How Leasehold achieves decentralization

One of the main challenges of blockchain technology is the gap which exists between the digital world and the real world. Once data is recorded on a blockchain, it cannot be modified; this can be independently verified by anyone. Unfortunately, when it comes to the real world, tamperproofing is not enough, it’s also essential to guarantee that each piece of new data was accurate at the time when it was added to the blockchain.

A naive solution which is often suggested is to use decentralized oracles (multiple nodes/machines operated by different people) to only record information on the blockchain if a sufficient number of these oracles agree on the state of the data — Ideally, this data should be gathered independently based on real-world measurements and/or observations. The main problem with this approach concerns incentives; oracles may not necessarily have any stake in the success of the underlying token. In fact, when representing certain kinds of valuable data (e.g. real estate assets) it’s likely that the interests of oracles could conflict with the interests of token holders; it could become profitable for oracles collude to record invalid data on a blockchain; particularly if those oracles are anonymous. Decentralized oracles are only a good solution if their incentives are aligned with the success of the use case.

Since the early days of blockchain, there has been a lot of interest in bringing blockchain technology to the real estate industry. One of the most common use cases which is often mentioned involves allowing users to record and trade individual real estate assets on the blockchain as Non-Fungible Tokens (NFTs). The core idea behind this model is to use blockchain-based NFTs as alternatives to legal deeds in the real world.

There are several major issues with using NFTs to represent ownership over individual real-estate assets in this way:

• Accuracy: This is probably the most significant problem and it relates to the point made earlier about oracles. How can people trust that the data which was inserted into the blockchain was correct to begin with? How can we trust that user A actually purchased property B as was originally recorded on the blockchain? How can we trust oracles to report those real-world events accurately and reliably?
• Legacy: In a court of law, a legal deed (in paper format) or a digital record kept in an official government system is likely to take precedence over data recorded on a third-party blockchain — Especially if that blockchain was previously unknown to the judge who is presiding over the case. If blockchain data was to conflict with data recorded on ‘official’ government systems, the data on those ‘official’ systems would most likely override the blockchain data. This means that NFTs are evidently not reliable for this use case. Especially as it involves high-value assets.
• Enforceability: Even in the unlikely case that a court was open to consider the blockchain as being the primary, overriding source of truth, ownership disputes over specific real estate assets would cause administrative bottlenecks — For example, a plaintiff would have to know the identity and location of a defendant in order to file a complaint against them within an appropriate jurisdiction. Again, the NFT use case creates a tight dependency on the (centralized) legal system — There are too many possible cases where the blockchain will be insufficient to enforce ownership over any specific asset and there are too many possible counter-parties with conflicting interests… The blockchain is redundant because not many people would be satisfied with the idea of owning an NFT which provides such weak guarantees in the real world.

Due to the above issues, Leasehold does not attempt to represent individual real estate assets as NFTs. Instead, Leasehold uses a fungible token to represent a share of rental income from its entire portfolio of real estate assets. Coupling fungible tokens to a group/portfolio of real-world assets instead of coupling NFTs to specific assets gives investors a lot more collective power and also lessens their reliance on the legal system altogether — This is because the value of Leasehold’s LSH token relies on a single clause which applies uniformly to all participants and ensures that their interests are aligned with one another. The only guarantee which Leasehold Holdings needs to uphold (and which, on its own, is sufficient to support the value of the LSH token) is that it will use 100% of its profits from its portfolio to re-invest in itself — Either by buying additional real estate assets or by buying back and burning LSH tokens. This clause is part of Leasehold Holdings’ memorandum of incorporation (signed by all directors).

Token buybacks are carried out in a fully transparent and immutable way on the blockchain; this means that token holders can compare the volume of on-chain buybacks against their profit expectations for any given year to verify the size and authenticity of the underlying economic activity (buybacks act as a kind of Proof of Profit). This approach is effective because it costs real money to buy back tokens from the market. Cryptocurrency tokens are used instead of shares to represent ownership — Instead of distributing income to shareholders via share buybacks, token buybacks are used.

Unlike with the NFT use case, in the case of Leasehold, there is no risk of clogging up the legal system with investors raising legal cases against each other to establish legal ownership over specific assets — Any possible legal case would have to be between LSH token holders and Leasehold Holdings; any such case would almost certainly be a class (group) action; since any single LSH token holder could file a complaint on behalf of all token holders, for the benefit of all token holders.

Also, because the directors of Leasehold Holdings own a significant number of LSH tokens (which are locked in multisig wallets for the first 5 years), the interests of directors are aligned with that of all other LSH investors. This makes it extremely unlikely that the majority of LSH directors would operate Leasehold Holdings in a way which runs counter to the interests of LSH token holders since token-holding is the primary mechanism through which Leasehold directors themselves receive compensation.

The incentives of all Leasehold participants have been carefully designed to ensure that the LSH cryptocurrency is the main asset and the focus point which connects all members of the Leasehold community to the underlying economic activities carried out by Leasehold Holdings. Moreover, using LSH as our store of value (instead of company shares) opens up unique incentives and opportunities to connect additional real estate companies and projects to LSH in the future. The more companies and projects we can connect to the Leasehold blockchain, the more valuable and decentralized it becomes.