Blockchain, Bitcoin, Ethereum and Smart Contracts – What it is and how it could affect us
Blockchain technology, along with the Internet, could be regarded as one of the most important inventions of the last century. Basically, blockchain could be able to solve one pressing need: ensuring financial interaction without middlemen, for example sending money via internet without trusting a central server. A central server or, in other words, a bank.
Confidence is a key element, if one needs to transfer money electronically. As far as the banking system in the West is concerned people are used to trust the system which operates fairly well. But in other parts of the world, the banks are not delighted with the same trust like in the West.
Vitalik Buterin, inventor of Ethereum, one of the cryptocurrencies, also being discussed later, commented: “Blockchain solves the problem of manipulation. When I speak about it in the West, people say they trust Google, Facebook, or their banks. But the rest of the world doesn’t trust organizations and corporations that much — I mean Africa, India, the Eastern Europe, or Russia. It’s not about the places where people are really rich. Blockchain’s opportunities are the highest in the countries that haven’t reached that level yet.” Quoted from here.
The main purpose of the pioneers of Bitcoin, one of the first decentralized digital currencies and most renown one, was to create a system without middlemen like banks and without fees. Furthermore, they wanted to make transactions more transparent and impede manipulation.
What is Blockchain?
In this article, we may not discuss how the blockchain works in all its technical details, but rather give a general overview about the technical possibilities and how it may affect us.
The blockchain was invented by Satoshi Nakamoto. The identity behind this name is still unknown. It has not yet been clarified, whether Satoshi Nakamoto is a group or a single person.
Blockchain was originally founded for Bitcoin, but there are also other areas where it can be used.
Blockchain provides an open decentralised database of any transaction involving value like money, property, goods, but also work and votes. It is imaginable that even elections could be held by means of blockchain technology.
The blockchain is a network consisting of many computers, well said a chain of computers. If someone wants to conduct a transaction all these computers must approve this transaction before getting verified, recorded and distributed on a public ledger. But publicly, does not mean unsecure. The transaction is saved on a public digital ledger, but with a use of cryptography it is possible to keep the exchanges secure.
Blockchain technology offers many advantages. It allows consumers and suppliers to connect directly, without any middleman. Blockchain technology makes the database decentralized, which excludes the possibility of it being easily corrupted.
A further advantage of blockchain technology is transparency. All changes of the blockchains appear on a public ledger. They are publicly viewable by all parties and therefore it could succeed to prevent fraud. Furthermore, all transactions are immutable, so they cannot be deleted or altered.
Also, transaction time can be reduced. Normally, transactions could last days, at least hours. At the weekend even longer. Blockchain technology is capable of accelerating this process to minutes at any time of a day. Moreover, by eliminating the third party, transaction costs can be reduced.
One Bitcoin is a single individual unit of the Bitcoin digital currency like a Euro, Dollar or Moldovan Leu. Bitcoin has no intrinsic value, meaning it has no value by itself like for example gold. It has value only because we accept it as a means of payment. In other words, the price of Bitcoin is a result of interplay between supply and demand. If more people believe in Bitcoin and accept it as means of cashless payment, its value will rise higher, but also the other way around is possible. Even a total loss is an option.
In 2009 Satoshi Nakamoto said about Bitcoin: “It might make sense just to get some Bitcoin in case it catches on. If enough people think the same way, that becomes a self-fulfilling prophecy.” Quoted from here.
Ethereum and Bitcoin are often mentioned in one breath, but in fact they do not have much in common, except for both running on a blockchain technology. It is also based on a peer-to-peer network. Compared to Bitcoin transaction the code is not pre-defined, and Ethereum is programable. Ethereum is a decentralised software platform, which enables building smart contracts and decentralised applications, also known as dapps.
Already in the year 1997 the American lawyer and computer scientist Nick Szabo, the blockchain not being founded yet, described how a car purchase could look like with using smart contracts, instead of “normal” contracts. Ethereum allows to write such smart contracts.
The basic principle is quite easy: two parties negotiate and build a contract. The terms of the agreement are programmed into a code, which is running on blockchain technology. Finally, when conditions, which have been stipulated between the parties and programmed into code, are met, consequences are caused automatically. Specifically, this means that from now on the contract is monitored, executed and enforced by itself.
