Hard News by Russell Brown


Blockchain, what is it?

by Alex Sims

Many people will have heard Blockchain or “distributed ledger technology” and some may have dismissed it as hype – especially when you hear claims that Blockchain is possibly the most important IT invention of our age. But no matter what your view, there is no doubt that Blockchain is a distruptive technology. For those with little or no knowledge about the Blockchain, what is it, how does it work and what can it be used for?

Bitcoin created the first blockchain, and thus Blockchain technology. Since Bitcoin’s release in 2009 there are now hundreds of blockchains. Some are copies of Blockchain’s blockchain, others are entirely new, such as the Ethereum blockchain.

The premise of Blockchain is deceptively simple. A blockchain is a record of transactions/information — in other words a ledger or a database — that are combined into blocks cryptographically linked to form a chain (hence the name blockchain). The brilliance of blockchain is due to three factors.

First, a blockchain is held by hundreds if not thousands of “nodes” around the world. Thus Blockchain is decentralised. When the blockchain is updated by the addition of a new block, each “copy” of the blockchain is updated automatically. The timing of the blocks depends on the blockchain. For Bitcoin a new block is added around every 10 minutes, Ethereum’s around 14 seconds.

Second, no centralised party adds blocks, rather the blockchain itself does it. If B wants to send C half a bitcoin, the blockchain is checked to see that B has the necessary bitcoin. If B does not have sufficent bitcoin the transaction will not go ahead. The valid transactions are gathered and miners compete to solve a very difficult mathmatical problem. Once that problem is solved a block is created and added to the blockchain.

To incentivise miners — a lot of computer power and electricity is required to create each block — when miners solve a block they are given bitcoins (the block reward) and any transaction fees.  Miners are vital as they provide the blockhain’s infrastructure. (Not all blockchains require Bitcoin’s “proof-of-work” and less energy hungry methods, such as “proof-of-stake” can be used.)

Third, the information on the blockchain is immutable. Even if nodes are hacked, their blocks will not match the majority of the network and will be ignored. There simply is not enough computing power for a hacker to compromise Bitcoin’s blockchain. Nothing is completely risk free; however, it is technically possible for nodes to combine to control over 50% of the network (a 51% attack). Money is safer on the Bitcoin blockchain than it is sitting on a bank’s computer system or when it is sent from one bank to another.  

Terminology is important. There are public, permissioned and private blockchains. “Blockchain” is technically a public, decentralised blockchain, the software is open source and anyone can run a node. Bitcoin and Ethereum are examples of public blockchains. Permissioned and private are not technically blockchains, rather they are distributed ledgers, but they are often referred to as blockchains.

Permissioned blockchains are where only certain entities have access.  Private blockchains are controlled by one entity. Permissioned and private blockchains are not as secure as there are fewer nodes, making them more vulnerable to attack and with permissioned ones it could take only a few parties to combine to control the blockchain. In many ways there are parallels with the early internet with walled gardens, it was not until the walls were torn down that that the power of the Internet came to the fore.  

Although the creation of cryptocurrency is amazing in itself, the excitement about Blockchain is its wider potential beyond fintech. Work is underway on a bewildering array of things, including: eliminating the need for auditors; paying taxes automatically in real time; automatic payouts for insurance claims; putting land records and thus titles on the blockchain; creating digital identies, no need to go through an identification process every time you open up a bank account; allowing people to control their health information; allowing secure uncorruptible electronic voting; disrupting the distrupters such as Uber and Airbnb; and ensuring music creators are paid royalities in real time, not months or years later; the list is seemingly endless. Essentially, if you have a process that requires an intermediary it is ripe for disruption.

Even our conception of how our businesses are organised is being turned on its head with the potential use of DAOs (decentralised autonomous organisations), a company can be run on the blockchain.

Many of Blockchain's uses enlist smart contracts which are self executing programmes that run on a blockchain. In the case of life insurance a smart contract could automatically pay on the issuance of the insured person’s death certificate.

Smart contracts combined with IoT are a futher potent source of disruption. For example, a one-off insurance policy could be issued and be paid in real time if a car driver decides to take dangerous route B rather than the safer route C.

The current state of technology and knowledge of Blockchain is similar to the Internet in the early 1990s. Crucially another promise of Blockchain is to finally make the Internet secure. We can’t predict what will happen, only that it is going to be an exciting and scary ride.

Alex Sims is an Associate professor in the Department of Commerical Law, University of Auckland. She is currently leading a project funded by the Law Foundation into the legal regulation of cryptocurrencies in New Zealand and Australia.

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