Bit by bit, blockchain is coming

What's cryptocurrency?

Understanding blockchain technology starts with understanding cryptocurrency. And to explain cryptocurrency we will use its star pupil: bitcoin. Bitcoin is a digital currency, created and stored electronically, existing entirely in computer code. Bitcoin was first revealed in a white paper written by one Satoshi Nakamoto in 2008, which foreshadowed its primary, ground-breaking use: a platform on which individuals can make secure payments to each other without the need for an intermediary (like a bank). The identity of Satoshi is still unknown.

Each bitcoin is created by being "mined" by computers, much like how gold is mined. Bitcoin shares some other attractive features with gold:

• it's decentralised, which means it's not controlled by any one entity (unlike fiat currencies which are generally controlled by national governments)
• it's scarce, there will never be more than 21 million bitcoins in the world (unlike fiat currencies which can be printed at the will of a government).

What's a blockchain?

What’s more fascinating (to some) and revolutionary than cryptocurrency is the technology sitting behind it: the blockchain. The simplest way to think about blockchain is as a digital ledger containing every transaction made in a particular cryptocurrency, stored publicly and chronologically. Each transaction is verified for authenticity by thousands of computers in the network, called nodes; the transaction is then time-stamped before being added to the end of the chain as part of a new block. The verification process thwarts any fraudulent dealings and makes the transactions irreversible.

The beauty of the blockchain is its transparency and accountability. Any computer in the network can see the contents of the blockchain. Parties can independently create and verify transactions, without having to trust (or pay for) an intermediary to provide those services.

The value of blockchain technology was put quite elegantly by venture capitalist Marc Andreessen:

"…a way for one Internet user to transfer a unique piece of digital
property to another Internet user, such that the transfer is guaranteed to be
safe and secure, everyone knows that the transfer has taken place, and nobody
can challenge the legitimacy of the transfer. The consequences of this
breakthrough are hard to overstate." ¹

Though it should be noted here that blockchain technology is not infallible; one only has to look at the short history of crypto-currencies to see it is dotted with serious security breaches. ²

What's a smart contract?

A smart contract is an agreement that is written in computer code and runs on the blockchain. Smart contracts are somewhat similar to regular contracts in that they designate a set of rules and outcomes for contracting parties. Unlike regular contracts, they are able to self-execute those outcomes when certain pre-conditions are met.

The term ‘smart contract’ was first phrased by legal scholar Nick Szabo in 1997, using the analogy of a vending machine. Think about the vending machine experience: the machine displays its drinks (offer), you put in your money (acceptance) and it exchanges your money for a drink (consideration). Once the item is selected the outcome cannot be stopped, the drink cannot be returned, and the entire process is automated without intervention from any intermediary. These are essentially the elements of a smart contract.

To use a basic example, imagine a residential lease agreement written in code so that rental repayments are automatically deducted from a tenant's bank account each month. You can immediately see the value this arrangement offers over a regular contract (at least for the landlord). By automating the outcome, the landlord no longer needs to trust the tenant to make on-time repayments, and no longer needs to worry about the path of recourse if the tenant were not to pay.

Smart contracts need smart humans too though. I daresay it is easy to imagine a future where smart contracts are used every day by practitioners to automate the simple aspects of some transactions. However, there are some key elements of most contractual arrangements, which cannot (yet!) be written in code. Consider for example, the element of good faith negotiation. The interception between smart contracts and humans is intriguing, and is a space where lawyers will be able to build efficiencies and add value.

What's blockchain to lawyers?

There is an ever-growing possibility this technology will disrupt, or at least become relevant to, your area of practice. It is impossible to predict the reach of blockchain technology at this early stage (remember this technology is less than a decade old), but one doesn't have to look far to see how many industries are already a part of the movement.

There are some obvious sectors ripe for blockchain disruption like financial services (given that bitcoin allows people to transact without a bank). In real estate blockchain presents an opportunity to build secure land registries and automate property settlements. In intellectual property, blockchain could be a pathway to guaranteeing ownership and protection of basically anything.

Outside law, blockchain technology is being utilised in some fascinating ways:

• Provenance is driving ethical consumerism by allowing users to track a product's supply chain from end-to-end.
• LO3 Energy is developing microgrids that allow buildings to trade solar-powered energy in real time using smart contracts.
• Everledger verifies the place of origin and authenticity of diamonds.

Opportunities are knocking

This is not a fear-mongering, "robots will take our jobs" article; quite the opposite. Yes, I do believe blockchain will change the way law is practised. However, I’m not worried; I’m excited by the opportunities these changes pose to our profession.

As so many industries become increasingly affected by blockchain, lawyers and law firms who understand the technology will find opportunities to increase their value proposition to clients. Furthermore, the possibilities for how we, as lawyers, can employ this technology to streamline our services and reduce risk in our practice, are endless.

Suddenly, the blockchain-savvy lawyer is the smartest person in the room.

So now that you know what it is, do you see blockchain technology as a threat or an opportunity?

Some further reading…

This article attempts to provide a basic overview of an incredibly complex area of learning, in the hope of sparking some fascination amongst my peers. The concepts discussed have been greatly simplified. If you want to join me down the rabbit hole, let me suggest some further light reading.

If you're interested in how Australia is leading the charge to establish international standards for blockchain technology, check out Roadmap for Blockchain Standards. If regulation is more your interest, learn about ASIC's position by reading their information sheet for distributed ledger technology or their stance on regulating ICOs (initial coin offerings).

Alternatively, to understand the origin of the technology straight from the horse's mouth, check out Satoshi Nakamoto's brilliant white paper, which started it all. It is beautifully written and surprisingly easy to understand; us lawyers would do well to take note.

¹ Marc Andreessen, 'Why Bitcoin Matters', Another View, New York Times. 21 January 2014.

² In August 2016, hackers stole just under 120,000 bitcoin from Hong Kong bitcoin exchange Bitfinex (worth over $1 billion AUD today).

This article was first published in the LIV Young Lawyers Journal Online on 15 November 2017. The LIV Journal version of this article is available here.