Imagine a world where someone in Yerevan, Armenia, could send a sum of money to someone in Pokhara, Nepal, without needing to exchange the Armenian dram for the Nepalese rupee. Ten years ago, such an idea was but a figment of our collective imagination. Today, borderless transactions are happening every second, all thanks to the blockchain.
Despite its growing prominence in the public discourse around economics, law, and technology, most people find themselves at a loss when asked to explain blockchain technology. As this once-obscure concept becomes a very real and even ubiquitous part of our digital and financial landscape, understanding its fundamentals is no longer optional – it is essential. Blockchain is swiftly becoming a cornerstone of modern innovation, driving advancements from cryptocurrencies to secure data sharing, and all in the context of a greater technological revolution that is evolving at breakneck speeds. This article attempts to take us back to square one – or “block” one, as puns may have it – and give an overview of the basics of blockchain technology.
The story of the blockchain starts long before cryptocurrency became something you could purchase with an app on your phone. It starts before there were even apps or smartphones that could operate them. The idea of a “digital timestamp” became popular among academics in the early 1990s, but was not implemented in real life until 2009, when Satoshi Nakamoto used it to create the popular cryptocurrency Bitcoin. In short, blockchain is the progeny of years of research into ways to record transactions so that they could not be backdated or tampered with, a problem that persists with traditional, centralized financial institutions.
But what is blockchain?
Blockchain is a public, decentralized ledger of information. The blockchain is a digital chain of “blocks,” each of which contains data relating to a transaction. These blocks live on-line and are maintained by networks of servers that are constantly reading incoming transactions and verifying them as legitimate. Depending on the type of blockchain, a block might tell you from whom a payment was sent, to whom it was sent, and the amount of the payment. Each block has a special “hash” made of characters and numbers. Hashes are like fingerprints: they are unique to a block, so no two blocks have the exact same hash. Each block, however, also contains the hash from the previous block. In this way, the blocks are tied together in a “chain.”
Because the chain is public, anyone with an internet connection can see the transaction. For example, you can watch incoming Bitcoin transactions in real time at this link. While that might seem like an invasion of privacy, at least as compared to the privacy enjoyed by those who transact with traditional financial institutions, it also means that the transaction is essentially immutable. It is exceptionally difficult to manipulate or hack the chain because any change in the data contained in the block changes that block’s hash. Because the hashes are linked together, a new hash will change all the subsequent blocks in the chain, alerting the network. Confirming that change would require the consensus of all participants in the network, which requires engaging additional types of software that ensure the blockchain is synchronized across all servers and stays secure. Even in the rare circumstance that a block is tampered with, the network of computers verifying and recording the transactions can spot the error and reject the block as a fake. In this way, blockchain technology increases transparency and accountability and prevents fraudulent transfers.
Perhaps the biggest perk of blockchain technology is its efficiency. By allowing cryptocurrency holders to engage in peer-to-peer transactions, blockchain eliminates intermediaries like banks – and the transaction costs that come along with them. Financial transactions are streamlined and can occur much more rapidly than transactions that pass through numerous institutions before payment is tendered to the recipient. Blockchain transactions can often be completed in a matter of minutes, even when the payor and payee are on opposite sides of the globe. Comparatively, traditional transactions under such circumstances might take days. Those who are bullish on blockchain as the future of financial transacting might liken traditional, centralized financial institutions to the telephone operators of the 20th century: soon to be defunct in the face of better technology.
Blockchain also has applications beyond simple financial transactions. Many companies are now implementing blockchain in supply chain management, using the technology to create and store data relating to purchase orders, inventory items, invoices, and so on. Manufacturers, distributors, and retailers working together on product movement can see the details of cargo transport in real time – the route, speed, and documentation, along with all the changes made to that documentation (when, why, and by whom). They also can use the blockchain to automatically pay vendors upon delivery to the final destination, for example, or track changes in the weight of a shipment during transport, which might indicate goods were removed from the shipment without authorization, or illegal items were added to the shipment. Such innovation could one day mean that, for example, in the case of an outbreak of salmonella contained in a shipment of eggs sold by a major grocery retailer, distributors could trace the source of the contaminated supply and destroy only the latest supplement, as opposed to destroying the whole stock. Likewise, healthcare companies are looking to use blockchain technology to safeguard patient records, record patient treatment events like vital signs and medication distribution, and protect the integrity of patient data. The applications, truly, are endless.
Blockchain certainly is not the easiest concept to understand, but getting a good grasp of the basics can help demystify the technology and reveal its potential in various sectors. It is crucial that legal professionals, consumers, and business leaders, especially, learn as much about blockchain as possible as its applications and influence continue to expand.
If you or your business has questions about blockchain technology or other matters involving technology, privacy, or data security, Stoll Keenon Ogden’s team of attorneys is here to help. Our attorneys regularly advise clients on matters relating to corporate actions, regulatory matters, and other compliance issues, and we look forward to assisting you in navigating this new world where technology, finance, and law are inextricably intertwined.
