From oral agreement to distributed agreement: digital ledgers in land registration

This article conceptualises the application of digital ledgers in land administration by addressing some fundamental questions. The article first discusses what digital ledgers are and how they are relevant to land administration. It then expands on how digital ledgers could improve land administration. It concludes with elaborating on some technical challenges in adopting digital ledgers in land administration

Mohsen Kalantari Centre for Spatial Data Infrastructure and Land Administration, Melbourne School of Engineering, The University of Melbourne

Xueling Chen Centre for Spatial Data Infrastructure and Land Administration, Melbourne School of Engineering, The University of Melbourne

Zhouyang Wang Centre for Spatial Data Infrastructure and Land Administration, Melbourne School of Engineering, The University of Melbourne

Luan Nguyen Centre for Spatial Data Infrastructure and Land Administration, Melbourne School of Engineering, The University of Melbourne

What are digital ledgers?

A digital ledger is a geographically distributed database that is shared and synchronized across a network by consensus of the network participants. Digital ledgers can be designed in various ways one of which is the popular Blockchain. A blockchain is a chainlike data structure with an unceasingly growing chain of records. Any change or update of the data will be stored in blocks, linked and secured by cryptography. Blockchain was first developed for cryptocurrency and now is being used in handling identities, contracts, assets and various types of records.

The blockchain is as a peer-to-peer electronic transactions system. In this context, the transactions are referred to the exchange of something of value. It can involve exchanging money, valuable documents such as shares or documented agreements such as contracts. The premise of blockchain is that the transactions can happen between two parties and the role of the trusted intermediary party that witnesses and endorses the transaction is removed. In the blockchain process, the trusted intermediary party is replaced by a cryptographic signature.

The cryptographic signature is based on a hash algorithm that converts data of a random size into data of the string of a predefined and fixed length which is called hash. The principle here is that a hash should be easy to compute from the data but it should be complicated to compute the data from the hash.

There are three types of blockchain: public blockchain, consortium blockchain and private blockchain. A public blockchain allows anyone in a network to be involved in the process of adding blocks. A consortium blockchain requires participants to be pre-selected or from a union of organizations. A private blockchain is fully operated by one organization.

In the public blockchain system, every user receives a unique public key and a unique private key. These two keys can be used for privacy and authentication. When a member wants to transact with another member of the system, the transaction is encrypted using the public key of the other party and is made available publicly in the system (Privacy). For authentication, a member can use his or her private key to encrypt the transaction (Authentication) and make it publicly available. This is called a digital signature.

On this basis, blockchain becomes a chain of digital signatures that are joined together in clusters with a specific size called block. The blocks are created through the verification of each signature in the cluster signature by a third party called miners. Miners’ role is to solely provide computational power to perform cryptographic proof of the authenticity of transactions.

Why are digital ledgers relevant to land administration?

Land registration is a process by which the ownership of a piece of land is formally recognised and recorded. A piece of land, often named “land parcel”, is issued a certificate title as a result of land registration. The process involves issuing a title for land parcels that do not have a title as well as transferring the title of a land parcel from a rightful claimant to another.

Broadly speaking there are two types of land registration, and they are title based and deed-based systems. In the deedbased system of registration, a deed, being a document, which describes a transaction (e.g. transferring the ownership of land from one person to another), is registered. This deed is proof that a land transaction took place, but it is not proof of the legal rights of the involved parties. As such a transferee must trace the ownership of the land back to its root and establish if the transferor is a rightful claimant. In the title-based system, it is not the transaction that is registered, but it is the legal consequence of it which is registered.

The land right itself together with the name of the rightful claimant and the spatial extent of that right are registered. Deed and title-based systems of land registration are the result of centuries of optimising land administration systems. Early land registration systems indeed were paperless and based on oral agreement and relied on human witnesses. In small communities, the ownership of land could be transferred from one person to another by shaking hand backed by witnesses (leaders and elders) as the proof of transaction. Such systems still exist in small communities such as villages.

Clearly, the oral land registration was not going to be effective in ever-growing societies. This was when the deed system was born and papers were used to “witness” the transfer. Transferees and transferors go in front of an authority and declare there that one transfers the right to another. Public offices such as courts and notaries keep a record of activities where the transaction is witnessed in writing. Deeds are then left in the hands of the ‘new’ owner. The deed-based system is vulnerable to fraud such that the chain of transactions can be broken. A deed of land can be unlawfully altered and the land transferred to several transferees at the same time. As such legal professionals are heavily involved in the deed-based systems, so there is no break in the transaction chains. The title based system was born as a result of this flaws in the deed based system. When a transferee and transferor go to a title office, the registrar changes the name of the “current holder” to the “new holder” dispossessing the current holder’s right and guaranteeing the new holder’s right.

What is shared in both the title based and deed-based system of land registration is the need for verification of transaction by an intermediary system before registration. Digital ledgers can be useful tools for this verification.

How would digital ledgers help with land administration?

The verification process in land registration involves two key aspects. First, if the subject land exists and second the transferor is the rightful claimants. In the deed-based system, the chain of transactions is verified by a legal expert making sure that the transferor in each isolated transaction is a rightful claimant of the subject of transfer and establish every prior transaction is valid. After that a summary the transaction is registered in a public notary and recorded in a central deeds register. In the title system, the registrar checks if the transferor is a rightful claimant, the land exists and is owned by the transferor but does not concern the previous transaction of the subject land. What is critical in the verification processes of both deed and title systems, is the trust in and accountability of the intermediary system. Digital ledgers are always in a state of consensus. In this state, they are automatically checked in given time intervals.

They possess a self-auditing ecosystem of a digital value such that the network reconciles every transaction periodically. Such a system is inherently transparent as it is public and more importantly it can hardly be corrupted because altering any details of the land transaction on the distributed databases would require a tremendous amount of computing power to change the entire network.

What are the technical challenges in adopting digital ledgers in land administration?

While digital ledgers are promising technologies to improve land administration, there are challenges in realising them. The problems have roots in spatial and non-spatial nature of land transaction data. In the transfer of a land, only the ownership of the land changes and the spatial extent of it stays without change. In the land subdivision or consolidation process, it is the spatial extent that changes. In some cases, both spatial and nonspatial aspects of land change.

This poses a challenge that the land administration system enabled by digital ledgers may complicate verifications of the transactions in the cryptographic process. Moreover, the growing size of a chain requires more computing power to join a blockchain network and that is against its design principle of decentralization. The total blockchain size of the Ethereum, one of the blockchain application, has exceeded 1 Terabyte by the May of 2018 and it already makes some nodes with lower computing power unable to synchronize with the network. This is another challenge for adopting digital ledger when storing a large volume of land transaction data.