But what if we could replace trust and expectation with certainty? With extravagant and diverse praise like “The trust machine”, “Web 3.0”, “The renaissance of money”, and “a hyper-real-time version of the court system”, the replacement of trust with the technological certainty of “blockchain” is fast approaching.
Blockchain casts a long shadow of potential disruption across society, and particularly professional services who have been the traditional repositories of trust. Legal Economy explains how the principles of blockchain will affect the way we practice law, and how best to get ahead (spoiler: it isn’t choosing a new career).
What is blockchain?
Blockchain’s appeal extends well beyond currency. Significantly to lawyers, blockchain technology could:
- potentially replace the need for a trusted intermediary between parties in a transaction; and
- be programmed to complete transactions autonomously in some degree (a concept known as smart contracts (to be discussed in a later article)).
This article investigates the first use — blockchain as a replacement of trust — which forms the basis of its impact upon the legal sector.
So, how does blockchain establish trust? Ultimately, blockchain’s ability to allow two parties to verify the status of their transaction, and the security of the blockchain technology, provide a foundation upon which two parties can transact without the need for a trusted intermediary. The following summary of the technology, paraphrased from an excellent article in the Harvard Business Review, explains the technological features of blockchain that make this possible.
Blockchain is a decentralised, universal ledger. It operates on a distributed database, meaning that the record of all transactions on the ledger is accessible to each individual computer that connects to the blockchain, also known as a “node,” rather than being stored in some discrete control centre. Similarly, interaction between nodes occurs through peer-to-peer transmission, eschewing an intermediary central node.
New interactions are added in “blocks” every few minutes to the chronological “chain” of stored transactions at all other nodes (hence the name). Each interaction is verifiable by virtue of it being connected to the previous one, rather than by its confirmation through a central authority. A good analogy is the way land ownership was established through an unbroken chain of title, as opposed to a Torrens title where ownership is verified by a central registry.
An obvious downside to this decentralisation is that, just as one could alter a chain of title to forge ownership of land, so too a hacker could theoretically alter the blockchain to, for example, forge ownership of currency or execution of an obligation to enact payment. However, in practice this would be extremely difficult (if not impossible) given that the blockchain is distributed across a network of many nodes, each of which would need to be altered. The blockchain is effectively irreversible.
Additionally, each user has a unique identifying address between which the blockchain transactions take place. This system provides transparency with pseudonymity, as the address of each party to a transaction is traceable and therefore accountable, yet users retain the choice of whether to verify their identity or remain anonymous.
Add to these two qualities the fact that blockchain functions are, of course, written in computational logic, rather than legal language, and we have the potential for automated transactions between parties that are both trustworthy and secure. This is the concept that underpins “smart contracts”, which will be explored in depth in our next post.
Chain of Fools?
Despite the immense promise of blockchain, it has not been without its controversies. While the blockchain itself is virtually secure, the processes that govern transactions on networks are more vulnerable. A single attack last year drained an experimental decentralised blockchain network of US$79.6 million. This practical uncertainty around large-scale projects, as well as enormous infrastructure and regulatory requirements suggest that if the blockchain revolution succeeds, it will certainly not happen overnight.
How should the savvy lawyer approach this volatile technology? Firstly, don’t run. Nick Szabo, the man credited with inventing smart contracts believes that, rather than replacing lawyers, this technology is “mostly making possible new things that haven’t been done before”. Further, many changes across all levels of society are needed before blockchain will approach anything like its predicted ubiquity, so lawyers should be wary of overcapitalisation. Start small: perhaps offer bitcoin as a payment option, or use blockchain applications for internal data storage. Most importantly, stay informed.
Written for Legal Economy Pty Ltd by Nicola Hard. You can contact Nicola at email@example.com.