Smart Contracts Could Fix Unfair Ukrainian Land Market

For anyone working in crypto, it’s natural to dream that blockchains and decentralization of power will bring us closer to a utopia where everything is fair and BFT, or at very least, where people own their money, protected from dictatorships and meaningless wars.

When it comes to facts, crypto is definitely not there yet. But how far is it from being really useful?

Recently, the Ukrainian government introduced a new land law that allows selling farmland to its citizens. It has received a lot of criticism for de-facto, giving an unfair advantage to the oligarchs. I believe it could be much fairer if only the government utilized smart contracts.

I will quickly introduce you to the essence of the new law, and the pitfalls that will be, obviously, exploited by oligarchs. Then we’ll take a look at the alternative “blockchain way”, that technically could be implemented today.

I argue that we have, is enough to start integrating crypto tech in systems like the land market and benefiting tremendously from it.

The Essence of The Land Law

The advertised purpose is to free people from restrictions of buying and selling farmland. Sounds like a democratic freedom act, but the devil is in the details.

The law becomes active in 2021. During the first year, only individuals, citizens of Ukraine and not entities can buy farmland from the government, with the restriction of 100 ha. to one individual.

During the second year, no more than 10 000 ha. to one individual, then, after 3 more years, entities will be given rights to buy land.

Individuals who have rented the land previously will be given temporary exclusive rights to purchase the land escaping the auction.

Reality check

It’s no secret that Ukraine and corruption are long-time friends.

First pitfall. The value of the land will be defined by the government appraisers, on whom, obviously, agro-oligarchs have much more influence than normal individuals.

Second pitfall. As mentioned earlier, individuals, who have rented the land previously, have priority purchasing rights, that they can transfer to others. That gives oligarchs the ability to escape auctions by using figureheads who would buy land for them. Figureheads would be trusted individuals, exercising their advantageous purchasing rights (since they rented the land previously).

This situation is the perfect example of power abuse by oligarchs, that can be avoided now more than ever before, thanks to the blockchain and smart contracts.

The Blockchain Way

Taking the current law as a basis, let’s add some blockchain magic on top and imagine what would change.

We are aiming for the balanced land market. Giving advantage to farmers over oligarchs. Government is still playing a major role in this scenario, but some things are different.

Let’s dive into a thought experiment and imagine a system where smart contracts and a few government entities are working in synergy to make a fair system.

Thought Experiment

Our goal, as a government is to give advantage:

  • individuals over entities;
  • individuals who already rent the land, over other individuals (for that piece of land).

We also want to disincentivize entities to use figurehead individuals, to buy land exercising their advantageous rights, and then, selling that land back to entities.

To make an example simple, we will only talk about the three-year process of the initial government land sale, not the land market itself. Assuming the smart contract would be based on Ethereum (it’s all just theoretical, it doesn’t matter).

In this experiment, we have such actors:

  • Government bodies;
  • Entities (large businesses);
  • Individuals (citizens of Ukraine);

Government Bodies Involved

Since we are not living in the crypto-economy yet, people don’t have identities in the crypto networks and still use fiat currency. We account for that, by using government entities to organize the automated market and on-boarding of citizens into the new system.

Government Appraiser

Creates a public registry of government-owned farmland that will become available for sale. Each piece of land is registered as a polygonal shape, area in ha. units and the initial value assigned in UAH (national fiat currency).

Before the market opens, the registry must be hashed and signed to ensure immutability.

Government Identity Provider

Any individual citizen of Ukraine who wants to participate in the land market can pass government verification, get a private key, and a trading category — Individual .

If such an individual already rents the land from the government, he will be assigned temporary exclusive purchasing rights to this land (more details below).

Entities will go through the same process, but their trading category would be an Entity .

Central Bank

Given a land contract would exist on the Ethereum network, the central bank would update the UAH-ETH rate every 12 hours, using a special private key.

If you know a smarter way to do it, please share in the comments.

Auction Design

The contract needs a mechanism of time-based public auction , in which the highest bidder becomes the owner of the token.

Such auctions could be implemented entirely in the smart contract. Minimal bid for any piece of land would be defined by the Government Appraiser in the preparation stage, and any allowed participant who suggested the highest bid wins the lot.

The owner of the lot (government, individual or an entity) can at any time put the land on the auction.

Market Design

By having the smart contract and actors assigned individual/entity categories, we may easily enforce ownership transfer rules for any piece of land.

To explain the logic behind the contract, let’s introduce some terminology to describe the lots in the market:

  • L — a token for a piece of land;
  • R — a lot can be sold only to previous individual renters.
  • A — a lot can be sold only through an auction (not directly).

Since the goal is to disincentivize entities to use figureheads to escape the auction, all actors identified as entities would not be able to purchase any piece of land directly, but only through an auction . In other words, entities can only purchase AL , and individuals can purchase both AL an L .

The modifiers are set via the Government Appraiser body, mentioned above, during the preparation stage.

Market Design Figure

The time frame would be very similar to the one, described in the real law:

  • 0–6 month: individuals can buy up to 100 ha. of L, AL or RL assigned to them.
  • 6–12 month: individuals can buy up to 100 ha. Of any L or AL .
  • 12–24 month: individuals can buy up to 10 000 ha. of L or AL .
  • 24 month: individuals can own any amount of L or AL , but entities can only buy AL.

As a result of such design, farmers and communities of farmers have the advantage to buy their land and advantage over entities. Big players, who want more than 10 000 ha. of land will be forced to offer the best price at an auction .

Smart Contract Benefits

One can argue that this is doable without smart contracts, with the same old land cadastre, legal restrictions and human auctions.

But, in that case, we would need to trust people, not publicly available code. And humans proved themselves not trustworthy when it comes to big money. In other words, it is extremely hard to enforce the law in a system, with many human variables, especially where the incentive to cheat is high. In contrast, the rules in the smart contract are unbreakable.

This situation is a great example of where the cost of implementing smart contracts would be worth paying. As a benefit, blockchain would also increase market efficiency, due to process automation.

To summarize, what exactly smart contracts bring to the table:

  • Increased market efficiency;
  • Transparency of transactions;
  • Automated trustless settlements without middlemen;
  • Unbreakable market rules.

Conclusion

I just showed a simplified case of a smart contract that could be implemented today. Such a contract would substantially improve people’s lives and ensure a fair distribution of wealth. If only the incentive to implement it was there…

I believe the time will come when the benefits of cryptocurrencies and smart contracts will be obvious to the average citizen, and the crowd will demand to do things “the blockchain way”.

Until then, what we all can do is start spending a little bit more time educating our surroundings. One person at a time, creating the informed, demanding crowd, so the “blockchain way” becomes the only way.

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