Insight

Blockchain 101

The rapidly developing technology is good for much more than just cryptocurrency exchange. What do lawyers need to know?

What is Blockchain?
PB

Peter Brown

September 21, 2018 01:48 PM

For the last year or so, cryptocurrencies have been the object of a global investment frenzy, leading many to try to understand the underlying technology, blockchain, that makes it all possible. To laymen, blockchain often seems like some sort of magical black box, almost a belief system: great for Bitcoin obsessives but offering limited practical utility for the average business. Once you understand how cryptocurrencies work, though, blockchain’s long-term potential seems less phantasmagoric. Indeed, its real-world applications are diverse and numerous—and growing only more so.

A decade ago, Bitcoin’s developer—a mysterious figure (or group) known as Satoshi Nakamoto—sought to create an anonymous medium of exchange that could be used securely over the internet, impervious to easy duplication or being counterfeited. The solution it came up with was blockchain, which combines digital encryption with distributed-network technology to provide a means of exchange that needs no central authority, such as a government or bank, to facilitate and support the transfer of value.

Hashing It Out

Blockchain is what’s known as “distributed ledger technology.” Regarding Bitcoin, for example, it’s a series of digital records that together form an unbreakable string of financial transactions.

Successive transactions are linked using a cryptographic function called a “hash,” which takes input data of a given nature and creates unique output data from it. For Bitcoin, the hash function will accept input data of any length of numbers relating to each transaction but generate an output of fixed length. Each transaction in the chain is represented by a digital record (a “block”) that includes transaction data and a time stamp.

In addition, each block contains a cryptographic hash of the previous block in the chain. This fixed-output summary can then be compared to prior outputs in related transactions to detect whether the input has been altered. With Bitcoin, then, an input resulting in a new and different hash value output might indicate an unauthorized transaction in the input data, or an attempted counterfeit.

Strength in Numbers

The integrity of the Bitcoin blockchain is bolstered by the proliferation of copies of the entire ledger across a network of dedicated nodes, and the requirement of consensus among these nodes for acceptance of additions to the chain—security features that make it difficult and costly to alter it.

Blockchain is not without drawbacks. As implemented in Bitcoin, the process consumes enormous amounts of computing power, which has widely documented knock-on environmental consequences. Encryption consumes another precious commodity—time—which limits the speed at which new transactions become valid—Bitcoin’s blockchain is by definition open and public, necessitating the participation of self-appointed volunteers—known as Bitcoin miners—who provide the nodes and computing power needed to operate the system. What’s more, the Bitcoin blockchain has not yet been fully vetted by the kind of widespread use that would reveal potential significant systemic vulnerabilities.

Secure, Reliable Recordkeeping

Increasing numbers of mainstream professions outside the opaque realm of cryptocurrencies are beginning to recognize blockchain’s potential for secure, reliable recordkeeping: real estate, personal property, chain-of-custody provenance for documents or works of art, notarization and enforcement of escrow agreements, and more. Property sales and transfers might henceforth be embodied in a blockchain ledger, potentially lowering governments’ cost of maintaining public land records.

Pilot projects of this nature have been launched by governments in the U.S. and abroad. The government of Estonia, for example, has implemented a blockchain solution for storing and processing citizens’ health records.

Another promising area: cross-border and supply-chain transactions. Ideally, blockchain would enable all parties in a string of transactions to verify the performance and payment information provided by all manner of remote parties.

Piece by Piece: Blockchain and the Law

Blockchain may well offer disruptive legal-practice solutions, too. On the litigation side, blockchain systems are being proposed to improve the reliability of information related to service of a summons or subpoena. One proposed implementation: A smartphone app reports GPS coordinates and a time stamp to verify the time and location of service attempts.

It’s also being promoted as a way to structure “smart business contracts”—those in which the obligations of a transaction can be embodied in a blockchain record and structured so that specific events automatically trigger the parties’ performance and payment obligations. IBM currently offers a platform for drafting and executing smart contracts, as do a number of startups.

It seems unlikely that smart contracts will replace transactional attorneys anytime soon, but lawyers need to get familiar with the technology and conversant in smart-contract structures as the use of blockchain on contracting proliferates. Indeed, getting well acquainted with all aspects of blockchain technology is becoming a necessary component of any forward-looking lawyer’s tool kit.

Related Articles

Russian Rubles are Going Digital


by Rebecca Blackwell

Russia is moving toward the ever-expanding trend of digital currency.

Russian Rubles are Going Digital

Tales From the Crypto


by Gregory Sirico

The economic turmoil of COVID-19 has given cryptocurrency its moment in the spotlight. But are we, and more importantly our banks, ready for it?

Cryptocurrency on the Rise During

An Interview With Sayenko Kharenko


by Best Lawyers

Ukraine's 2020 “Law Firm of the Year” winner in Capital Markets Law

An Interview With Sayenko Kharenko

IN PARTNERSHIP

Cryptocurrency and Divorce


by Crystal Espinosa Buit

One lawyer explains how cryptocurrency, the fastest growing investment form, can impact assets in a divorce and why it should not be ignored in divorce proceedings.

Pixelated image of paper money bill

The Future of German Technology


by Best Lawyers

How Germany's Law Firm of the Year in Information Technology is leading the way.

