UK: Dentons TechTalks – Blockchain: An Explanation

Last Updated: 26 September 2018
Article by Justin Hill

It can be difficult to find a simple overview when trying to learn about a new technology. Although there might be lots of information out there, it is not often written with a newcomer in mind. As part of Dentons TechTalks series we are now focusing our attention on blockchain. What follows is a simple explanation of what blockchain is and how it can be used.

Imagine a new technology so influential that it transforms the basic building blocks of our society. This technology would influence the way our economy, governance and businesses operate. It would change how we perceive trade, ownership and even trust.

This technology already exists. It is called blockchain and is the breakthrough that facilitated the rise of cryptocurrencies (Crypto).

People tend to think of Crypto (like Bitcoin) as virtual money, or a transaction system. But the monetary element is just the beginning.

Money exists to facilitate trade, but trade has become extremely complicated. Anyone can trade with anyone, worldwide. Trade is recorded via book-keeping and this information is often centralised, isolated and closed to the public. Both parties have to trust a middleman to approve transactions correctly and to keep the books. Think of governments, banks, accountants, notaries and the physical money in your wallet. We call these trusted third parties.

In this internet age, information such as photographs, videos or text can exist in many places at once. When you share something with someone, you now both have it. But when it comes to value, that is problematic. Value in a currency can only exist in one place at one time. When you give money to someone, you no longer have it. It is paramount that you know you are not getting a copy of that money, since there is no value in a copy. Blockchain solves difficult technical problems associated with how to secure an open network like the internet in a way that would ensure that our money could not be altered, copied or duplicated.

This brings us to the essence of Crypto. Crypto software allows a network of computers to maintain a network for book-keeping online. This book-keeping is recorded chronologically and, according to purest blockchain principles, it is not closed or under the control of one party. Instead it is publicly available in one digital ledger that is fully distributable across the network. We call this network the blockchain.

In Bitcoin, all the details of a transaction are logged. Every node (participant) in the network owns a copy of the blockchain. The transactions are verified by Bitcoin miners, who maintain the ledger. The nodes automatically and continuously agree about the current state of the ledger and every transaction in it. If anyone attempts to corrupt a transaction, by double spending the same value for instance, the nodes will not arrive at a consensus and decline to incorporate the transaction into the blockchain.

This means that every transaction is public and thousands of nodes need to unanimously agree that a transaction has occurred. The blockchain provides a high degree of certainty on the true state of the ledger. This way everyone has access to a shared, single source of truth, which is why some will say that we can always trust the blockchain.

The ledger does not care if a Crypto represents an amount of pounds or dollars, or anything else of value. Users can choose what a unit of Crypto signifies. A Bitcoin for instance is divisible into a hundred million units. Each unit is individually identifiable and programmable. This allows users to assign properties to each unit. A unit can be programmed to represent a penny, a share in a company, a kilogram of steel or healthcare data, for example. Because of this, Cryptos are much more than simply a way of transacting value, they can represent anything.

Blockchain allows currencies to become smarter. Imagine dental insurance in pounds or dollars that can only be used to pay for dental services at certified providers. In this case, whether someone follows the rules is no longer verified in the subsequent bureaucratic process – it is programmed into, and therefore an intrinsic part of, the money itself. So, we have compliance built in. The unit can also be programmed whereby it will automatically be returned to the provider if the receiver does not use it within a certain time frame. This allows the provider to make sure that allowances are not stockpiled.

Companies can programme their spending in the same way – programming budgets for salaries, equipment and services. Money can be specified and therefore cannot be spent on other things. We can have laws and regulation built into the money or into particular transactions. It is possible for the currencies to pay their own taxes and automatically give discounts to people meeting certain criteria at the point of transaction, instead of enforcing or reimbursing such things at a later date. We can create custom-made currencies that meet our needs and serve our highly complex modern economy.

The programmable character of Cryptos allows us to innovate and restructure our financial sector and our administrative processes, make them more efficient and transparent, and significantly decrease bureaucracy.

But there is more.

Blockchain goes further than money – it allows a network to work reliably without a central point of control. This network can be trusted by its users as there is no central point of control which can fail, suffer a hack or become corrupt. Think about other services beyond money that are also controlled centrally – a social network that automatically rewards content producers depending on the value added1 . What would a digital cloud look like without servers in the centre, but with data and processes encrypted and spread across a web of personal computers, each being rewarded for exactly the amount of work provided2 ? Or a trusted system of provenance that allows jewellers to guarantee the authenticity and integrity of the diamonds they purchase3? These are examples of three real blockchain solutions already available and ready to use.

The first iteration of blockchain development has exposed various problems ranging from energy consumption to high transaction fees and long wait times. The technology is already being improved to combat these teething problems. For example, Nano works using something called a block lattice whereby all users hold their own blockchain and interact with others through the network to achieve a greener, instant and feeless alternative to Cryptos, such as Bitcoin.

Of course, this is only the beginning. Internet technology is disruptive and breaks the status quo. It opens markets as it proliferates and tends to become mainstream. Bitcoin and other Cryptos have caused a paradigm shift already. It is time to explore this new technology constructively and critically, whilst openly discussing its potential applications.

That is exactly what we at Dentons are doing with our partners and clients.

Footnotes

1. This blockchain solution is called Steem.

2. Examples already existing include Dadi, Oracle and BlockCloud.

3. Provenance blockchain solution for diamonds is called Everledger.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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