Article byPosted Featured AuthorMarch 2019
The word “blockchain” is everywhere we look. There is talk of blockchain technology revolutionizing industries, creating wealth, and generally improving humanity. But what is blockchain technology? Isn’t it that bitcoin thing that everyone lost all that money on?
Yes and no. To understand what blockchain technology is, and what it isn’t, it’s important to know why it was created in the first place.
For decades, computer scientists had been attempting to develop a digital-only, peer-to-peer currency, only to run into the “double-spend” problem. In short, the double-spend problem arises when Person A pays Person B in digital currency, but then spends that same digital currency before the transaction with Person B is processed.
Unlike digital currency, physical currency never had this problem. Once Person A handed over possession of his physical currency (be it paper money, coins, seashells, beads, or whatever) to Person B, the transaction was complete and the double-spend problem did not exist. In more complex electronic or ledger-based transactions, the double-spend problem was solved with trusted third parties (banks). There are three problems with the use of trusted third parties to avoid the double-spend problem. The first issue with a trusted third party is that it charges a transaction fee, thereby increasing the cost of transactions. The second issue is one of security. If the trusted third party’s security is breached, then numerous problems can arise from the breach. Finally, there’s the issue of trust itself, which in the great economic crisis of 2008 was in short supply.
Sparked by the crisis of 2008, a person (or group of people) going by the pseudonym “Satoshi Nakamoto” developed a digital currency called “Bitcoin.” Bitcoin was far from the first attempt at a digital currency, but it was the first to solve the double-spend problem without reliance upon trusted third parties. Blockchain technology, the core innovation of Bitcoin, is how Satoshi pulled it off. Using this technology, the trade of digital currency became as secure as the trade of physical currency, all while being totally independent from a trusted third party.
So how does blockchain technology work? It helps to first think of the blockchain as a simple ledger of transactions. This ledger, either in part or in whole, is distributed between the networked computer hard drives of all users of the blockchain. The ledger is secured on each user’s computer using cryptography, which is a special type of computer programming used to secure your desktop computer, your bank’s computers, your cellphone, etc. When two users wish to add an entry to the ledger, they verify the entry through the use of cryptography “keys.” Typically, each user’s “name” on the blockchain software is their “public key,” which only they can access by use of their “private key.”
Once the two users have used their keys to authenticate their transaction, the other users of the network begin automatically adding that transaction to their copy of the ledger. After a majority of the users (51% in most blockchain programs) have added the transaction to their copy of the ledger, a transaction has “gone through.” After a set number of transactions are recorded on the ledger, that portion of the ledger is closed for future entries and is known as a “block.” As each block is closed, it is given an electronic fingerprint that contains the time and date of the block’s closing. That fingerprint is called a “hash.” The next block is then created and first marked with the hash of the preceding block. Then this next block is ultimately closed with its own hash, which is stamped on the following block, ad infinitum. That process is what creates the “chain” of the blocks, ergo “blockchain.”
Another feature of blockchain technology that makes it attractive is the immutable nature of the records kept using it. What makes blockchains so impervious to attack is that the copies of the distributed ledger exist in many places and can only be changed by taking control of 51% of the computers on the network at the same time or by bringing online enough new computers to own 51% of the network’s total computing power. The more users there are on the system, the more difficult it becomes to hack the system. To illustrate how difficult this is, the bitcoin blockchain alone currently processes more than 250,000 transactions a day, and is stored across more than 5,000,000 computers. In order to undertake such a “ 51% attack,” the perpetrator would have to immediately take online more computing strength than half of the new total number of computers working on the network. The cost to purchase the needed number of computers is estimated to be $1,400,000,000.00. But that is just to purchase an adequate number of computers. That doesn’t account for the physical housing of those computers, the labor to install and support them, and more importantly, the electricity to power them. Given that the current bitcoin blockchain computers collectively use more electricity each day than the entire country of Morocco, that type of attack isn’t feasible.
The implications for blockchain technology are currently not fully knowable. Many pundits are comparing this era of blockchain tech to the late 1990’s internet, and there are indeed comparisons from a financial standpoint. Most of us can remember the dotcom bubble, where irrational exuberance led to absurd valuations of companies which evaporated in years or even months. The dotcom bubble of the late 90’s bore strong resemblance to the cryptocurrency market of 2017, where the price of bitcoin pushed $20,000.00 per coin by December after beginning the year at $1,000.00, only to crash to a current price of around $4,000.00. The rise of other coins (called “altcoins”) was even more dramatic, and millionaires were indeed made and broken almost overnight. The cryptocurrency market has had its Pets.com, too.
There are, however, less dire similarities. During the late 1990’s, people were still figuring out exactly what problems the internet could solve. (Who could have imagined Facebook in 1997?) That is what is happening now with blockchain technology. Aside from being able to track financial transactions, blockchain technology has been engineered to allow for “smart contracts.” These smart contracts are essentially programs that allow for an individual to perform an act and not wait for any external validation of that action. Take for example, the transfer of real property from one person to another. In the future, a real property registry could be completely housed on a smart contract-enabled blockchain. The owner of a parcel of land, Owner A, decides he wants to sell said parcel to Buyer B. Owner A would authenticate the price of the parcel himself using his key, Buyer B would then deposit funds in the amount of the purchase price into the blockchain, and the smart contract would automatically transfer ownership in a way that is immutable and does not require a physical repository of information… or perhaps even a lawyer.
Another example of blockchain technology finding its way is the storage of medical or legal records. Because documents stored using blockchain technology are unable to be altered, Vermont has already declared them to be self-authenticating under the Vermont Rules of Evidence. California, New York, Arizona, and others are considering doing the same. Delaware has determined that private businesses may keep stock registers on a blockchain, possibly doing away with the need for outside transfer agents. Other potential uses of blockchain technology that are receiving a lot of attention and venture capital investment at the moment are copyright protection, digital voting, food safety, weapons tracking, self-executing wills, energy trading, prescription drug tracking, and identity theft prevention.
In the end, blockchain technology represents the next “big wave” of technological change. It almost certainly will affect lawyers substantially, as the way we prove facts and otherwise do our jobs will become at least partially dependent upon knowledge and use of various blockchain platforms. On the bright side, lawyers do have some time to learn and become familiar with this technology. The timeframe for implementation of blockchain technologies in ways that affect a majority of us is likely the next 5–10 years.