Demystifying blockchain technology
Blockchain has taken the IT world by storm, enabling businesses to store data securely in a distributed database, with updates happening in real time. It’s the concept that underpins financial transactions made via Bitcoin (which it was originally developed to power) and many other technologies that rely on distributed security to work.
Blockchain is a form of public ledger, meaning the data is shared and updates are reflected across every copy of it in real time, so the data is always up to date. However, it’s not stored in one location (ie., there isn’t a “master”), meaning a hacker can’t steal or corrupt the main database. But the data is also accessible by anyone at any time.
Although originally developed for digital currencies, blockchain is starting to be used across a wide range of different areas that demand the security of the technology, with the flexibility of real-time updates. Industries that change frequently, but where being unhackable is vital are the perfect sectors.
How Does Blockchain Work?
Picture a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of the blockchain.
Information held on a blockchain exists as a shared — and continually reconciled — database. This is a way of using the network that has obvious benefits. The blockchain database isn’t stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralized version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.
Blockchain Is Like a Public Ledger
If you send Bitcoin (or some other cryptocurrency) to a friend, or sell it, that information is publicly available on the blockchain. Other people may not know your identity, but they know exactly how much value has been transferred from one person to another.
Many people see blockchain as an alternative to traditional banking. Instead of needing a bank or some other institution to verify the transfer of money, you can use blockchain and eliminate the middle man.
“The Internet of Value”
Building off the idea of a public ledger, another popular way to describe blockchain is as the internet of value. The idea is pretty simple: the internet made it possible to freely distribute data online, blockchain does the same thing for money.
Instead of relying on newspapers, television and radio (which are mainly controlled by big corporations), the internet gives everyone a voice—for better or worse. Blockchain and cryptocurrency make it just as easy to transfer money across the world by bypassing traditional middlemen like banks and even governments.
Blockchain Is Like Google Docs
The traditional way of sharing documents with collaboration is to send a Microsoft Word document to another recipient and ask them to make revisions to it. The problem with that scenario is that you need to wait until receiving a return copy before you can see or make other changes because you are locked out of editing it until the other person is done with it. That’s how databases work today. Two owners can’t be messing with the same record at once. That’s how banks maintain money balances and transfers; they briefly lock access (or decrease the balance) while they make a transfer, then update the other side, then re-open access (or update again). With Google Docs (or Google Sheets), both parties have access to the same document at the same time, and the single version of that document is always visible to both of them. It is like a shared ledger, but it is a shared document. The distributed part comes into play when sharing involves a number of people.
Imagine the number of legal documents that should be used that way. Instead of passing them to each other, losing track of versions, and not being in sync with the other version, why can’t *all* business documents become shared instead of transferred back and forth? So many types of legal contracts would be ideal for that kind of workflow. You don’t need a blockchain to share documents, but the shared documents analogy is a powerful one.
How blockchain is transforming business models
The traditional business model is under attack… as well it should be. In this era of disruption, it’s absolutely necessary to redefine business models and archetypes as a whole. This post dives into the benefits of blockchain, its impact on the financial system, and how some companies are experimenting.
Taking the adoption of mobile and online banking as an example, most companies wait until a technology reaches a certain level of maturity before investing into it. The fact that these incumbents use antiquated tech propels the rise of fintech companies who utilize technology to make financial services more efficient and could potentially disrupt the financial services industry.
Blockchain, however, has caught not only the eye of fintech companies but the traditional incumbents as well. The reason for this is that when mutual distributed ledgers (aka blockchains) hit maturity, it will have a sweeping impact on financial business models.
In a broad sense, all these financial services processes are experiencing operational inefficiencies due to both sides of a trade, transaction or transfer of information or assets keeping separate records of the event (and if applicable future obligations).
Consequently, since there are two separate records, a lot of effort and resource is spent reconciling the two records at each step of contract execution to make sure that both records match. In theory, spend on data related processes such as obtaining, checking, reconciliation can dramatically be reduced by mutual distributed ledgers.
Speed of execution
Mutual distributed ledgers can use smart contracts (computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract) in accordance to business rules.
Since these can be customized on a contract by- contract basis, transactions can be streamlined by cutting out counterparties and intermediaries. This means that trades and contracts can potentially be executed at a much faster rate because the middlemen are replaced with technology.
