of reliable escrow services.
> You don’t know that. If enough projects got funded this way-big if- lenders could buy, sell trade their positions.
It doesn't matter who is funding them, they have no liquidity because the government does not recognize tokens as units of ownership in property.
All your recent comments (on this thread and others) are anti-blockchain. However you provide no tangible argument other than ‘centralized servers already do this fine.’ Ever seen the clip of Ballmer talking about the original iPhone? He says it will fail because it’s slow, expensive and you can already send email using a blackberry. That POV has not aged well.
You’re right, centralized servers can execute the computations just fine. A reason people are excited about ethereum is that they have serious misgivings that the operators of central servers are truly ‘neutral’ parties. With distributed systems built in blockchain, you can always audit the code before you enter a contract. I do not know of any widely-used centralized service that allows this.
Yes, a smart contract can execute a physical document. One way (of many) would be hellosign/docusign but running on ethereum main net. Of course this is only necessary if you want to produce a signature that looks handwritten (not essential for the doc to be legally-binding in the USA).
> All your recent comments (on this thread and others) are anti-blockchain
This has nothing to do with the merit of the argument.
> you provide no tangible argument other than ‘centralized servers already do this fine.
This is a strong argument because the cost of blockchain decentralization is extremely expensive so it has to provide a very compelling value to be worthwhile.
> Ever seen the clip of Ballmer talking about the original iPhone? He says it will fail because it’s slow, expensive and you can already send email using a blackberry. That POV has not aged well.
That's not a "POV", it's a criticism that can be applied to any expensive alternative, whether or not the criticism is accurate depends on the specific circumstances, so trotting out an example of when someone incorrectly evaluated the value proposition of the expensive alternative does not prove anything.
Additionally, this entire reply is a complete red herring because this discussion is not about the potential future successes of blockchain technology, it's about the usefulness of this specific example (selling blockchain tokens as shares of ownership in a property). The bottom line is that nothing is gained by using a smart-contract, but they are slow and expensive so using them is worse than a trusted centralized system.
Your entire argument depends on something that does not really exist, a ‘trusted centralized system.’ Maybe you can trust a system you or your colleagues design and maintain, but any 3rd party centralized system can be manipulated.
In its current state, a smart contract sacrifices speed and cost but eliminates the need for trust. You may not value that as much as others, but it certainly doesn’t make blockchain ‘worse.’
And yes, I think the fact that all your comments disparage blockchain shows you may have simply already made up your mind.
WRT the OP, the question was ‘is this possible?’ I have shown that is technically possible to finance a home purchase via crypto tokens, assuming one can find interested investors. Whether the solution is of value to you personally is totally irrelevant.
> Your entire argument depends on something that does not really exist, a ‘trusted centralized system.’
Of course there is, what do you call the NASDAQ or the NYSE? Those are trusted centralized systems that work just fine every day and process more transactions than any blockchain can hope to acheieve.
> a smart contract sacrifices speed and cost but eliminates the need for trust
No it doesn't in any meaningful way. I need to trust that my tokens will be recognized as a legal share of ownership in the property, all the smart-contract can do is give me confidence that the tokens are not counterfeit or double-spent, but this is obviously a non-issue with our current centralized system. Nobody is concerned about counterfeit Apple stock. There is no benefit to using a smart-contract because it does not solve a problem (in this case). Are there situations where a smart-contract could be useful? Probably, but attempting to tokenize the equity of your home is not one of them and you've completed failed to demonstrate otherwise.
The tokens would allow you to access a share of the payback on the loan, or the executed deed in the event of default confirming your interest. You are correct, tokens are not securities. As I understand OP’s question is whether or not this is technically possible (not whether this is an actual problem worth solving). It is technically possible. You have only shown why it might be risky or undesirable.
> > How do the token holders know the documentation they will receive upon default will be legit?
> That's a risk with any type of transaction,
No, it's not; particularly, traditional mortgages (the closest real world analog to your proposal) don't have this problem, because there is no hidden-until-default document transferring interwst, there is an interest of the named mortgage holder registered against the title record when the mortgage is initiated. This is a solved problem, but the desire to try to move things into smart contracts means you can't use the solution.
> but easy to verify with a good lawyer.
