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What is a Blockchain and why will it change the world?

A blockchain is almost self descriptive - it is a chain of digital blocks of data. This is a simple data construct, but one that underpins data management. As data is used everywhere, the potential application of blockchains is ubiquitous in our economy.

Let us take your bank account. If you study your statement, then you will see that it starts with an Opening Balance (or Opening State or Block), and then has a series of amendments to that balance which are Transactions (or thought of as Blocks of Data). The status of your account at the close of the period is then the Opening Balance and the chain of Transactions (Blocks of Data), otherwise known as the Blockchain.

Depiction of a blockchain of data.

In fact any ledger, which records the status of an object and changes to it over time, has to contain this construct. The inventory in a store, the ‘likes’ you have on Facebook and of course the ownership of land at the land registry. This essentially describes a database, that not only records the current value (bank balance, land owner), but also captures the trail of transactions that composed that value. 

Given how generic (and foundational) this concept is, clearly it can be utilised in a broad range of scenarios in society.

What is the furore about?

Blockchains have been around since the first ledgers: so about seven thousand years. Which begs the question 'what all the excitement is about?' 

In brief, it is because we can now combine cryptography with blockchains and the internet, to allow two complete strangers to transact directly with 'trust' and subsequently let the entire community know of that agreement, so that the community can update their copies of the public ledger (the millions of computers or nodes that also keep copies of the ledger of transactions).

Until recently this process of managing an authoritative and trusted ledger had to be managed centrally, giving that central source of information, credibility, power and of course the potential for error or abuse. A society’s most important ledgers, such as the ownership of land or taxes owed, were maintained by governments (or their agents), but as private enterprise expanded, corporations and banks also control other essential ledgers, such as your bank account. 

That said, such ledgers are pervasive. Your local coffee shop may extend you credit, and in doing so are maintaining a personalised ledger of their local customers.

The decentralisation break-through

On the 18th of August 2008, under the pseudonym of Satoshi Nakamoto, an unknown computer programmer proposed mechanism for direct (peer-to-peer) management of a ledger. His Bitcoin Whitepaper explained the technology behind Bitcoin, and his goal was to create a new form of money. Whether that form of money gains traction and is successful is a separate question. 

In order to achieve his goal, he also created the first successful public ledger, that no longer needed a central authority and could be managed by a community of users.

He achieved this by cracking the ‘double spend’ problem which had long plagued the community of developers who had attempted this before. The ‘double spend’ problem is that in a public ledger there is a time-lag between the Transaction (in which one party agrees to pay another party) and the public ledger (the millions of 'nodes' or computers that are everyone else's record of that same ledger) being updated. It was therefore possible to abuse that time lag, by spending the same ‘coin’ twice. 

Nakamoto solved this by limiting the identifying criteria of a transaction to a single CPU (computer processor) and time stamping the transaction, as it would not be possible for a single CPU to work on two transactions simultaneously. 

This elegant solution introduced the dawn of a new age of data management - decentralised data management: something that we have never been able to do before. Put in that historic context it is easy to see what the furore is about.

How will this breakthrough be applied?

Entities (individuals, corporations and any other party) can now interact directly with each other. Let us imagine for a moment a commercial environment, that is low in trust, for example a ‘start-up’. It is not inconceivable that in a decade, start-ups can share a ledger of their accounts, live (as transactions happen), with just their investors. 

The implications of this are profound, and it is not an understatement to say that they are beyond our comprehension. 

A community of nodes or participants capable of instituting 'trust' in each other.

Such seeming hyperbole is actually fair because this a shift in a foundational building block for the engagement between entities, and given how complex our society already is, this could steer web-ecosystem in entirely new directions. 

If one thinks back to the origins of the internet, it was nothing more than academics remotely accessing each other's libraries. Fast forward three decades and individuals have utilised these new technological building blocks (of the original internet) to innovate and create an ecosystem that society can barely live without.

Why is trust so important?

For those of us that are less suspicious in nature, the emphasis on 'trust' may seem overblown. However, let us think of an example like Facebook. The way the world currently works, individuals hand over their data to Facebook (which owns it all) and then connects individuals. Moving from Facebook is almost impossible without starting from scratch. All their photos, connections and chat histories are on it. 

However, imagine a world where all your data was on an App (or DApp - decentralised app), that you owned. This means you (and your data) and your network can flit between Social Media platforms at your convenience.

Unsurprisingly, the less the 'trust' in the environment, the greater the applications for this technology. Let us consider, whistleblowers in emerging market countries, or even Italy in the 1980s (for those who followed the battle against the mafia). It is plausible to set up entirely, mutually secure but mutually trusted communications until it is clear there is sufficient evidence to prosecute. 

Finally in the age of cyber conflict, a system where individuals control their data is more secure (the flip side of the 'trust' coin) than one that is centrally controlled. Imagine for example a rival superpower building a quantum computer that hacks all banks and sets their balances to zero. It would plunge society into chaos. Once the stuff of science fiction, but these are the scenarios that policy makers need to consider in the 21st century.

Whilst that is an example of a foreseeable, but still fictional, catastrophic breakdown of trust, perusing history one can see the use cases for the blockchain in many conflicts. When one ethnic or religious group takes over and disenfranchises another, these acts are often accompanied by unilateral amendments at the land registry, destroying and / or creating new records of ownership. 

Under a blockchain ecosystem fleeing or marginalised groups can stake their claims, evidenced by these electronic assets at future dates. Whilst this is more rare in developed countries, emerging markets continues to face real challenges in this regard that the blockchain could resolve.

In sum, the most valuable use cases for this technology are inversely correlated to the trustworthiness or security of the existing centralised solutions.

Changing the world

There is a reason why small communities (villages), distrust big cities, where know-one ‘knows’ each other, and that is the lack of ‘trust’. 

Reading Sapiens (by Yuval Noah Harari), one can see how in an ancient tribal structure, everyone knew everyone else, and accounts of who owes whom what or of which individuals could be trusted were more straightforward. 

Societies became more complex in the intervening millenia and we needed to institutionalise those basic building blocks of commerce, and those institutions were often cumbersome and flawed. This technology is revolutionary in its ability to permit ‘trusted’ interactions between strangers.

Blockchain has the potential to literally turn ‘the whole world into a village’.

Why does it matter to litigators?

Like all innovative technologies (from the South Sea bubble, to the railways to the internet), where there is progress, there is speculation and what follows are losses. As litigation is a function of losses and contractual opacity, we expect to see a substantial amount of litigation around this space in the years to come. In our series on blockchain, we explore the economic arguments. Sound economics, at least in principle (setting aside the law), makes an asset look like an investment, whilst flimsy fundamentals, makes it look more like a fraud or Ponzi scheme.

We start this series of by exploring the value of the cornerstone asset of the blockchain world: Bitcoin. In our series on money, our first article is about Ancient Money. In the series, we work our way up the chain of monetary assets through history and explain what value, if any, Bitcoin has today.

Why does this matter to litigators?

We expect there to be a significant increase in Blockchain based litigation as there will both be losses in the sector and given its novelty there is much opacity about exactly how stakeholders expect it to work.

No doubt a great many claims will centre around the idea that they are fraudulent or a Ponzi scheme, and there are complex economic arguments both for and against that position, and in reality it is likely to depend upon the structure of the respective Decentralized Autonomous Organisation (DAO).

In our series on the blockchain we will explore these issues of value and what would constitute a Ponzi scheme, so connect with us on LinkedIn to be notified when we publish future pieces on this topic.

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