The South by Southwest interactive conference has quickly become one the premier technology conferences in the country. Over the past several years, there has been an unofficial theme to the types of technology highlighted throughout the conference. Last year, overwhelmingly, that theme was blockchain.
From the trade show to the pitch contests, everyone was abuzz about the potential for this new technology. Considering its popularity, it was not surprising to learn that this year’s conference featured its very own “blockchain” track.
In 2018 alone, statistics suggest that nearly $4 billion in venture capital was invested in blockchain startup companies and cryptocurrency. And yet even those within the companies making those investments are asking questions like, “What is blockchain anyway?,” “Is it just a fad?,” and “Will this actually effect my business?”
Indeed, these are the questions I hear most frequently from corporate counsel. Certainly the technology itself can be very complex, but the general concepts do not have to be. This article is intended as a beginner’s guide to blockchain, cryptocurrency and bitcoin. By the end, I hope to offer some practical information that can serve as a baseline for conversations about the technology, and hopefully ease some of the fear sparked by the mention of “bitcoin,” “cryptocurrency” and “blockchain.”
What is blockchain?
“Blockchain” is shorthand for “decentralized distributed ledger technology.” The need for this shorthand is apparent given that the latter is quite a mouthful. But parsing the words in the full name provides significant insight into the foundational concepts of blockchain. “Decentralized” means that the technology is not controlled in any one place or by any one person. Rather it exists in many places at once.
A “ledger” is a list of transactions. Traditional “ledgers” log dates, times, the nature of the transaction and the people involved. Typically these can be accounts, statistics or any other types of records. We use ledgers to memorialize the important details of a transaction so that it can be referenced if the need ever arises. A “distributed ledger” is a ledger that is passed around to everyone. In other words, everyone has a copy of the ledger.
In sum, blockchain is a technology that records transactions, where everyone has a copy of those records but no single person is in control of the records. The transactions are recorded in blocks. These blocks can reference a single transaction or a group of transactions. But the blocks have a special characteristic that is the beating heart of blockchain technology. Each new block incorporates information from the last block. That incorporated information is comprised of a mix of the substantive transaction record from the previous block (such as the date, time and people involved) and information from the block before that. Thus, every new block is related to the last block, which is related to the block before that, and so on. The result is a ledger listing a chain of transactions that are all interrelated and thus “blockchain.”
Finally, everyone using any particular blockchain has a copy of the ledger. Every time there is a new block added to the chain, everyone’s copy of the ledger is updated automatically. Thus, all users have a copy of the current ledger. As a result, if some bad actor wanted to modify a past transaction in the chain, they would have two major problems.
First, since every block is related to the last, it would be readily apparent to anyone reviewing the ledger that a block in the chain had been broken. The information contained in the modified block would not match the information that it had previously loaned to the blocks that came after it.
Second, the meddler would have to change more than half of the ledgers maintained by everyone using the system. If the system has any significant number of users, this can be virtually impossible. For example, if the system has 50,000 users, our mischief-maker would have to individually change 25,001 user’s ledgers to even make an argument that his modified transaction is the correct one. Since the system is decentralized, the evildoer cannot hack a single system to achieve his malevolent ends. This is one of the central advantages to blockchain technology.
Blockchain, cryptocurrency and bitcoin: Is there a difference?
I often hear the words bitcoin and blockchain used interchangeably. In fact, they are very different. If blockchain is a type of technology, then bitcoin is an application of that technology. To analogize, if blockchain is the internet, then bitcoin is Amazon.com. Amazon uses the internet to operate, but there are millions of websites that also use the internet to transact business.
Bitcoin is a type of digital money or currency that relies on blockchain to propagate and maintain the integrity of all transactions involving bitcoin. Every bitcoin transaction ever is logged in the bitcoin blockchain ledger. That includes the thousands of bitcoin transactions that happen every day.
But bitcoin is not the only type of digital currency. Some estimates suggest that there are over 2000 different cryptocurrencies, with that number growing constantly. Anyone who can engineer a new blockchain platform can create their own cryptocurrency. One feature of most cryptocurrencies such as bitcoin is that the system automatically gives out free money (such as free bitcoin) to those that lend their computing power to the system. This means that by investing in a several computers and a whole lot of electricity, someone can “mine” cryptocurrency by loaning that computing power to the system.
Besides cryptocurrency, there are limitless potential applications for blockchain technology. Companies are using the technology to track produce from farm to table, to match social media influencers with advertisers, to track the authenticity of sports memorabilia, and to create whole new markets for buying and trading fractions of valuable works of art. Anything that benefits from recording transactions is a potential field for blockchain technology.
What is a smart contract, and will it take my job?
In the legal profession, one of the most talked about blockchain applications is the so-called “smart contract.” Some inside and outside counsel even fear over their role in a future where contracts become entirely digital. However, there is no need to despair. A smart contract is simply a self-executing contract. In other words, in theory, no one needs to make sure that the terms of the contract are met. Instead, the digital contract will automatically execute the terms of the contract and log each transaction on a blockchain. Someone will still need to negotiate and draft the terms of the contract, and lawyers will still be called upon to resolve disputes if the system fails or even over the operation of the system itself.
There are several types of emerging legal issues that blockchain technology may create. If the automated system fails, who is responsible for the breach? The parties to the contract? The person who wrote the code? Must lawyers review the contract code as well as its written terms? These questions do not presently have clear answers. But they are sure to be addressed as the technology becomes even more pervasive. It will be the lawyer’s job to be aware of the potential issues, and work to avoid them before they arise. Your job is safe.
Blockchain technology is here to stay. It is already a multibillion dollar industry, and its impact is growing daily. There are currently more applications of the technology than would be practical to list. And the law always follows technology. The key for lawyers will be to keep up with the types of regulation that are created specifically for, and those that are applied to, blockchain. For example, the Securities and Exchange Commission has decreed that certain types of cryptocurrency transactions are subject to existing securities regulation. Wyoming has adopted financial incentives for new businesses involving blockchain technology. New Zealand has created a blockchain system specifically for tracking property records and is pushing for other countries to adopt the technology. There are tax and regulatory issues involving the location of cryptocurrency, such as where it resides.
With any new technology comes new legal pitfalls. (For examples, see automobiles and traffic laws or the internet and cybersecurity.) Simply keeping informed is the best way to understand where trouble may arise. Blockchain, hopefully now less mystifying, is no different.
Matt Acosta is a litigation and intellectual property partner at Jackson Walker, LLP and a founding member of Jackson Walker’s Artificial Intelligence and Blockchain Practice Group.