You have probably heard of Bitcoin, but what is the technology behind the cryptocurrencies, which has the potential to transform the digital landscape?
Often described as a new type of internet (although the concept was created over 10 years ago), blockchain technology allows data to be stored chronologically and securely without a centralised storage location or governing authority.
A blockchain is made up of “blocks” of digital information linked together in a “chain” and then stored in a public system.
Each block contains transaction information (e.g. date, time); parties involved (using their encrypted digital signature); and the block identity. For identification, each block is given a unique computerised code (a “hash”) and, to form the chain, is labelled with the hash of the previous block.
When a new transaction occurs it is verified by a network of computers before being added to the chain.
Blockchains are public and anyone can view the transaction data. Some users opt to add their computer to the network and will receive a copy of the blockchain, which is updated each time a new block is added. This means that millions of copies of each blockchain can exist and there is no single source which has control (and therefore no single source left vulnerable to attack).
One practical example would be to imagine the purchase of an e-book.
Currently, the e-book would be purchased by the customer from a third party platform. That third party platform charges the author a fee for facilitating the sale, and there will be transaction fees from any credit card company involved in the payment.
Now imagine that the e-book is written into blockchain. That e-book would exist in an encrypted form. When it is paid for by the customer, the blockchain technology transfers the money directly to the author and unlocks the e-book for the reader; eliminating the need for the electronic bookkeeper.
With no transaction costs, blockchain has potential to disrupt those businesses making money from charging transaction fees or businesses acting as intermediaries between manufacturers and end users.
While cryptocurrency is one major application of the technology, blockchain is increasingly being utilised in other sectors. In food and drink, blockchain can allow for traceability from source to shops; in healthcare, patients’ medical records may be stored securely and in legal services, smart contracts may allow for automatic fulfilling of terms (such as automatic release of a key to a property when a house seller receives funds). Fast fashion, which has been criticised for its environmental impact, could also be curtailed by the introduction of blockchain into the secondary clothes market, where resellers could utilise the technology to prove the authenticity of the clothes they are reselling.
Aside from no transaction costs, the main advantage of blockchain is its linked identification system. If a block is edited in any way, its hash will change. As its old hash is included on the next block in the chain, the next block’s hash included on the next and so on, a hacker would have to update the hash on every block in the chain for a change to go undetected.
Blockchain can also provide transparency in transactions which would otherwise have been private, which can increase accountability and ease of monitoring for regulators.
The idea of decentralisation (i.e. blockchain spread across a network) is that the technology is less vulnerable. A hacker would have to infiltrate a large proportion of the remote network to make changes. If a hacker was able to take control of 51% of the network, it may be possible (but still difficult) for a ‘51% attack’ to be carried out, enabling double-spending of cryptocurrency.
The lack of personal identification through the use of digital signatures means that you can never be sure who is adding blocks to the chain and who makes up the network of computers holding copies of it. To combat this, some blockchains require testing prior to adding a computer to the network. According to Investopedia, only 1 in 5.8 trillion computers pass Bitcoin’s ‘proof of work’ test which requires a huge investment in terms of power, the hope being that this makes hacking the network more effort than it is worth.
For more information on crypto-asset fraud, see our article here.
Blockchain has been poised to revolutionise our economy for many years but businesses have been slow to adopt it. This may be due to the difficulties with scaling the technology up or public scepticism caused by its historical connection to unlawful activities.
Legislation is likely to be implemented to try and retain control over it as it grows, which will be an important consideration for the legal profession going forwards. The technology is in its infancy but is already an important topic for discussion and will undoubtedly have an impact across many sectors in the future.