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Crypto and the Law: Understanding Blockchain

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Within ten short years, blockchain technology has gone from being a mere dream in a computer scientist’s head to a breakthrough technology. It promises to decentralise and redefine the very concept of money, with a current market capitalisation of hundreds of billions of dollars.  

Despite all the hype on the internet and in the business world, there is still little clarity over:

  • its history;
  • how it can be used; and
  • what blockchain really is.

Is this technology the revolution it’s cracked up to be? Will we be buying coffee in 10 years with Bitcoin or Ethereum? This series will explain the mysterious beginnings of this technology, what it actually does, and its impacts on the law. But the first step is understanding blockchain.

For all the hype, few people understand blockchain

Blockchain? Bitcoin? Satoshi? Let’s Set the Scene

Blockchain is the fundamental technology that makes up Bitcoin. It’s, therefore, basically a ledger, a way to track the status (e.g. ownership) of a digital token (e.g. currency). This ledger is special because it is decentralised, meaning that (in theory) no single entity controls and can unilaterally change the ledger.

An example of a centralised ledger, by contrast, is one which is owned and operated by your bank. Because the “master copy” is stored on the bank’s servers, it could be hacked or subject to errors.

A decentralised ledger means that, as there isn’t a “master copy”, hacking the ledger is extremely difficult, so you can trust it to reflect the ownership of a currency honestly. Since this ledger resides on the internet, it’s also very accessible. A farming tycoon in Kenya can transfer hundreds of millions of dollars worth of currency to a shipping magnate in China in seconds, at a few cents’ cost. Further, you can make a transaction via blockchain anonymously.

Bitcoin is to blockchain what email is to the internet; an application of the technology

Bitcoin was the first ever use-case of using blockchain to create a viable currency. Since its inception in 2009 by Satoshi Nakamoto (a pseudonym of the person or people behind bitcoin), it has never been hacked. It created a form of currency that was novel, regulated not by a banking system but by simple computing processes and a pre-set mathematical code. Bitcoin has become a currency that is:

  • easily accessible to all;
  • decentralised and distributed;
  • cheap and fast to use; and
  • technically unalterable (immutable).

Although many exchanges have been hacked and funds stolen, this has never happened to Bitcoin itself. Therefore, it is arguably one of the most democratised stores of value that has been developed.

What Does This Mean For Law, Commerce, and Society?

Digital currencies traded anonymously on a decentralised ledger without one ‘true’ owner have enormous legal, social and commercial implications. This sudden, unregulated ease of transferring value across the globe is causing governments and its people to question many of our fundamental assumptions, including what money actually is and the true extent of separation between nation states.

Blockchain Versus the Internet

To accurately understand blockchain, it’s useful to understand the inception of the internet. Both:

  • are decentralised;
  • are freely accessible;
  • transcend international boundaries; and
  • dictate the protocols of digital transfer of discrete packets (one of information (the internet), the other of value (blockchain and digital currencies)).

And, of course, both technologies have had enormous financial booms once their use shifted to mainstream consumers. Considering these similarities, the impact that blockchain technologies will have on our lives and businesses may well be similar in nature to that of the internet.

Blockchain is incredibly similar to the internet. And the internet changed us in ways we could never have imagined.

Speaking the Same Language

Many attribute the birth of the internet to a Californian beer garden in the mid-1970s.

Before then, there were informational networks. Some of them were quite large (for example, Arpanet, part of a US Army initiative). However, each network’s protocol was different (i.e. they each spoke a different ‘language’). This meant that they could not easily communicate and information was largely siloed to separate networks.

Cut to seven men and one woman sitting in a beer garden, the woman typing into a computer terminal. They were trying to send the world’s first inter-network message to Boston, transmitted through a wire that ran from the beer garden into a van in the parking lot. Converting the message into a radio signal, the van transmitted the woman’s message to a radio tower atop a nearby mountain, which amplified the signal and again passed it on to an antenna.

Until this point, the message ran through a single radio network and in a specific format. The only way to get to Boston was through a separate, military-funded network called Arpanet, which ran on a different protocol (i.e. a different ‘language’). It’s important to note that, as of today, this is the current status of the blockchain ecosystem. There are a number of blockchain ‘networks’ like Bitcoin and Ethereum that remain separate, unable to transfer value across except through clunky manual exchanges, and difficult to scale.

The team was testing a new protocol that could format the message differently. When it was transferred from the radio network through to Arpanet, it would undergo a formatting metamorphosis while retaining its core message. The test was a success; the message travelled close to 5,000 kilometres to Boston, on the other side of the continent. The internet was officially born.

Blockchain’s Challenge (and Opportunity)

The internet had to connect disparate networks to be most useful. Similarly, blockchain needs to seamlessly connect the separate cryptocurrencies into a single, interconnected organism.

There are a number of projects attempting to do for the cryptocurrency world what those eight researchers in a Californian beer garden did for information networks. Referred to as ‘interoperability’, projects like Polkadot, ICON, BlockCollider and more have attracted some of the brightest minds in the field (e.g. Gavin Wood, Ethereum’s co-founder) to solve this problem.

The internet changed our world when separate networks were able to be combined. This is currently the singular focus of many of the brightest minds in blockchain.

When interoperability is achieved and blockchain becomes scalable, cryptocurrency will bring an extra dimension of connectivity to the world’s businesses. In the same way that the internet became integral through the dot-com boom, a similar cryptocurrency boom may be on the horizon. If and when this happens, those that navigate this new technological and legal grey-zone will be best suited to the new era of commerce.

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Key Takeaways

Bitcoin is an extremely successful proof of concept for what blockchain can offer. It effectively creates an opt-in network for the storage and transfer of value, with built-in incentives to maintain, propagate, and protect the network.

However, to understand its growth, it’s helpful to return to the beginnings of the internet and understand how the internet began to connect separate networks. Many of the smartest computer scientists in the world are increasingly focusing their energies on doing the same for blockchain. For all the volatility and growth that has happened in this space to date, it seems there could be much more to come.

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