An Introduction to Blockchain Technology
Updated: Jun 13
Over the past decade, blockchain technology has disrupted the banking and investment industry. To investors, blockchain-enabled cryptocurrencies offer the opportunity for enormous, albeit volatile returns. The value of Bitcoin grew from $104.86 on August 1, 2013 to $23,346.40 at time of this writing. While blockchain has mostly attracted attention through speculation on cryptocurrency, the technology poses a far more fundamental innovation in banking, finance, and law. At heart, blockchain is simply a record keeping technology designed to be resistant to change and characterized by decentralized management.
Blockchain technology promises to eliminate the need for trusted third party intermediaries, like banks, government agencies, and courts, to facilitate transactions. The ability to enter into agreements with others without relying on trusted intermediaries or government enforcement is nothing short of revolutionary. Blockchain’s primary value proposition is as a trust machine. 
Trust is a prerequisite for entering into any agreement. We have accomplished this primarily through government and trusted intermediaries. Even if you do not trust the other party, in contemporary civil society we can rely on third parties to ensure the other party performs. These intermediaries earn trust through some combination of reputation, the ability to mitigate and absorb the costs of fraud, and the backing of government force.
For instance, an accounting firm will do work for a client they do not know because the agreement with the client can be enforced in a court of law. Landlords will rent to college students because they trust the Equifax report. Further, Equifax must trust the data they get from banks and credit card companies. When the local coffeeshop accepts a credit card, they trust the credit card company to ensure the identity of the payer, manage their accounting, and to deal with fraud.
The major pain point with our current system is that we must pay processing fees and/or taxes to ensure our trust in the transaction. For example, your bank charges fees to maintain the account, protect your money, and process payments. Banks verify that the customer has the money in their account to pay for the item they just purchased. Products like PayPal, Upwork, eBay, etc., also provide trust by collecting and distributing payment upon completion of the agreement or delivery of the product. Simple transactions, like selling trading cards or betting on sports games online rely on these intermediaries.
We can evade some of these fees by making direct Peer to Peer (P2P) agreements; you can list your Kobe Bryant trading card on Craigslist and have the buyer pay cash in person, and we could make a bet on a game with someone on a message board and just agree to mail checks. But these kinds of P2P transactions are impeded by a lack of trust, and many times they lack the convenience provided by intermediaries.
This is the problem that blockchain solves: it facilitates trust between disparate parties to expand the possibility of P2P transactions. It accomplishes this simply by furnishing a public ledger whose records are computationally and economically infeasible to alter or falsify; this allows people to rely on the structure and integrity of the blockchain rather than intermediaries to establish trust between parties. 
What does this mean in practice? Since people can trust blockchains to store a valid account of money and contracts that no one can corrupt, they can enter into many kinds of P2P agreements with people they do not know or personally trust. For our individual trying to sell his Kobe Bryant trading card, it means he can sell his cards without the transaction fees of eBay or the inconvenience of cash; he could simply accept payment through the blockchain. He could even store a self-enforcing smart contract on the blockchain, where he is automatically paid upon delivery of the card. Similarly, instead of going through an online bookie, the football fan could bet on a game by entering a smart contract stored on a blockchain; the program could automatically update the parties’ accounts depending on who is reported as the winner. Existing blockchains such as Bitcoin and Ethereum have already made these functions a reality.
In total, blockchains drastically reduce fraud and transaction costs, presenting enormous implications for economic efficiency in every sector. Any industry that relies on record-keeping (that’s all of them) can benefit from employing blockchains. Blockchains have already been employed to improve supply-chain efficiency. Walmart has utilized IBM’s blockchain based Food Trust initiative to improve the traceability of food products; supply chain audits and recalls that used to take days can now be done in seconds. 
Blockchains are also being employed in the music industry. New streaming platforms are using smart contracts stored on blockchains to automatically disburse royalties to artists as people purchase or stream their music—this cuts out middlemen distributors, leaving more revenue for artists.  Blockchains promise to improve the management of intellectual property (IP), both improving the records of IP rights and streamlining the distribution of profits earned through fractionally owned IP assets. 
In the future, we can expect blockchains to work similarly to power grids or the internet — an ubiquitous infrastructure that facilitates our everyday activity and undergirds our society. As this technology is relatively new and the law controlling it is evolving, there is room for forward thinking investors and business owners to take full advantage.
One of the big reasons why entrepreneurs and investors may be apprehensive about employing blockchains in everyday business and commerce is lack of knowledge about the technology.
