Blockchain and Bitcoin for beginners-what you need to know

Have you heard of Blockchain?

It may have come across your radar in the last five years or so. 

I did not pay much attention to it at first because I associated it with Bitcoin, cryptocurrencies, speculation and high risk pump and dump schemes which would inevitably lead to catastrophic losses for those who did not understand or were foolish enough to get involved.

But it has not gone away and has appeared again on my horizon in the context of its possible usefulness in business generally and in the legal industry in particular.

Blockchain technology is software that is being seen as having tremendous potential in business and law. At its core is the ability to record information reliably, securely, and safely. It creates a transparent chain of data without the need for intermediaries.

The information recorded cannot be changed which gives blockchain massive potential in relation to making contracts, so called “smart contracts”.

Users of blockchain need to be mindful of certain ramifications as to public law, criminal law, financial and regulatory law, and so forth.

Blockchain also has benefits in global trading on account of the need for supply chain visibility and security, data transfer, and allowing trade compliance systems that can deal with the electronic exchange of data.

How does blockchain work?

Think of blockchain as a large distributed electronic database or ledger. The database is decentralised with no one party having control over it.

The same copy of the ledger is downloaded to the computers of each party concerned in the contract. Any change made is visible to the other parties involved in the transaction. This allows the removal of the usual middleman or intermediary which you would normally have in a transaction.

When transferring an asset from one party to another you would usually require a bank to act as a middleman but blockchain allows the parties to link together directly. 

Blockchain uses a complex series of algorithms and cryptography to verify transactions.

Blockchain uses

The uses of blockchain therefore could include transactions involving:

  • Assets
  • Shares
  • Money 
  • Property

Blockchain can also replace traditional contracts with a “smart contract”, which is self executing. 

Smart contracts are programmable transactions which can automatically execute the terms of the contract once the rules are met. There is no need for an intermediary or third party to provide verification for the terms that form the contract are coded by the software built on the blockchain. Therefore the question of the parties trusting one another does not arise.

The traditional idea of signing a paper contract can be set aside when thinking about smart contracts and blockchain. 

The type of blockchain used for these smart contracts is called Ethereum, unlike Bitcoin which is built on a currency version of the software. 

Moreover, smart contracts should provide scalability and lower compliance costs together with the elimination of the need for paper contracts and a significant reduction in the need for human intervention in contracts.

Smart contracts can also provide an accurate history of any changes to the contract and verify electronic signatures. 

Such contracts have potential uses in property transactions, distributing assets arising from probate, and common contracts that you might encounter in your everyday life-for example club or gym membership.

Other uses of the blockchain protocol may included

  1. digital signatures and IDs
  2. private permissioned ledgers for organisations with sensitive data obligations and requirements
  3. tokenisation of assets involves a blockchain token which digitally represents ownership of an asset
  4. an EU Digital Single Market is a possibility based on blockchain technology

Blockchain problems?

Implementation costs may be high in the first instance and coding a smart contract requires skill and specialised knowledge. 

Security is also a concern with cyberattacks a potential risk with subsequent significant financial losses. 

Bugs, defects and coding errors in the software are inevitable.

The question of enforceability and regulation is an important one. There is no statutory regulation covering blockchain in Ireland at the moment which leaves the question of the enforceability of the smart contract open to challenge and dispute.

It is notable that Italy has implemented a regulatory regime for blockchain and perhaps this will show the way for other jurisdictions such as Ireland to follow.