Wednesday, January 4, 2017

Blockchain

What is blockchain?

Blockchain provides a way for multiple individuals who may not trust each other to work on the same ledger or document without a trusted intermediary (such as a bank in the case of crypto-currency). In more technical terms, a blockchain is a way to maintain the integrity of information on a distributed decentralized network. Blockchains work by utilizing software which generates a “cryptographic hash”* from the information stored in a network. Each time the information is changed anywhere on the network the blockchain software generates a new block from the new information, a timestamp, and the previous block’s hash. These new blocks are then added to the previous blocks to create a chain, thus a blockchain. The updated blockchain is then sent to all the computers on the network. Since the majority of the computers on the network have to agree on the values contained in the blockchain** unauthorized changes to the information become more difficult with each block added to the chain.  For example, Bitcoin, an entirely online form of crypto-currency, was created using the first blockchain and has never been hacked.*** The Bitcoin blockchain has been running since January 2009.

How does blockchain relate to law?

Some have labeled blockchain as next year’s disruptive technology in the field of law. For instance, Ethereum, another crypto-currency created by a former Bitcoin programmer, includes a programing language designed to create “smart contracts.” Smart contracts are computer programs which act as agreements. Since the negotiation and execution of such contracts can be entirely electronic and without intermediaries, the transactional cost of such contracts can be much lower than traditional contracts.
Smart contracts can also be self-executing. For instance, farmers could buy crop insurance using such a system to cover them in the event of crop failure. The insurance would pay if the temperature fell below freezing between a particular range of dates. The smart contract program would monitor the temperature via the internet and pay automatically if the conditions were met according to the terms of the policy—without further intervention from either the insured or the insurer.

Other legal aspects

Blockchain technology development has been mostly done using open source practices. However, this may change since big businesses are realizing the potential of this technology. Since 2013 about 1.4 billion dollars have been invested and over 2,500 patents filed for blockchain technologies. It remains to be seen how open blockchain technology will remain.

Conclusion

This blog post only outlines a few plausible uses of blockchain technology. Other uses being developed include real estate registry, medical records, financial services, and countless others. One thing is certain though, this technology will have widespread impact on business transactions and thus on the practice of law.
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* A cryptographic hash is a string of text with a set number of characters produced by feeding information to a computer program.  If the exact same information is fed into the same hash producing program in different locations the resulting hash strings should be identical.
** The longest blockchain will be chosen in the event of inconsistent information.
*** While this is true of Bitcoin’s blockchain itself, some Bitcoin related businesses have been hacked see e.g. http://money.cnn.com/2016/08/03/technology/bitcoin-exchange-bitfinex-hacked/

2 comments:

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