How Blockchain works:
To provide you with a little more confidence to explore ways to best utilize the blockchain to your advantage, we explain what blockchain is. Blockchain is simply a record keeping technology designed to be resistant to change and characterized by decentralized management. A blockchain can be described as a distributed ledger, a public accounting book available to everyone in a blockchain network. “Blocks” on the blockchain are simply digital records, the nature of which will depend on the function of a blockchain.
Blockchain technology relies on certain members of the network called "miners" to add new records to the ledger. Blockchains prevent fraudulent records or alteration of the ledger by establishing consensus mechanisms for adding new blocks. Consensus mechanisms are simply mechanisms to make sure everyone in the network agrees on the veracity of records. 
While there are several consensus mechanisms, the first and most widely used consensus mechanism is called Proof of Work (PoW). It was invented for Bitcoin in a seminal whitepaper by Satoshi Nakamoto. Satoshi offered "an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party".  The solution is based around "transactions that are computationally impractical to reverse." 
In a PoW system, to add the block to the blockchain or distributed ledger, the miner must solve a cryptographic hash function — that sounds complicated, but it just means they have to solve a difficult math problem that requires an enormous amount of computing power. PoW systems usually give miners a reward for adding blocks to the chain. This reward incentivizes miners to dedicate computational resources to solving the problem. These math problems are solved when miners produce a specific hash value; this is a fixed length number that will be unique to the block and serve as “proof” of the computational work employed to add the block. Hash values are unique functions of a block’s contents, changing anything in a block will change the hash value. 
Why does adding this computational obstacle and chaining make blockchains secure? Essentially, with the way blockchains are structured, to alter one block, one would have to redo the computational work needed to add all of the previous blocks on the chain (every block contains a record of the previous block’s hash). Since many miners are competing for the block reward, to maintain a fraudulent chain of records, bad miners would need to consistently outpace the rest of the network at solving the necessary math problems. To accomplish this, bad actors would need to control 51% of the computing power in the network — as blockchain networks grow, this becomes infeasible. 
A server farm committed to mining Bitcoin. The energy devoted to Bitcoin mining is roughly the same as Ireland's energy consumption.
As the blockchain matures, the costs necessary to accomplish fraud grow exponentially and it is simply more lucrative for miners to devote energy to adding honest records. The blockchain’s incentive structure makes the costs of fraud prohibitive, and the gains from honest mining high; it keeps miners racing against each other instead of colluding against the network. Decentralization and scale keep blockchains secure. A testament to this is the durability of Bitcoin, the oldest blockchain; no one has ever successfully counterfeited a Bitcoin. 
Because of blockchain’s technological innovations and novel incentive structure, members of a blockchain network can trust the veracity of a public ledger without relying on any central authority to manage it.
WRO Law & Strategy is committed to remaining on the cutting edge of the legal profession. As new technology both disrupts and presents new opportunities to you, we can help you navigate it. Do not hesitate to reach out if you have any questions on blockchain or any other legal issue.
 See DEL WRIGHT JR., A SHORT & HAPPY GUIDE TO BITCOIN, BLOCKCHAIN AND CRYPTO (2020).
 See How Walmart used Blockchain to increase Supply Chain Transparency, The Leadership Network,(January 22, 2020), https://theleadershipnetwork.com/article/how-walmart-used-blockchain-to-increase-supply-chain-transparency#:~:text=Walmart%20has%20been%20working%20with,the%20open%2Dsource%20ledger%20technology.
 See Felipe Erazo, Report: Blockchain to Increase Royalty Streams to Artists in the Digital Music Industry, COIN TELEGRAPH, (April 28, 2020), https://cointelegraph.com/news/report-blockchain-to-increase-royalty-streams-to-artists-in-the-digital-music-industry
 See Alex Shkor, How Blockchain Will Disrupt Intellectual Property Management, LAWYER MONTHLY, https://www.lawyer-monthly.com/2020/02/how-blockchain-will-disrupt-intellectual-property-management/ (last visited November 19, 2020).
 See Jake Frankenfield, Consensus Mechanism (Cryptocurrency), INVESTOPEDIA, https://www.investopedia.com/terms/c/consensus-mechanism-cryptocurrency.asp (last visited November 19, 2020).
 See Satoshi Nakamoto, A Peer-to-Peer Electronic Cash System, (March, 2009), https://bitcoin.org/bitcoin.pdf.
 See Jake Frankenfield, Cryptographic Hash Functions, INVESTOPEDIA, https://www.investopedia.com/news/cryptographic-hash-functions/ (last visited November 19, 2020).
See DEL WRIGHT JR., A SHORT & HAPPY GUIDE TO BITCOIN, BLOCKCHAIN AND CRYPTO, 6 (2020).