How smart contracts could be key to blockchain adoption in real estate


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The real estate industry could represent the perfect testing ground for blockchain technologies, due to its arcane record-keeping practices, high transaction costs, and varying laws which slow the process of buying and selling real estate.

While blockchain technology can be used to address record keeping, another important capability could be unlocked with the adoption of smart contracts. Doing so would enable the execution of transactions without human intervention. A number of startups are looking to establish a beachhead in this nascent market, but security issues around smart contracts still need to be addressed.

In this article, we’ll look at some of the ways blockchain is being used in real estate transactions today and review how smart contracts work. We’ll conclude with an examination of recently discovered security issues in some smart contracts.

How smart contracts work

Smart contracts, which are programs run on a blockchain like Ethereum, have the potential to reduce the need for intermediaries in many real estate transactions.

The industry is in the early stages of adopting blockchain applications for documenting real estate transactions, but already there are more than a million smart contracts on the Ethereum blockchain, according to a recent study.

Smart contracts are specified using a programming language such as Solidity, which is similar to JavaScript. These programs define a series of operations that constitute a transaction, such as making a purchase. The code will typically include functions to confirm purchase and verify an item is received.

The code used in a smart contract is stored on the blockchain, and when executed the state of the program or contract also gets stored on the blockchain. This provides an immutable contract and the ability to represent the effects of the execution of the contract in a transparent way.

Today developers are working on limited types of smart contracts, which could include collecting rent on leases at regular intervals. That said, there are significant shortcomings that must be addressed before they see widespread adoption.

Although smart contracts sound like typical software applications, there are some important differences. Because smart contracts are immutable, they cannot be patched or updated like other software. The code can also be difficult to test, especially when the smart contract invokes services outside of the blockchain platform. And like other software services, security vulnerabilities can be found in smart contracts.

Smart contract vulnerabilities

A recent study found three broad categories of vulnerabilities in Ethereum smart contracts. Some contracts can lock funds indefinitely. At the other end of the spectrum, there is a risk that contracts can leak funds to unauthorized parties. In other cases, coding or configuration errors have led to problems with executing contracts or allowing a non-owner to become the owner of a contract.

As a result, the security of smart contracts must be improved. Computer scientists have developed formal verification methods that can prove some programs are error free. These should be applied to smart contracts. Finally, platforms for executing smart contracts must be designed with an eye toward multiple layers of defense.

Smart contracts need to be verifiably correct and implemented on secure platforms. Only then they will they make significant in roads into the real estate industry.