For many, talk of Blockchain technology and cryptocurrency seems alien, and is often misunderstood. However, it’s an exciting technology that’s becoming increasingly popular as it promises to improve business processes between companies and revolutionise the legal sector. So, it’s something all lawyers need to be aware of.
What is cryptocurrency?
Before you can understand what Blockchain technology is and how it’s used, you firstly need to understand what cryptocurrency is.
Crypto assets are digital assets that are created or implemented using cryptographic techniques to generate a medium of exchange of financial assets.
Cryptocurrency is a crypto asset and is therefore a medium of exchange, like the British pound or the US dollar. However, cryptocurrency is digital rather than physical and is stored electronically. It’s encrypted to control the creation of the units and to verify the transfer of funds.
It also has no intrinsic value, meaning it’s not redeemable against another commodity, such as gold.
The most common form of cryptocurrency is Bitcoin and it was for this type of cryptocurrency that Blockchain was initially used.
What is Blockchain technology?
Blockchain technology is the technology that enables the existence of cryptocurrency as it’s where it’s created and stored electronically.
It’s a decentralised ledger of all transactions of cryptocurrency across peer to peer networks (P2P networks). This means its supply is not determined by central banks, so it enables people to make transactions, such as fund transfers, without the need of a central clearing authority.
Blockchain technology is constantly evolving and can now be used for smart contracts, keeping records, such as medical records, collecting taxes and voting, amongst other things.
How does Blockchain technology work?
So now, here’s the technical part. Blockchains are named so, as they’re a chain of blocks that contain data. Blockchain technology groups data together into blocks which are timestamped. These blocks are mathementally chained into preceding blocks, creating the Blockchain. This means that transactions can be traced back easily and with full transparency.
The process is broken down into 5 steps.
- When someone requests a transaction, it’s broadcast to a P2P network of computers, known as ‘nodes’.
- The nodes validate the transaction, and the status of the person requesting the transaction, using algorithms, which are a set of mathematical instructions that calculate an answer to a problem.
- If everything is fine and nothing has been tampered with, the nodes will verify the transaction.
- Once verified, the transaction will be combined with other transactions and this will create a block of data for the ledger.
- This block of data is then added to the existing Blockchain.
Once these steps have been taken, the transaction is complete.
When would Blockchain technology be applied?
Blockchain technology has various potential applications, such as:
- Property ownership
- Vehicle ownership
- Financial services
- Voting
- Medical records
- Smart contracts
What are the benefits of using Blockchain technology?
There are several benefits of using Blockchain technology. When a transaction is complete, the ledger is permanent and can’t be altered in any way, so can’t be backdated or tampered with. This means when new blocks are added you can trace back the full transactions and know they’re accurate, which gives you increased transparency.
Additionally, it has an advantage where costs are concerned, as the improvement it makes in the business process between companies saves money and therefore offers a higher return than most internal investments.
How does Blockchain technology keep crypto assets secure?
As many people are unfamiliar with Blockchain technology, there’s understandably concerns about security. However, there are mechanisms in place which make it near impossible for Blockchains to be tampered with:
The hash mechanism
Each block containing data within a Blockchain has something known as a “hash”. A hash is code which is unique, very much like a fingerprint.
In addition, each block also contains the hash of the previous block it’s chained to. So, it looks something like this:
The hash mechanism makes it much more difficult for people to tamper with a Blockchain as if they change one hash, the previous hash will not match so it will make the other blocks invalid.
The proof of work mechanism
The hash mechanism alone is not secure enough as computers can calculate hundreds of thousands of hashes at a time and quickly make those blocks valid. Therefore, to mitigate this, Blockchains also have the “proof of work” mechanism, which works together with the hash mechanism.
The proof of work mechanism slows down the creation of new blocks. For example, say a block took 10 minutes to create and someone changed one block, they’d need to recalculate the proof of work for all the following blocks.
Distribution to P2P network (nodes)
Another way Blockchain technology secures Blockchains is by being distributed. Blockchain technology doesn’t use a central entity to manage a Blockchain. It uses a P2P network that anyone can join. Each member of the network, known as a node, will get a full copy of the Blockchain, and this system is used to check that everything is in working order.
For example, when a new block is added, this is distributed to the nodes and they’ll check it hasn’t been tampered with. If at least 50% of the nodes agree that everything is okay, the block to be verified. If the block is verified, the nodes will add the block to their own Blockchain. If more than 50% of the nodes agree a block has been tampered with, it will be rejected by them.
What this means is, if someone were to tamper with one of the blocks, they’d need to change all the hashes for each block, redo the proof of work for each block and also take control of more than 50% of the nodes. As this is almost impossible to do, Blockchain technology has a significant amount of security.
What are smart legal contracts?
Smart contracts are computer programs stored on a Blockchain that can run automatically without human intervention and can perform transactions on decentralised cryptocurrency exchanges.
A smart legal contract is a smart contract that can be used to perform the obligations of a legally binding contact. These contracts are set to revolutionise the legal industry and are becoming increasingly popular as they increase both efficiency and transparency of transactions.
The Law Commission is looking to reform the law in relation to smart legal contracts and submitted its ‘Advice to Government’ in November 2021.
In February 2022, Master of the Rolls, Sir Geoffrey Vos, an advocate of Blockchain and smart legal contracts, spoke at the launch of the Smarter Contracts Report. He emphasised in his speech that the use of new technologies, such as Blockchain and smart legal contracts, is not something that might happen, but something that’s happening now
It’s therefore highly likely that the landscape of technologies within the legal sector is about to take a dramatic, but necessary step forward.
Inspire Legal Group’s position on Blockchain technology
Inspire Legal Group is a technology-driven law firm with our fingers on the pulse. We’re more than a law firm: we want to revolutionise the legal industry with technology, making the lives of our lawyers and our clients easier through smarter solutions.
We’re not just thinking about Blockchain technology, we’re already using it. We have our own Blockchain technology, through our Vleppo UK brand, meaning we don’t have to rely on anyone else. We believe implementing Blockchain technology and smart legal contracts into the legal sector is an extremely important step forward, and one which all firms should be taking.
If you’d like to speak to one of our experts about our Blockchain technology and how that can help you, get in touch with one of our experts, who will be more than happy to help.
*The content of this article was correct at the time of publication.
