“Blockchain, A Primer”

You hear the term “blockchain” quite frequently these days, usually in the context of Bitcoin or other cryptocurrencies, but blockchain technology has a wide variety of applications and the potential for even more.  But, as with all things new, use and experimentation will shed light on the ways in which blockchain technology can impact our lives (i.e., internet use, financial transactions, information storage, etc.).

To many of us, though, blockchain is a mystery.  Even those who are more familiar with blockchain freely admit that they do not fully comprehend it.  Our firm advises clients on technology legal and business issues, and we intend in this blogpost to offer you a primer on blockchain and to explore possible blockchain applications beyond cryptocurrencies.

A blockchain is a continuously growing network (a chain) of encrypted digital records stored simultaneously on many computers.  A cryptographic hash function is a mathematical algorithm which maps a bit string of data (a block).  Each cryptographic hash is designed to be a one-way function which is infeasible to corrupt.  The input data is called the message and the output data is called the hash value or hash.  Each block in a chain contains a hash of the previous block in the chain, a timestamp and transaction data.

Decentralization, though, is the central feature of blockchain technology.

Decentralization renders the blockchain highly resistant to alteration.  The mass collaboration of the computers comprising the peer-to-peer decentralized network and the offer-and-acceptance dynamic of each transaction create a reliable, robust workflow.  The blockchain cannot be controlled by any single entity and it allows for simultaneous access and revision to all users involved.  All the information on the blockchain is updated and re-verified in ten-minute intervals, and multiple parties are required to authorize any alteration to information on the blockchain.  Virtually anything of value can be processed on the blockchain, so it’s use is not limited to financial transactions.  To compromise any of the data on the blockchain, a hacker would have to simultaneously override the entire network, which requires enormous computing power.  Therefore, from a security perspective, decentralization seems rather appealing compared to the centralization of financial institutions.

An additional feature of decentralization is the lack of an intermediary such as a bank.  For example, if one individual wishes to make a payment to another individual on the blockchain, no intermediary is necessary to verify or process the payment, the way banks do so.  Instead, the blockchain verifies and processes the payment, and accordingly updates the data every ten minutes as usual.  Removing the intermediary from the equation creates a more efficient system which can instantaneously process and verify transactions, as opposed to waiting for a bank to verify and approve the transaction, which can take days.  This level of low cost efficiency and self-verification has the potential to replace banks at the center of financial management.

Let’s recap—a blockchain is a network of many computers (that’s the chain) which controls and stores bit strings of data (blocks) and duplicates them across the entire peer-to-peer network.  All users on that network may simultaneously access and revise the information, and the entire blockchain updates itself at regular intervals.  To relate it to something many people have used, Google Docs is a helpful analogy: when a Google Doc is created, the creator can set the number of users who may access and revise the document; the users may access that document through their Google accounts at any location and make any revisions they wish.

Where Google Docs and a blockchain differ is that a single user can alter a Google Doc, and a blockchain requires the consensus of multiple unrelated users to modify a blockchain (all previous blocks must also be changed if necessary).  A blockchain retains each iteration of a document or ledger for the duration of its lifespan on the blockchain.

Each block contains a timestamp and a link to the previous block, which forms a chronological chain of information that is reinforced and secured by unique digital signatures.  This ensures that this chronological recordkeeping mechanism cannot simply be altered at any moment by a single user.  Such a mechanism makes the blockchain a viable domain for the creation, storing and sharing of legal documents.

Every transaction or action requires the authorization of multiple users before the blockchain will reflect that transaction or action.  This is the conceptual backbone which defines Bitcoin and other cryptocurrencies.  Why does any single Bitcoin have value?  Because multiple unrelated parties agree: a) that a Bitcoin has value, and b) on the amount of value the Bitcoin has.  Consensus is the key.  Yet, while this user-to-user consensus across a vast digital landscape is the key to a blockchain’s reliability, it is that very decentralization which makes many consumers and investors uncomfortable.

The U.S. Dollar is backed by the full faith and credit of the U.S. Government, which is overwhelmingly considered by our society and other societies across the globe to have value.  The stock market reflects the consensus of investors: the increase in price of a particular stock is an indication of investors’ shared belief in the value and relevance of that stock.  On a more micro level, a contract between two parties is deemed to have value because the two parties agree that it does and agree to be legally bound by its terms and conditions.  In other words, consensus is value.  Therefore, it may only be a matter of time before cryptocurrency replaces tangible money, or before blockchain technology becomes your everyday wallet, notebook and stock portfolio

As a closing point, let’s consider the growing preference for transparency.  Nearly ubiquitous mobile broadband has created a world of easy and common access.  The mobile use of tools, such as Google, Facebook and Twitter, has placed the world of information at one’s fingertips. The functions that blockchain technology serve in our lives have yet to unfold, and, while blockchain technology is not devoid of risk, its benefits potentially are many.  Risk is, after all, the eternal companion of change.


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