The key point of Nick Szabo’s car purchase is the following: electronical devices in the car are purposefully coordinated with the contract clauses via blockchain technology.
Let’s say for example the car is debt financed and the debtor is insolvent. Now the car receives the message that there is no more receipt of payment and the car stops automatically to drive, concerning mandatory safety standards.
The number of possible applications is unlimited. Another example, always used in this context, is the weather bet. Two guys betting on tomorrow’s weather, the loser must pay 100 Leu to the winner. Basically, there are three ways to execute the bet.
- Both parties trust each other that the loser will pay 100 Leu to the winner.
- Another way would be to conclude a contract. Until now this was the most common way, even you did not know the other party well enough or you had no confidence into the other party. If the other party is not paying, you need to go to court and file an action. This takes time and is annoying.
- The last option is that each party transfers 100 Leu to a neutral party and that neutral party is obliged to pass the total of 200 Leu to the winner. But if the neutral party is a state approved party, you must pay fees and if you pass it to a friend or random party, you have the same problem as mentioned in 1. The confidence problem.
Once again said, smart contracts and blockchain technology could be a solution. With Ethereum a code could be written, which accepts 100 Leu from each party. Then the weather is checked automatically at the next day and the winner of the bet receives 200 Leu.
Smart contract and Bitcoin are pursuing the same aim. Both technologies try to avoid third parties, like banks, lawyers or courts and minimize reliance on trust.
How blockchain technology could change our lives
First of all, the blockchain technology is still at its very beginning. We can only speculate about its potential impact. Nevertheless, it would not be an exaggeration to say, that the technical progress could turn our lives in general, and the legal system in particular, completely upside down. Through this new form of technology, it appears that entire sectors of economy or public services may get nearly extinguished or dramatically upgraded. Should the blockchain really be the technology of the future, there would be partially no need for people in the finance sector or legal profession for example.
Nevertheless, there are at least some good news for the lawyers. As already mentioned, smart contracts are capable of monitoring and executing of the contracts, so there would probably be not the same need of jurisdiction as now. But smart contracts also need to be coded. Therefore, lawyers come into play again. Currently, it is not yet imaginable that these contracts, especially in complicated issues, which need to be discussed in detail between the parties, are made without any help of lawyers whatsoever.
Even in the public sector, blockchain could play a role. National authorities are responsible for obtaining personal records on birth and death, marital status, business licenses, permits, property transfer and criminal record. This data maintenance means a lot of work to do, especially when some of the records are still available only in a paper form. Furthermore, people usually have to pay fees when documents are issued or modified.
Blockchain technology could help make everyday life easier as well. All data vital for our routine daily operations and activities would be saved on a digital ledger. It is transparent, more comfortable and time-saving because people would not have to appear personally at the office of authority for every change of their documents. And again, fees would be reduced.
Nevertheless, there are reasons why blockchain technology should be treated with caution. So long as there is technology, hackers will always try to hack it. Even though blockchain technology is considered safe, there are security failures occurring from time to time. On 26 January 2018 took place the largest cryptocurrency hack of all time. Hackers have stolen 523 million NEM Coins with a value of USD 534 million. The victim was Coincheck, a large Japanese cryptocurrency exchange.
As a matter of fact, innovative technologies could facilitate our lives in many aspects. Besides all the advantages, it should not be forgotten, that the technology as such is in its infancy. Until it gets rather sophisticated and widespread to be accepted is a fully-fledged alternative to the existing institutions, several years or more likely decades, may elapse.
Unfortunately, it is not possible to give a more precise prediction on how blockchain will affect us because there are too many imponderables. In particular it may be pointed out that there are many legal and regulatory aspects, which are not clarified yet. Recently, South Korea for example is even preparing a draft law in order to ban cryptocurrency trading completely.
However, people would be we well advised, to deal a bit with blockchain technology because this kind of technology with its wide range of possibilities will surely find it place in the future social, legal and economic domain. It appears that those who name blockchain “Internet 2.0” are very close to the true state of affairs.[divider type=”3″] [/divider]
Thomas is a German legal professional, currently engaged in internship and knowledge sharing program within ACI Partners.