The devil’s in the details
A caveat of all this interest in blockchain from the financial services industry is that it wants a similar technology with the perceived benefits, and not the actual blockchain underlying Bitcoin. This is because some of its current features will not work in a financial services context.
It’s also unclear to what extent the robustness and simplicity of the Bitcoin blockchain can be replicated within a financial services application, what form or variation the mutual distributed ledger would take and to what extent they should be applied in a wider financial services context. Therefore, a lot of research and experimentation has yet to unfold.
The most visible element of a blockchain, for example, Bitcoin (BTC) or Ethereum (ETH). Like any other currency, it can be traded on exchanges and used to buy and sell goods and services. The challenge – how it trades with traditional (“Fiat”) currencies.
Decentralized Computing Infrastructure
A blockchain binds a number of networked servers together that commonly follow a consensus process for releasing and recording information. However, developers do not need to set up these servers. This is contrast to the Web, which uses an HTTP request sent to a server. With a blockchain, the network makes the request to the blockchain.
A blockchain network validates value-related transactions of digital money or assets. Each time a consensus is reached, a transaction is recorded on a “block” (a storage space). The blockchain keeps permanent track of every transaction for future verification. A private blockchain can perform up to 10,000 transactions per second (TPS), and by 2019, it’s estimated that the TPS will be virtually unlimited.
A blockchain stores data semi-publicly in a linear container space (the block). Anyone can verify you’ve placed the information because the container has your signature, however, it remains secure: only you can unlock what’s inside.
Shared, Distributed Accounting Ledger
A blockchain is also a distributed, public, time-stamped asset ledger that keeps track of every transaction ever processed on its network. The ledger can be shared across multiple parties, and can be private, public, or semi-private.
These days banks know virtually everything about their clients: credit history, addresses, phone numbers, spending habits and so on. It is all very different with Bitcoin, as the wallet doesn’t have to be linked to any personally identifying information. And while some people just simply don’t want their finances to be governed and tracked by any kind of an authority, others might argue that drug trade, terrorism and other illegal and dangerous activities will thrive in this relative anonymity.
The anonymity of Bitcoin is only relative, as every single BTC transaction that ever happened is stored in the Blockchain. In theory, If your wallet address was publicly used, anyone can tell how much money is in it by carefully studying the blockchain ledger. However, tracing a particular Bitcoin address to a person is still nearly impossible.
Those who wish to stay anonymous with their transactions can take measures to stay under the radar. There are certain types of wallets that prioritise opaqueness and security, but the simplest measure would be to use multiple addresses and not transfer massive amounts of money to a single wallet.
The Bitcoin network processes payments almost instantaneously, it normally takes just a few minutes for someone on the other side of the world to receive the money, while normal bank transfers can take several days.
Once you send your Bitcoins to someone, there is no way of getting them back, unless the recipient would want to send them back to you. This ensures the reception of a payment, meaning that whoever you’re trading with can’t scam you by claiming that they never got the money.
The potential impact of blockchain technology on the legal services industry
Though speculation about the future of blockchain continues, it is gaining momentum and deserves attention from law firms, courts, and legal technology providers. Large enterprises are gearing up for a blockchain revolution. Corporate clients are actively pursuing it.
Microsoft, IBM, and other large enterprise technology providers are partnering with blockchain startups to advance projects. Beyond the financial and payments applications, use cases for blockchain technology include supply chain tracking, authorship, ownership, identity management, and even diamond and gemstone identification and tracking.
Blockchain technology is going to disrupt many businesses and industries and the legal profession just might be next. Although there are many appealing characteristics of blockchain technology for lawyers, perhaps the best one of all is that it can secure information in an immutable and transparent ledger. Blockchain technology is on pace to revolutionize the legal industry and many predict it will become as ubiquitous as the internet is today.
The Power of Blockchain
Today, most interactions use a trusted intermediary such as a bank, agent or mediator to complete transactions. The excitement surrounding blockchain is related to its limitless potential. Almost any type of transaction involving an exchange of value, be it information, money, goods, or property, can be conducted securely and efficiently with blockchain.
Blockchain technology creates a decentralized, digital ledger of transactions. The blockchain encrypts transactions, then distributes them throughout the network, creating a public record that is virtually impossible to hack. This allows for a highly reliable digital system where interactions, transactions, and agreements can happen without the need for a single centralized authority.