Isabell Conrad Schneider Schiffer Weihermulle

An Interview With Latham & Watkins


by Best Lawyers

Germany's 2020 “Law Firm of the Year” honoree in Banking and Finance Law

An Interview With Latham & Watkins

Why Stablecoins Will Be Regulated


by Mladen Milovic

In Order To See Adoption, Stablecoins Must Clear These Hurdles

Why Stablecoins Will Be Regulated

An Interview With Egorov Puginsky Afanasiev & Partners


by Best Lawyers

Russia's 2020 "Law Firm of the Year" in Arbitration & Mediation Law

An Interview With Egorov Puginsky Afanasiev

Banking On It


by Catherine M. Brennan and Nora R. Udell

The fintech revolution has spurred a host of legal questions concerning online lending. Developments at both the federal and state level are beginning to provide some answers.

The Biggest Changes to Fintech in 2018

Trending Articles

2025 Best Lawyers Awards Announced: Honoring Outstanding Legal Professionals Across the U.S.


by Jennifer Verta

Introducing the 31st edition of The Best Lawyers in America and the fifth edition of Best Lawyers: Ones to Watch in America.

Digital map of the United States illuminated by numerous bright lights

Unveiling the 2025 Best Lawyers Awards Canada: Celebrating Legal Excellence


by Jennifer Verta

Presenting the 19th edition of The Best Lawyers in Canada and the 4th edition of Best Lawyers: Ones to Watch in Canada.

Digital map of Canadathis on illuminated by numerous bright lights

Legal Distinction on Display: 15th Edition of The Best Lawyers in France™


by Best Lawyers

The industry’s best lawyers and firms working in France are revealed in the newly released, comprehensive the 15th Edition of The Best Lawyers in France™.

French flag in front of country's outline

Presenting the 2025 Best Lawyers Editions in Chile, Colombia, Peru and Puerto Rico


by Jennifer Verta

Celebrating top legal professionals in South America and the Caribbean.

Flags of Puerto Rico, Chile, Colombia, and Peru, representing countries featured in the Best Lawyers

Announcing the 13th Edition of Best Lawyers Rankings in the United Kingdom


by Best Lawyers

Best Lawyers is proud to announce the newest edition of legal rankings in the United Kingdom, marking the 13th consecutive edition of awards in the country.

British flag in front of country's outline

Unveiling the 2025 Best Lawyers Editions in Brazil, Mexico, Portugal and South Africa


by Jennifer Verta

Best Lawyers celebrates the finest in law, reaffirming its commitment to the global legal community.

Flags of Brazil, Mexico, Portugal and South Africa, representing Best Lawyers countries

Prop 36 California 2024: California’s Path to Stricter Sentencing and Criminal Justice Reform


by Jennifer Verta

Explore how Prop 36 could shape California's sentencing laws and justice reform.

Illustrated Hands Breaking Chains Against a Bright Red Background

Announcing the 16th Edition of the Best Lawyers in Germany Rankings


by Best Lawyers

Best Lawyers announces the 16th edition of The Best Lawyers in Germany™, featuring a unique set of rankings that highlights Germany's top legal talent.

German flag in front of country's outline

Celebrating Excellence in Law: 11th Edition of Best Lawyers in Italy™


by Best Lawyers

Best Lawyers announces the 11th edition of The Best Lawyers in Italy™, which features an elite list of awards showcasing Italy's current legal talent.

Italian flag in front of country's outline

Tampa Appeals Court ‘Sends Clear Message,” Ensuring School Tax Referendum Stays on Ballot


by Gregory Sirico

Hillsborough County's tax referendum is back on the 2024 ballot, promising $177 million for schools and empowering residents to decide the future of education.

Graduation cap in air surrounded by pencils and money

Find the Best Lawyers for Your Needs


by Jennifer Verta

Discover how Best Lawyers simplifies the attorney search process.

A focused woman with dark hair wearing a green top and beige blazer, working on a tablet in a dimly

Key Developments and Trends in U.S. Commercial Litigation


by Justin Smulison

Whether it's multibillion-dollar water cleanliness verdicts or college athletes vying for the right to compensation, the state of litigation remains strong.

Basketball sits in front of stacks of money

Woman on a Mission


by Rebecca Blackwell

Baker Botts partner and intellectual property chair Christa Brown-Sanford discusses how she juggles work, personal life, being a mentor and leadership duties.

Woman in green dress crossing her arms and posing for headshot

Best Lawyers Celebrates Women in the Law: Ninth Edition


by Alliccia Odeyemi

Released in both print and digital form, Best Lawyers Ninth Edition of Women in the Law features stories of inspiring leadership and timely legal issues.

Lawyer in green dress stands with hands on table and cityscape in background

The Human Cost


by Justin Smulison

2 new EU laws aim to reshape global business by enforcing ethical supply chains, focusing on human rights and sustainability

Worker wearing hat stands in field carrying equipemtn

Beyond the Billables


by Michele M. Jochner

In a recently conducted, comprehensive study, data reveals a plethora of hidden realities that parents working full-time in the legal industry face every day.

Women in business attire pushing stroller takes a phone call