Legal Technology

Understanding Blockchains

By | Jun.12.17 | Daily Dispatch, Innovation, Legal Technology

Blockchains — a sort of digital ledger best known for powering the bitcoin digital currency — have been getting a lot of attention from lawyers for their potential to change how people transact. Specifically, there are a number of software projects aimed at applying blockchains to create self-executing “smart contracts” (or at least trying to).

Lawyers often deal with how people transact, so it’s probably a good idea for lawyers to understand blockchains.

Understanding blockchains is hard, though, especially when approaching them from a legal standpoint without looking under the hood from a technology standpoint. Here are some of the best resources for understanding blockchains from outside of law.

Digging In: The Bitcoin Connection

A top resource for understanding blockchains is “Bitcoin for the Befuddled” by Conrad Barski and Chris Wilmer. Why read a book about bitcoin to understand blockchains? Bitcoin is the first and best-known implementation of a blockchain, and bitcoins and blockchains are essentially inseparable: To possess bitcoins means to possess the credentials to tell the bitcoin blockchain that your bitcoins should go down and someone else’s bitcoins should go up by the same amount. Using bitcoins as a real-life example of a blockchain makes understanding blockchains much easier.

Another excellent resource is CoinDesk, especially its guides on blockchains (all written by Nolan Bauerle, who studied digital currencies while doing research for the Canadian Senate Banking Committee).

These resources focus less on legal or regulatory matters and more on how blockchains work (and also less on breathless predictions of the impending blockchain revolution and more on real life).

In particular, these resources differ from descriptions of blockchains often found in legal publications on two important claims.

Running Down Two Claims: Irreversible and Unhackable

One claim is that when you save data to “the blockchain,” it’s permanent, unchangeable, irreversible. This claim often appears in discussions about bitcoin transactions stored on the bitcoin blockchain, and in the bitcoin context, irreversibility is absolutely essential. (Digital currencies wouldn’t work if you could go to the store, spend your digital currency, take away your newly purchased stuff, and then use “Undo” to get your money back.) But the claim is sometimes presented in a way that makes it seem like the bitcoin blockchain is the only blockchain, or like all blockchains necessarily work the way the bitcoin blockchain does.

Unless you really mean “every kind of blockchain and other distributed/decentralized/peer-to-peer (crypto) ledger generally now and forever,” it’s probably not a good idea to talk about “the blockchain” in the abstract — no more than it is a good idea to talk about “the social networking website” in the abstract. There’s Facebook, Google+, LinkedIn, Twitter and more. And while these are all social networking websites, they each work a bit differently.

A more technical analogy is “the version control system.” Software developers use version control systems to manage changes to source code over time. Git, one of the most widely used version control systems, is similar to a blockchain: Both Git and blockchains use a Merkle tree (or something similar) to save and verify changes to data. In addition to Git, there’s SubversionMercurial and more. And just as social networking websites offer different features, so do version control systems: Git allows you to modify past data (but you have to be careful); Subversion doesn’t really allow this.

So: Is Data Saved to “the Blockchain” Permanent?

For blockchains generally, the answer seems to be, “It depends.” Besides bitcoin, there are a number of software projects with their own blockchains (EthereumSymbiont, many others, and more seemingly monthly). It’s practically impossible to put together an overview of all the blockchains under active development (CoinDesk’s Smart Contracts Report makes a brave attempt), but it wouldn’t surprise me if a few of these blockchains had mechanisms for modifying past data. (Git, which uses essentially the same data structure as a blockchain, allows modification of past data, so it’s not like it can’t be done.)

There’s also interest in private blockchains.

Part of what makes data in the bitcoin blockchain (essentially) permanent is that the bitcoin blockchain is stored on many computers that aren’t controlled by a single party — there’s no central repository of data that you can change and call it a day. But if a blockchain is private, and you control the computers that store the blockchain data, and you decide you want to rewrite history, who’s to stop you? A March 2017 Harvard Business Review article on blockchain security characterizes the ability to reverse transactions — that is, rewrite history — as a benefit of private blockchains (at least in certain contexts).

For the bitcoin blockchain in particular, the answer is probably, “Yes, for all practical purposes” (but not a straightforward “Yes”).

In bitcoin’s early stages (August 2010 — the first bitcoin block was saved to the bitcoin blockchain in January 2009), someone exploited a bitcoin bug (similar to what caused Gandhi to go around nuking everyone in the first Civilization computer game) to create billions more bitcoins than were ever intended to exist. As dire as that sounds, this event actually ranks dead last in CoinDesk’s The 9 Biggest Screwups in Bitcoin History.

The bitcoin developers’ solution (in addition to fixing the bug) was a rollback of the bitcoin blockchain: remove the bazillion bitcoin transaction and all the transactions after it. All of that permanent, irreversible bitcoin transaction data in the blockchain? Gone. (Good thing, too.)

But that was in 2010. For a number of reasons (not the least of which is that the bitcoin blockchain is stored on so many more computers today that arriving at a consensus on a rollback would be very difficult), another rollback is very unlikely today – but very unlikely isn’t the same as impossible.

A second claim is that “the blockchain” cannot be or has never been hacked. 

At some level, the claim that a blockchain has never been hacked is just semantics. For example, if you cause a bazillion spurious bitcoins to be added to the bitcoin blockchain by exploiting a bug in bitcoin code, but not blockchain code (like someone did in August 2010), I guess it’s more accurate to say that you hacked bitcoin and not the blockchain, but what difference does it make?

In any event, CoinDesk publishes plenty of articles on memorably named digital currency hacks that involve exploiting attributes of blockchains: 51 percent attackstime warp attackseclipse attacks and more.

Benjamin Whetsell is the co-founder of Paper Software. He is admitted to the bars of New York and Washington, D.C. Previously, he was an associate at Fried Frank in New York City, where he worked on financings, mergers, and fund structures for clients such as Bank of America and Goldman Sachs. He holds a B.B.A. from the University of Michigan Business School and a J.D. from Columbia Law School. Follow him @benwhetsell and @papersoftware.

Illustration ©iStockPhoto.com

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