How is a lawyer going to validate that a deed PDF that can't be accessed until default is a valid document in advance of the actual default?
The pdf would be accessible anytime. It's free to read the state of the contract anytime. In the event of default, the pdf would be automatically executed and delivered to the parties. I'm not familiar with the notary requirements for a deed, but there are plenty of online notaries (you submit a picture of yourself and your ID). Also doesn't Opendoor already process deeds completely online?
Again, I think you do not have a clear technical understanding how smart contracts work. You can view the state of a contract for free at any time(unless otherwise specified). You can also validate the deployed contract against open source code. So yes, if you (or your lawyer) can’t understand solidity code you would need to pay someone to review it for you, but that seems surmountable.
Furthermore, a lender cannot easily trade or liquidate a mortgage without losing significant value. Foreclosures/short sales typically undervalue properties.
It's not the code that is the issue, but the PDF documentation which is only made available after default. Knowing the code will correctly deliver the document doesn't do me any good if I can't verify its a legally adequate document.
(Of course, the fact that a PDF will likely not meet the signed and notarized original requirement for property transfer is another issue.)
The pdf would be accessible anytime. It's free to read the state of a smart contract anytime. In the event of default, the pdf would be automatically executed and delivered to the parties. I'm not familiar with the notary requirements for a deed, but there are plenty of online notaries (you submit a picture of yourself and your ID). Also doesn't Opendoor already process deeds completely online?
> I disagree that it very obviously cannot be done.
If you can get a jurisdiction to make the ledger on which the smart contract operates the legal source of truth for real property rights, it can work. For real existing jurisdictions without that, it's unworkable.
I don’t see why that is necessary. If a lender were willing to take the risk, which is admittedly significant, there is no reason the ledger would need to be a legal document. The legal document would be referenced in the contract, with a pdf copy held in escrow on ipfs or something similar.
My point is that without something equivalent to a recorded interest, no sane lender is going to be willing to take the risk.
Beyond a certain point, the risk is so high that the premium for that risk will price out most of the potential borrowers not intending to exploit the giant legal vulnerabilities in the scheme, which drives the risk premiums higher, which narrows the pool of borrowed even more narrowly on ruthless exploiters, etc.
To make it reasonable, it has to be a remotely reasonable choice for legitimate borrowers and lenders compared to other means of borrowing, or other investments.
People invest in ICOs based on a white paper. Risk is a relative term.
I can't think of any other way to invest and trade ownership online in properties you (the lender) curate. Yes, you can buy, sell, trade a REIT, but you are reliant on someone else to select the properties.
> People invest in ICOs based on a white paper. Risk is a relative term.
Sure. I'm not saying no one would participate in this scheme in the short term, I'm saying if implemented it would quickly collapse in a storm of abuse.
> I can't think of any other way to invest and trade ownership online in properties you (the lender) curate.
Yes, but the reasons no system for that exists don't have anything to do with anything that smart contracts solve (again, unless they are legally replacing title registers.)
> Basically all the comments are about how this can’t be done, which aren’t super helpful.
I dunno. The truth seems pretty helpful. Not pleasant, perhaps, but that's a different story.
> What if they created a smart contract that held a signed pdf of the title deed (turning over the property to the token-holders) in the event of default?
Default of what? This isn't a lease contract, it's sale of a non-possessory interest that entitles token-holders to a share of the value price when the token-seller transfers it. The only time a failure of required payment could happen is after a transfer of title to some third party.
> Thoughts?
As well as likely not working legally for a number of reasons (if they can't access the deed until default, they also can't validate the deed until default, plus the problems with an unrecorded presigned transfer deed that isn't delivered until default, although the particular problems depend on the form of the deed, plus the fact that the unrecorded (in title records) encumbrance does not stop the recorded owner from burdening or disposing of the property adverse to the interests of token holders), your rental scheme isn't what the OP was seeking, which is to sell rights which give an interest only on the value at transfer.
So you've proposed a system which doesn't work for what you intend, and which even if it did wouldn't do what the OP wants.
The ‘truth’ is that you do not have a clear understanding how smart contracts work. All elements can be verified and validated against open source code using the contract’s Bytecode and a contract verification tool like etherscan.
