What’s a blockchain? A lawyer’s guide: Part one

By Jerome Doraisamy|25 June 2019

Blockchain and decentralised ledger technology has been growing increasingly in prominence as more and more start-ups, enterprises and governments around the world seek to unlock value in automation, efficiency and decentralisation, writes Michael Bacina.

While cryptocurrency is the most well-known application of blockchain technology, blockchain does not equal cryptocurrency, and vice versa. At its core, blockchain technology is simply a database system which enables a shared — and continually reconciled — ledger.

Ledgers have been used in commerce for hundreds of years to provide material evidence of transactions. Traditionally, these ledgers have been centralised, with copies procured and distributed by external parties, resulting in transaction and auditing costs. A distributed ledger (from which blockchain technology derives) is a form of shared and collaborative database where, in a public and decentralised deployment, no individual party can control or manipulate the records in the system. This ensures the veracity of all transactional records, giving confidence to users of the database that the date has a verifiable truth to it, specifically that once entered into the system, it has not been changed.

Bitcoin is a renowned example of a public decentralised ledger utilising blockchain technology. The database for Bitcoin, which records every transaction on the Bitcoin ledger, is stored internationally across numerous computers (nodes) and is openly available for download or inspection by anybody. The computers which verify transactions (miners) are also distributed globally, with the resulting network being trusted by many as a fully accurate record of which software wallets hold (or more accurately control) certain amounts of Bitcoin at a particular time. Once a transaction is confirmed on the Bitcoin network, no individual user can alter a transaction without controlling 51 per cent of the miners, entrenching the system’s accuracy and security. Bitcoin has operated for over 10 years and has not been hacked or suffered any serious outages.

Blockchain technology addresses two main problems with the internet. The first is that nothing online is immutable, as digital assets (such as a movie in a video file) can be replicated effortlessly and endlessly. In the cryptocurrency context, this manifests as the “double spend problem”, which has only been solved in a usable digital currency by cryptocurrencies to date.

By decentralising the ledger system and distributing it across every node in the network, the blockchain addresses the double spending problem. Unless an individual can verifiably prove to the entire network of nodes that a transaction is legitimate, they will be unable to amend the ledger to alter a transaction or to spend a digital currency amount more than once. As noted above, in most public blockchains, to commit this fraud, an individual would have to control more than 51 per cent of the network, which in practice has proven to be effectively impossible on networks of scale.

Centralised systems rely on our trust of a central entity, and recent history as well as mandatory data breach reporting have shown how vulnerable centralised entities are to hacking, theft, fraud, corruption or accident. The opaque nature of centralised record-keeping often leads to adverse incentives, and may result in some entities self-imposing internal roadblocks, such as restricting cross-departmental access to data. This form of data siloing may make sense in the short run to protect sensitive information and minimise the risk of breach; however, in the long run, it increases the costs of unlocking the value in that data, and causes wastage.

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By shifting the burden of data protection away to accountable and accessible networks, blockchain technology promises a new era of efficient censorship-resistant transparency. By doing so, users will be better able to access, transact with and enter information online with confidence in the security of that data, without needing to concern themselves with the possibility of a central server being compromised.

Michael Bacina is a partner at national law firm Piper Alderman.

What’s a blockchain? A lawyer’s guide: Part one
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