Understanding Blockchain

By Lachlan Commins, Patterson Houen & Commins, Lawyers, Sydney

In undertaking my research for this article, I set out to collate a year’s worth of legal articles and publications which had been sent to my work email over the previous 12 months.  At the beginning of this period, the focus of these articles was squared heavily on the wonder that is Bitcoin with little attention or notice being paid to the wonder that is Blockchain. No doubt much of this fascination was in reaction to the turbulent worth of Bitcoin as a cryptocurrency and the attached stories and tribulations of those caught up in its rise and inevitable fall. As the year wore on, however, I noticed that more and more attention started to be paid to Blockchain. At the time of writing it seems that Bitcoin is yesterday’s news, whilst the here and now, and the future, are all about Blockchain. Why is this?

As alluded to above, the initial craze over the potential of Bitcoin and cryptocurrencies has now shifted to perhaps a more mature and utilitarian focus on the technology behind Bitcoin: the Blockchain. Whilst Bitcoin may have had the razzle-dazzle, the hard graft all along has belonged to Blockchain. This is perhaps why more attention and public fascination is now focussed on other potential applications and uses of Blockchain technology. Indeed, in the more recent articles published towards the end of this 12 month period referred to above, Blockchain has been referred to as a “foundational technology” and compared to the arrival of data mainframes in the 1960s; central processing units (CPUs) in the 1970s;  personal computers (PCs) in the 1980s; internet in the 1990s; and smartphones and social media in the 2000s.

Team Work Makes the Dream Work

You may have heard the phrase “distributed ledger technology” being used in the same utterances as Blockchain. It is perhaps useful, therefore, to think of the Blockchain as being a live, common ledger that all parties to a transaction, or indeed an entire transaction chain, must use in order to have a transaction recorded.

Perhaps you may remember group assignment work from your university or high school days: at the end of the night’s study session everyone would be assigned their share of the assignment topic and would then be forced to reconsolidate the next morning (and so on and so forth) to combine the separate pieces of the assignment into the latest working version. I remember how  this enjoyable and character building means of completing a final document would often lead to final minute discussions regarding whether “Rev 6” or Rev “5A – latest” was the latest version of the document.

Of course the alternative to this ‘distributive’ and ‘flat’ means of completing a final document would be to nominate a team leader and to then delegate him or her (via a democratic and transparent process) with the sole power and responsibility of maintaining and updating the document: through this ‘centralised’ or ‘hierarchical’ process all nominated and proposed changes to the working document made by lowly team members would be funnelled through this one all-powerful checkpoint. Although this form of team work usually prevented any late night / early morning discussions over an assignment’s correct version, it did give the team leader (who seemed to be the same person year in year out) an extraordinary amount of power and control over the document’s final form and quality.

Both of these methods of document control were rendered largely redundant by the advent of cloud computing and document storage. This gave each team member the ability to remotely access and to make changes to the same document in real time. Therefore, theoretically, each team member could work from the same ‘centrally’ held document which was at the same time ‘distributed’ so that each team member had access or to or possession of the same version in real time.

Team Work (also) Makes the Chain Work

Think of an item produced in China for export to Australia: metal containers for paint, for instance. Think of this as a single object which begins its journey in a Chinese factory and which ends its transactional journey once it has been purchased by a customer in Australia at Bunnings. During this journey – its logistical chain – the container will change possession (both physical and legal) many times as it progresses from party to party from China to Australia. An analysis of this chain would be able to discern such things as: what time and date and the precise location at which the container came into existence; when, where and for how long the container came into possession of the various parties along the chain (the manufacturer, the freighter, the wholesaler, etc); when and how much money was transferred from one party to another at various steps. In fact an analysis of the container’s logistical chain could explain all there is that needs to be known about the container’s history and status.

Consider the information regarding the container’s logistical chain and the events thereon as being recorded or ‘time-stamped’ onto a digital ledger or spreadsheet as each event occurs: this digital record or ledger – as it grows with each event that takes place along the logistical chain – is the container’s blockchain. What makes this special is that it forms a record which can be viewed and inspected but which cannot be retrospectively manipulated or altered by any party. Essentially, it is a live distributed ledger that is a true, unalterable, self-executing, and above all, independent record of the container’s logistical chain.

Smart Contracts

Consider now that at certain points or at the happening of certain events along this logistical chain – as each is recorded or ‘time stamped’ onto the Blockchain – certain other corresponding events are meant to take place or certain other rights or obligations are meant to arise or be fulfilled. For example, say that according to the agreement between the freighter of the containers and their wholesaler in Australia, payment is due to the freighter upon the containers being landed and stored in the wholesaler’s warehouse. Rather than having a party from either the freighter or the wholesaler, or some third party, ‘on the ground’ verifying whether or not this has occurred, the status of the containers will be recorded and verified by the container’s blockchain. This status can then in turn trigger automatic payment from the wholesaler to the freighter pursuant to a ‘Smart Contract’ which is a self-executing agreement that uses information recorded on the blockchain to determine whether or not certain conditions have been fulfilled.

Blockchain: here to stay

What is the Blockchain? It is the digitization of the “middle-man” and a profound step in the evolution of Artificial Intelligence: more and more of our information will be recorded on it.

Contact the author directly by email or by telephone

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