I agree, this is a nonstandard legal structure but that doesn't mean it wouldn't work. As I understand, the OP’s goal is to raise money to buy a home, and securitize with an ownership in the home in the event OP cannot pay back what he/she borrows. He/she also wishes to offer funders the ability to liquidate/trade their token.
You're right, the owner could sell the house and keep 100% of the proceeds, ignoring the token holders. She would then be in default, the smart contract would automatically execute the legal document, and the new owners could then sue the original owner. You could even set up a listener on the contract to monitor the public record for sales of the specific property to automatically trigger the 'default' function in the contract.
Before you ask, it would be the responsibility of the lender to verify the code in the contract actually does this, but it's totally possible.
> The ‘truth’ is that you do not have a clear understanding how smart contracts work
The truth is that you don't understand the objection. And, AFAICT, even the rudiments of real property transactions.
> All elements can be verified and validated against open source code using the contract’s Bytecode and a contract verification tool like etherscan.
I'm assuming the contract is flawless. It's the PDF deed that needs to be verified as legally sufficient before initiating the deal without actually being delivered to the person who must verify it until default that creates an insurmountable verification problem in your scheme.
And that's leaving aside the legal sufficiency of such a document in the first place, and leaving aside the question of what form such a deed could take.
As I’ve said several times, you can easily view the unexecuted pdf ‘deed’ for verification purposes if it is hosted on ipfs and referenced in the contract. You can also validate the contract code itself to confirm that the executed pdf that would be delivered in default will match the unexecuted pdf. Finally, you can be confident that if the contract code is changed in the future, you will know.
As I understand, your objection is that current systems are OK, therefore we should not discuss blockchain-based solutions. You’re right, I do not understand that objection.
I don't think the core problem here is solved by the application of a distributed ledger. The problem that you will need to solve is this: residential real estate loses value fast if not maintained, and furthermore can vary a lot based on things like the presence of appliances, heating/cooling systems and other improvements. Investors that hold a small percentage and have no ability to enforce upkeep can find themselves losing money on this even in a rising real-estate market.
What are you going to do about stamp duty? And from a tax perspective, who is the beneficial owner? Are there any VAT/GST implications? I'd love to know the answers to these kind of questions, because this concept of "atomising" a larger asset is a really interesting use case for decentralised apps.
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You would have to pay proportional rent to the token holders, as they are entitled to it for owning a % of your house, otherwise they are letting you stay there rent free.
Dude's plan is to live there rent free until he eventually sells it and then the 'owners' get a return on investment -- kind of like buying shares in a corporation that doesn't pay dividends I suppose.
Solves the 'getting priced out of the market' bit brilliantly assuming he can find enough suckers to fall for this grand scheme.
--edit--
It's actually a double-plus brilliant plan.
If he manages to pull this off he sells the house for full price then buys back the tokens at a fraction of the value once the investors realize what a bad investment it is to let someone live for free in their house.
>I could sell shares of my house such that they confer only ownership of the economic value of the house at time of exit (sale, my death, etc.) or the shares could be re-sold to someone else if the housing market here gets hotter, etc. but I maintain ownership of the right to occupy the house.
So assuming you create the asset backed tokens via smart contract...when you sell the house and pocket 100% of the proceeds (nothing personal, just hoping for the best and planning for the worst), how am I to enforce my asset backed token in court? What’s the jurisdiction? Where the house is or where I am (the injured is)? It would be very inconvenient for me to have to bring suit in your jurisdiction not mine. What if I sell the token and you don’t pay out the buyer am I joint and severally liable to the buyer?
Assuming there is standing and personal jurisdiction, how does the court know what type of ownership the token creates or created if any at all? You claim it’s an economic interest, but how is the court to decide the ownership/rights over say: fee simple, fee simple defesable, with condition subsequent, joint tenancy, tenancy in common?
Also, maybe the token is not enforceable because it violates the statute of frauds (real estate contracts must be in writing... is a smart contract/code/token a writing that’s satisfies the statute of frauds?), or does the smart contract violate the law of perpetuity?
It’s definately “super doable” to create a token on Ethereum via smart contract (I’ve made multiple tokens myself), but I think it’s anything but clear a asset back token can be created to represent ownership in real estate claiming it’s a simple economic interest without addressing a quagmire of legal issues and enforceability. Even then it’s all theory until it gets tested in the courts and precedent is set.