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A Framework of Blockchain Technology for Green Real Estate Bonds

Written by Julian Bauer, Benjamin Bachmaier

Paper category

Master Thesis

Subject

Architecture & Real Estate

Year

2020

Abstract

Master Thesis 3.1 Blockchain technology The underlying technology of this key term is based on distributed ledger technology (DLT), peer-to-peer (P2P) network, cryptography, consensus mechanism and validity rules. Therefore, at least two users share a ledger on a P2P basis. Following the consensus mechanism previously set, transactions on this framework can be conducted without or reducing middlemen in verified transactions. This structure allows authorized parties in the P2P network to create new blocks in accordance with the validity rules (Wouda, Opdenakker, 2019). The blockchain system is composed of individuals who participate by connecting devices to the Internet. Therefore, the Internet is a communication medium that allows individuals (so-called nodes) to enter and leave the network at any time. Therefore, nodes work in a peer-to-peer manner in a distributed consensus mechanism. This mechanism updates the data on each node by using processing power to solve the encryption task. Since this power comes from the nodes, the system can resist the attack and manipulation by coordinating the nodes. In addition, this data synchronization allows individuals to enter and exit at any time (Böhme, Pesch, 2017). As one of the current issues related to blockchain, Casino et al. (2019) It is mentioned that experts often use blockchain as the method to solve all problems. However, some projects do not need to store data, so the blockchain cannot provide any added value. Another question Bartoletti et al. (2020) Mentioned the difference between smart contract programming and other programming languages. Therefore, it is not always easy to understand, and its complexity can lead to programming errors. If blockchain participants lose their private keys, the data will be inaccessible (Joshi et al., 2018). Even if no one else can access the data, there is still a problem because the key cannot be recovered, so the access rights are lost. In addition, Biggs et al. (2017) pointed out that blockchain technology is facing widespread adoption challenges, such as legal supervision and the governance and implementation of existing process infrastructure. In addition, the social acceptance of this emerging technology is highly correlated with the behavioral intention of the end user to actually use it (Lou, Li, 2017). The following are some technical definitions that help readers understand. 3.1.1 Public/Private Key To participate in the blockchain system, individuals need a combination of public and private keys. This combination of keys constitutes an encrypted identity. Since any number of key pairs can be generated, they act as pseudonyms that people appear in the blockchain system (Böhme, Pesch, 2017). 3.1.2 Consensus mechanism The consensus algorithm stores new information on newly added blocks. Some consensus mechanisms are briefly explained below. 3.1.2.1 Proof of Work Proof of Work (PoW) is to create the nodes of the system by bundling computing power measured by hash rate. Therefore, the influence of a node on the system is proportionally dependent on its hash rate. Therefore, the higher the computing power provided by an entity, the more likely it is to create a new block and add it to a series of ordered blocks (Bentov et al., 2016) (Duong et al., 2016). In this way, as long as a person's share of computing power does not exceed 50% of the total hash rate provided, users can be confident in the effectiveness of the system. For transactions in the blockchain network, a so-called node or user is randomly selected to record the transaction. This is nominated and selected by the transaction thesis initiator. The nominee is then verified by other participants. In this process, the random number (number used only once) in the block header is calculated. By constantly changing the value, different hash values ​​are calculated. This is how the newly created block is authenticated (Joshi et al., 2018). 3.1.2.2 Proof of rights Unlike the PoW mechanism, proof of rights alternately grants a stakeholder in the system the right to create the next block. Therefore, the stakeholder’s interest is to maintain the system by not creating a fraud chain, otherwise the value of their equity will decrease. The probability of each entity being selected to expand the ledger depends on its share of equity (Bentov et al., 2016). This means that the probability of being selected as a validator depends on the height of the previously stored stake. In order to be able to falsify the data in the system, at least 51% of the circulating value in the network must be kept by a stakeholder (Joshi et al., 2018). 3.1.3 Smart Contracts Under the assumption that stakeholders can be trusted, the blockchain itself is mainly secure, rather than private. This is the reason why user-defined arbitrary programs are placed on the blockchain. The program can be a so-called smart contract (Kosba et al., 2016). This is not only a digital contract, nor is it a tool based on artificial intelligence. Master Thesis - On the contrary, it is a tamper-proof, self-triggering system. This reduces the interaction between people and the risk of uncertainty or cost increases that come with it. Through smart contracts, real estate and other commodities can be exchanged more easily through a process automatically executed by a predefined algorithm (Cong, He, 2019). 3.2 Blockchain in real estate transactions Tapscott (2016) pointed out that due to technological changes, various markets require additional technologies to speed up processing and increase transparency and security. Read Less