CASE STUDY
What would a smart contract look like applied to a commercial real estate transaction?
This Stakeholder Action Timeline (SAT) models a commercial real estate transaction in Ontario, Canada, with and without the use of smart contracts and blockchain technology. The SAT presents generic steps contained in most commercial real estate transactions, from client acquisition to post-closing procedures. Almost every step of the process could be altered by using smart contracts.
The SAT is presented primarily from the perspective of a lawyer, but multiple roles are recognized. Indicated in the SAT are the three versions of when the smart contract could be developed.
At present, there is no public blockchain network that could host this smart contract transaction while providing an adequate level of privacy. As such, this type of smart contract transaction would likely take place on a private blockchain network, where only the parties involved in the transaction have access to the records.
Blockchain technology has many strengths.
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Track performance in real time
As documents uploaded are visible to all participants on the network, all parties are able to track performance in real time; meaning that everyone is aware of updates to a shared record of what is happening.
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Cost saving by increased efficiency and real-time effect
While blockchain does improve efficiency, it does not automate the most time consuming parts of the transaction (e.g. negotiations). Rather, it automates the smaller tasks such as signing the document and setting up a bank account.
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Quick transactions
Smart contracts ensure easily accessible documentation (vs. digging through papers or the cloud…), resulting in the whole process being sped up.
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Self-executing
Once the documents have been signed/verified the next step can automatically begin.
Tamper-resistant
Anonymity can still exist while the people involved can view changes being made but not change what has been added already; it is an immutable ledger.
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Reduce reliance on intermediaries
Blockchain can automate processes that would otherwise involve many stakeholders, removing intermediary staff oversight of transactions at institutions such as banks. However, it is important to note that automating processes may include extra time invested in the set-up and execution that decrease efficiency overall.
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Transparency
The terms and conditions are fully accessible and visible to all relevant parties if so wished by the network owner.
Continuous and permanent storage
The permanent record of the transaction made possible by smart contracts could be useful for recovering information later (LRO, tax, audits, etc.).
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Whether or not smart contracts can provide substantial benefits will depend on the nature of each use case. It is important to analyze the characteristics of each case before deciding whether smart contracts and blockchain technology are a good fit. As this case study illustrates, there are multiple considerations that contribute to whether blockchain and smart contracts are an appropriate fit. For example, while immutability may be an advantage for commercial real estate transactions where it is important to see what changes have been made and by whom, other characteristics of blockchain technology do not fit as well. If the involved parties had a previously existing relationship and a precedence of trust, using a technology that removes this need for trust is not only unnecessary but may introduce friction in a system where parties now need to interact with a ledger rather than with each other.