The Promise of Blockchain in Law
The secure, immutable and transparent nature of blockchain will allow attorneys to record and authenticate many types of legal matters. That includes any ledger-based activity: property records, UCC filings, court records, funds transfers, chains of custody, contracts and even legal opinions. The following examples illustrate the broad impact that blockchain could have in the legal industry.
If it hasn’t happened already, it surely will. Clients in all kinds of industries from publishing to music to healthcare are attempting to navigate the realities that blockchain technology opens up for their businesses in terms of law, regulation and policies. Law firms that position themselves as blockchain experts will be relied upon by other businesses for guidance and support. No matter what area of law you practice, expect that your clients will soon bring you questions related to blockchain technology.
Contracts and smart contracts
Blockchains are capable of storing any kind of digital information including computer code. It’s possible to create a contract that can automatically generate based on when certain variables are achieved without any human legal intervention. Once these are in wide use they will be what is defended in a court of law. Expect that contract doctrine will evolve and may look very different than the paper contracts and protocols that are used today. Additionally, since contracts can be self-executing there will be changes to intermediary jobs and roles that typically help to review contracts and execute them when all requirements are filled.
Land Registry and Property Deeds
A public blockchain ledger can keep reliable records of property titles, deeds and ownership changes as they occur. Property owners, banks, insurance companies, title companies and municipalities would all have access to clean records of ownership and title transfers, reducing future title search time and increasing transparency.
Intellectual Property Rights
As with real estate, blockchain can provide indisputable records for intellectual property rights on patents, trademarks, and copyrights. Blockchain is irreversible, secure, and time-stamped, offering a reliable way to track first use. A blockchain approach to IP management could also be used with any kind of digital assets, such as images, video files, audio recordings, and other digital content. For example, professional photographers or musicians could use it to manage licensing rights to their creations and to enable royalty payments.
Several startup companies, including Stampery, Stampd, and Blocksign offer notary services online using blockchain technology. These services accept an uploaded document, hash it, and provide a time stamp—a digital fingerprint of the document—that validates its date and time of creation, ownership, and independent verifiability. Any third party can verify these immutable facts about the document.
Though blockchain notary processes have not been challenged yet, some believe that a cryptographic signature alone is not sufficient to prove identity. Earlier this year, however, Microsoft announced the integration of Stampery authentication into Microsoft Office, signaling confidence in a blockchain solution for notarization.
Public Services Records
Blockchain can help agencies digitize existing records and manage them within a secure infrastructure, allowing them to make some of these records “smart,” as described above in the example of Delaware corporate filings. Government agencies could create algorithms to allow blockchain data to be shared between parties once predefined conditions are met. Blockchain applications in this arena might secure and streamline the management of birth and death certificates, driver’s license records, sporting licenses, professional licenses, passports, travel visas—the examples are plentiful.
Blockchain could be used to improve the criminal justice system with a distributed ledger architecture. Criminal charges could be shared and tracked in a ledger that law enforcement, prosecution, courts, probation, lawyers, and corrections organizations could access. When charges are added or dropped by law enforcement, prosecution, or courts, that information would be posted to the ledger as well, with the expected result being faster, more efficient administration of justice.
Alternative dispute resolution refers to a variety of processes that help parties resolve disputes without a trial. Typical ADR processes include mediation, arbitration, neutral evaluation and collaborative law.
For parties seeking ADR, a blockchain platform could provide a secure, immutable, and transparent platform for capturing negotiations, terms of a resolution, and the identities and agreements of each of the parties. Every fact and detail of the agreement would be available and traceable in case of further disputes. Availability and expertise of qualified third-party mediators could be recorded in a blockchain ledger as well.
As blockchain technology matures, we will continue to see applications that impact the legal profession. Until then, it is impacting most of the client’s lawyers serve so it’s worth the effort for anyone within the legal industry to start learning about blockchain technology and start preparing for how it will change your practice and the services you will offer in the future. In some cases, it will significantly alter the traditional role lawyers have played as trusted intermediaries.
The Blockchain a New Web 3.0?
The blockchain gives internet users the ability to create value and authenticates digital information. What will new business applications result?
Distributed ledgers enable the coding of simple contracts that will execute when specified conditions are met. Ethereum is an open source blockchain project that was built specifically to realize this possibility. Still, in its early stages, Ethereum has the potential to leverage the usefulness of blockchains on a truly world-changing scale.
