As blockchain continues to find new use cases throughout our modern world, it’s no surprise that the real estate industry has fallen squarely within the crosshairs. While the synergies between blockchain and real estate are seemingly endless, this Block article aims to briefly explore the application of blockchain technology, using digital non-fungible tokens (NFTs) built upon a blockchain, to transfer ownership of real-life, real estate between two parties.
Generally, ownership of real estate, also referred to as “title”, is typically transferred from one party to another by a written instrument called a deed. The recipient of such deed then records it in the public records of the county where the real estate is located to put the world on notice of such party’s ownership interest. Sometimes, sophisticated parties use other methods to transfer ownership of real estate instead of a deed due to a variety of factors including tax savings. For example, if title to the real estate is vested in a legal entity such as an LLC, then the person who owns the beneficial interests in the LLC (i.e., the membership interests) can transfer those interests to another party. The outcome is that, while there was no exchange of a deed, ownership of the real estate was effectively transferred from one party to another by transferring the ownership interests in the LLC that holds the deed to real estate.
Enter blockchain and NFTs. In a few, widely publicized real estate transactions over the past couple years, ownership of real-life real estate was transferred via the sale of NFTs. Upon transfer of such NFTs to the buyers, the transactions were instantly & permanently recorded on the Ethereum blockchain for all to see. At this point, you’re likely wondering how this was possible. Well, based on our research, the structure is as follows: (1) title to the real estate is transferred to an LLC via a written deed recorded in the county where the real estate is located, (2) an NFT is created upon a blockchain (e.g., Ethereum), (3) the document governing the LLC (often called an operating agreement) is drafted in such a way that the ownership interests of the LLC are represented by the digital NFT created in the last step, and (4) the NFT is sold on a NFT marketplace in exchange for cryptocurrency resulting in the instant transfer of ownership of the real estate to the buyer with a record of the transaction being permanently recorded on the blockchain.
But wait a minute…did this novel NFT approach really change anything fundamental about the way we transfer ownership of real estate? After all, in the structure described above, the LLC still holds a written deed representing ownership of the real estate that is recorded in the public records of the county where the property is located. It seems that instead of radically changing the traditional method of transferring real estate, the folks involved in these transactions simply added another layer of the proverbial onion to peel back. The written document representing the ownership interests of the LLC (i.e., the membership certificate), which can just as easily be exchanged between two persons via hand delivery, was simply replaced with a digital NFT that parties can now transfer on a cell phone connected to the internet via the blockchain.
While this is a massive step into a largely unknown realm for real estate, only time will tell whether the benefits to NFT real estate transfers outweigh the potential drawbacks, or whether some deeper fundamental change is necessary in order to truly revolutionize the way we transfer real property. One thing is for certain though – we thoroughly look forward to discussing these possibilities in greater depth with the Layer 1 community in an effort to advance the ball towards the next groundbreaking blockchain use case.
Post Date: August 30, 2023