Blockchain technology has been heralded as the ‘next big thing’ or ‘Web 3.0’ amid suggestions that it will be as revolutionary as the introduction of email.
You will have heard of, or even used, Bitcoin, a digital currency underpinned by Blockchain which can be used as a method of payment for a growing number of products and services, from pizza deliveries to space flights.
Blockchain is the underlying infrastructure that has allowed Bitcoin to circumvent the “double spending” dilemma, whereby electronic credits can be spent more than once given that any digital file can be duplicated. This provides bitcoin transactions with a level of permanence that has allowed the digital currency to persist and even thrive as a valid means of payment.
Yet whilst built for Bitcoin, Blockchain has greater implications beyond the digital currency, extending - or perhaps overreaching - into fields like finance, utilities and entertainment.
So what is Blockchain – and is it a passing fad or a genuine precursor for change?
Blockchain Explained - A chain of blocks
Blockchain simply describes a digital ledger which records data and is spread across a network of computers (a “peer-to-peer network”). Each piece of information is recorded in a block which is linked to the previous blocks (hence Blockchain) with a timestamp.
The Blockchain is updated every 10 minutes across a network. Each computer connected to the network has access to the same copy of the Blockchain and can work on it simultaneously. Access is granted by the use of a private alphanumeric key which is unique to each computer accessing the Blockchain. All information blocks are validated by interactive algorithms known as cryptographic hashes.
The distribution of the Blockchain across the network means data is decentralised and therefore more secure, as there is no single vulnerable location that hackers can target and infiltrate. This lessens the role of intermediaries and veers away from the concept of central databases.
The result is that a Blockchain holds a supposedly incorruptible record of precisely what blocks of data have been added to the chain (such as which transactions have been made) at what time and by/to whom, itself a super audit trail.
Blocks and networks and distribution are all well and good. But let’s take a step back – what does this look like in practice?
How is Blockchain currently being implemented?
Transactions lend themselves to being recorded via Blockchain – they are undertaken between multiple parties, require various real-time exchanges of data and often demand a high level of security.
Diamond Tracking – Crystal Clear
Blockchain is already enhancing supply chain transparency in multiple industries, such as the mining and sale of diamonds.
London-based tech company Everledger has used blockchain to develop a system which allows players at every level of the diamond supply chain, from miners to consumers, to verify that they are not dealing in blood diamonds, those used by militia to fund conflicts.
The mining, possession, cut, colour, quality and value of each diamond is tracked in real-time, openly available and reliably recorded via Blockchain. At the time of writing, over 900,000 diamonds have been added to Everledger’s Blockchain database.
You Can Bank on it
Fintech company R3 CEV has brought together a consortium of financial institutions including Barclays, RBS, Credit Suisse, HSBC and Goldman Sachs which have executed multiple international financial transactions across a Blockchain.
This involved the exchange of tokens across a global private network with no need for a central third party to clear the transactions nor to verify the identity of each party.
From our own commercial perspective, one of Blockchain’s more intriguing applications is the conception of smart contracts.
Smart contracts are simply Blockchains that are coded to send, receive and store money, to interact with other smart contracts and synchronise with any specified data available across the internet. Execution of a smart contract can be made autonomous such that the contract will itself perform or not perform based on the external data with which it interacts.
Finance is an obvious area in which smart contracts may thrive, such as a derivative which is paid out when a financial instrument reaches a certain benchmark, the sending and receipt of this payment being automated across the Blockchain. In this scenario, the contract will be coded to execute when a specified price level, time limit or other variable is reached.
However, to be fully autonomous, all relevant data must be accessible online. Where dealing with physical assets and variables that exist outside of the online space, manual input will continue to be required. In respect of transferring title to goods or logging the flow of goods and services throughout the supply chain, human intervention will be as important as ever.
It has yet to be seen whether the conception of Blockchain technology will truly revolutionise the way our clients do business and consequently the way we advise them.
There are as yet no formalised standards in place and it will not be until 2020 at the earliest before the technology will realise its true potential.
Unlike the internet, which was developed with government funding and used initially to connect research institutions and universities, Blockchain is being developed purely from a business viewpoint, which may fetter its expansion.
And unlike email, which launched with only one ubiquitous industry standard, Blockchain is subject to fragmentation with disparate industry players even at this very early stage in its lifespan.
Our recommendation for businesses and legal advisers now is to recognise the growing relevance of Blockchain and be prepared to change the way we conduct business. If it does not take off in the way that technology and commerce experts have predicted, there will no doubt be another technology on its heels which builds on the buttresses that Blockchain has already laid down.
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