At the technology’s current level of development, smart contracts can be programmed to perform simple functions. For instance, a derivative could be paid out when a financial instrument meets certain benchmark, with the use of blockchain technology and Bitcoin enabling the payout to be automated.
The sharing economy
With companies like Uber and AirBnB flourishing, the sharing economy is already a proven success. Currently, however, users who want to hail a ride-sharing service have to rely on an intermediary like Uber. By enabling peer-to-peer payments, the blockchain opens the door to direct interaction between parties — a truly decentralized sharing economy results.
An early example, OpenBazaar uses the blockchain to create a peer-to-peer eBay. Download the app onto your computing device, and you can transact with OpenBazzar vendors without paying transaction fees. The “no rules” ethos of the protocol means that personal reputation will be even more important to business interactions than it currently is on eBay.
Crowdfunding initiatives like Kickstarter and Gofundme are doing the advance work for the emerging peer-to-peer economy. The popularity of these sites suggests people want to have a direct say in product development. Blockchains take this interest to the next level, potentially creating crowd-sourced venture capital funds.
In 2016, one such experiment, the Ethereum-based DAO (Decentralized Autonomous Organization), raised an astonishing $200 million USD in just over two months. Participants purchased “DAO tokens” allowing them to vote on smart contract venture capital investments (voting power was proportionate to the number of DAO they were holding). A subsequent hack of project funds proved that the project was launched without proper due diligence, with disastrous consequences. Regardless, the DAO experiment suggests the blockchain has the potential to usher in “a new paradigm of economic cooperation.”
By making the results fully transparent and publicly accessible, distributed database technology could bring full transparency to elections or any other kind of poll taking. Ethereum-based smart contracts help to automate the process.
The app, Boardroom, enables organizational decision-making to happen on the blockchain. In practice, this means company governance becomes fully transparent and verifiable when managing digital assets, equity or information.
Decentralizing file storage on the internet brings clear benefits. Distributing data throughout the network protects files from getting hacked or lost.
Inter Planetary File System (IPFS) makes it easy to conceptualize how a distributed web might operate. Similar to the way a bittorrent moves data around the internet, IPFS gets rid of the need for centralized client-server relationships (i.e., the current web). An internet made up of completely decentralized websites has the potential to speed up file transfer and streaming times. Such an improvement is not only convenient. It’s a necessary upgrade to the web’s currently overloaded content-delivery systems.
Protection of intellectual property
As is well known, digital information can be infinitely reproduced — and distributed widely thanks to the internet. This has given web users globally a goldmine of free content. However, copyright holders have not been so lucky, losing control over their intellectual property and suffering financially as a consequence. Smart contracts can protect copyright and automate the sale of creative works online, eliminating the risk of file copying and redistribution.
Mycelia uses the blockchain to create a peer-to-peer music distribution system. Founded by the UK singer-songwriter Imogen Heap, Mycelia enables musicians to sell songs directly to audiences, as well as license samples to producers and divvy up royalties to songwriters and musicians — all of these functions being automated by smart contracts. The capacity of blockchains to issue payments in fractional cryptocurrency amounts (micropayments) suggests this use case for the blockchain has a strong chance of success.
What is the IoT? The network-controlled management of certain types of electronic devices — for instance, the monitoring of air temperature in a storage facility. Smart contracts make the automation of remote systems management possible. A combination of software, sensors, and the network facilitates an exchange of data between objects and mechanisms. The result increases system efficiency and improves cost monitoring.
The biggest players in manufacturing, tech and telecommunications are all vying for IoT dominance. Think Samsung, IBM and AT&T. A natural extension of existing infrastructure controlled by incumbents, IoT applications will run the gamut from predictive maintenance of mechanical parts to data analytics, and mass-scale automated systems management.
Today, in exchange for their personal data people can use social media platforms like Facebook for free. In future, users will have the ability to manage and sell the data their online activity generates. Because it can be easily distributed in small fractional amounts, Bitcoin — or something like it — will most likely be the currency that gets used for this type of transaction.
The MIT project Enigma understands that user privacy is the key precondition for creating of a personal data marketplace. Enigma uses cryptographic techniques to allow individual data sets to be split between nodes, and at the same time run bulk computations over the data group as a whole. Fragmenting the data also makes Enigma scalable (unlike those blockchain solutions where data gets replicated on every node). A Beta launch is promised within the next six months.