After Bitcoin’s value skyrocketed in 2017, the buzz around the digital currency and the technology behind it has become the hot technology topic. We don’t know what the future holds for Bitcoin, but we do need to know why it’s important and understand the broad-based technology that supports it.
Bitcoin is a decentralized, digital currency that can be held, received and spent worldwide. It is considered the first cryptocurrency, referring to sharing characteristics of traditional currency with cryptography verification. The more exciting innovation may be the technology and protocol behind Bitcoin, known as blockchain.
The Bitcoin network developed blockchain, a time-stamped, distributed ledger for bitcoin transactions. Ledgers as we know them are centralized and closed. Blockchain is radically different in that no one institution owns or controls the ledger, thus eliminating the need for banks, government agencies or companies to serve as the centralized authority. By decentralizing ownership, all users have a synchronized and verified copy of the ledger which is maintained by a group of coders who record and validate transactions. Similar to a shared spreadsheet, users can add a new ledger entry (or block), but aren’t allowed to modify or delete previous entries, creating a chain of irreversible transactions. Since it is controlled by many users, the potential for network hacking is minimized.
Blockchain technology must have three core components:
- Peer-to-peer networking – Connected computers reach an agreement over shared data.
- Consensus mechanism – Must have consensus on the rules written in software that connect the computers and ensure that they remain synchronized.
- Blockchains, or hash-linked data structures – Must be in a specific format. For example, all computers must agree that new data entries must always reference (link to) previous data entries, creating a linked chain of data.
Blockchain was developed for Bitcoin transactions, but experts claim that its applications are limitless. Distributed ledgers provide users with faster, more convenient and secure services by removing the middleman (centralized authority) and adding the anonymity of encrypted transactions. With its virtually permanent and immutable digital records, blockchain technology is expected to have a significant impact on the legal industry.
Smart Contracts: The Covenant of the Future?
Using blockchain technology to execute “smart contracts” is a possible game changer for many industries, particularly legal services. Smart contracts are computer transaction protocols that execute the terms of a contract based on a set of conditions. Legal transactions could be reduced to codes where clauses are automatically enforced once pre-programmed conditions are met. The use of smart contracts could greatly increase efficiencies by automating existing processes, but will likely give rise to new legal issues.
Specifically, adopting blockchain technology could reduce the time attorneys spend on repetitive, routine work, like drafting contracts, recording commercial transactions and verifying legal documents, thus freeing counsel to spend more time advising clients on complex legal matters. Attorneys, however, will also be faced with new legal challenges associated with the underlying technology and with a myriad of unforeseen implications arising from these smart contracts.
Since blockchain provides an immutable record of a finalized contract with time-stamped signatures, the good news is there will hopefully be less room for contract disputes. “We can use blockchain as a ‘spine’ to manage the entire legal industry, build more efficient systems, decrease the cost of legal services, and make sure people get the legal services they need,” said Aaron Wright, Professor at Cardozo School of Law and developer of a tool for creating smart contracts.
The Last Word
Blockchain is a complex, new protocol that is not fully understood, but the breakthrough technology has the potential to transform business transactions across industries. While smart contracts are in the early phases, law firms need experts who understand the applications and can advise clients on how to adapt to the technology while adding value to the client relationship. Stay tuned to see how and if this technology really does revolutionize the practice of law.
For questions about this article, please contact Paul Skalny.