By Adriana Linares
We all know that an important aspect of technology competence is understanding new technologies and applying them to practice as they become relevant. While some technological developments, tools, services or programs can be applied across a broad swath of practice areas and demographics, others can be more esoteric and far-reaching. Blockchain is no exception.
As blockchain continues to evolve, certain aspects are already in use regularly, such as in smart contracts, discovery requests and information authentication.
The Technical Aspects of Blockchain Technology
A common definition of “blockchain technology” is that it functions on a distributed ledger system using a decentralized database. Wait. What? Well, in simple terms, a distributed ledger is a database whose contents are duplicated across several devices (i.e., nodes). Each node replicates and saves an identical copy of the ledger and updates itself independently, no central authority pushes an update or controls all the data. By way of algorithms, the nodes update themselves. The ledgers are highly secured through cryptographic keys and signatures.
The database stores linked records in a time-stamped block, hence the moniker for the process. The digital record is the block, and the storage
in the database is the chain.
Users cannot change blocks, but they are visible to those with access. It operates on a proof of validity that is consensus-based. Defining a few key terms is critical toward adopting a secure and practical form of technology.
Below is a general overview
of the terms to understand
blockchain better:
Distributed ledger system:
A distributed ledger system works by processing and verifying every record through a node (like a small server).
It generates a record with a consensus on its accuracy.
Decentralized database:
A decentralized database is one that stores records across multiple nodes, not just a single, centralized location.
Mining:
The process of adding transaction records to the blockchain. This is how transactions are processed. Mining is performed by people all around the world called “blockchain miners.”
Hash:
A mathematical function that converts an input of letters and numbers into an encrypted output of a fixed length. A hash is created using an algorithm and is essential to blockchain security. A formula generates the hash, which helps to protect the security of the transmission against tampering.
Linked records:
The blockchain encrypts and connects records between nodes, but also associates the order in which they were introduced into the blockchain.
Time-stamped block:
Blocks store multiple types of information about the record, such as username, dates, times and amounts. It also creates a unique identifier — a hash — that is only used for a specific block.
What makes the blockchain so secure is that it creates a “hash” that points back to the previous item in the ledger. For example, if there are four blocks in the chain, and a hacker tries to change block four, it cannot occur unless it changes block three, two, and so on. Blockchain operates on the immutability of not being able to change an entire chain in this manner.
About Cryptocurrency and Why It Is on the Rise
Cryptocurrencies — like Bitcoin — operate on the blockchain. Think of them like “apps” based on blockchain technology. Digital currency exchange companies broker transactions for buying and selling them.
Miners verify transactions and then place them on the public ledger. Using complex algorithms and sophisticated computers, the first miner to verify the transaction is awarded a cryptocurrency payment under a system called proof-of-work.
Bitcoin accounts for nearly $6 billion in daily transactions. Analytics predict the likelihood of cryptocurrency transactions to increase over the next five years with a market cap of almost $1 trillion. Obviously, there is a robust level of support from cryptocurrency users, but what puts this form of payment in such high demand?
The three driving factors of cryptocurrency are utility, scarcity and demand.
Scarcity and demand are familiar economic drivers that are understood easily. If people want more of something and there is a limited number of it, that will drive the
value and number of transactions.
But what about utility?
The utility is the benefit that purchases gain from the transaction. This point is critical to internalize because law firms will see an increase in cryptocurrency transaction requests from both clients and other partners or parties. As a matter of fact, Nebraska lawyers can now accept cryptocurrency as payment according to an advisory opinion published by their Lawyers’ Advisory Committee, an ethics committee appointed by
the state’s supreme court.
Litigators now have an additional option to offer clients paying for their legal services. Bitcoin transfers value — or “bitcoins” — anywhere in the world. The Nebraska Ethics Advisory Board has approved the use of law firms accepting Bitcoin due to the uptick in use of digital currencies in other jurisdictions, albeit with strict requirements on when and how the currencies can be accepted. Lawyers should consider the strict requirements that come with accepting digital currencies when considering using them in their practice, caution leaders of the ABA Section of Litigation.
For those of us with our toes in water, starting to understand the current and future uses of blockchain in the legal world is important.
Adriana Linares is the San Diego County Bar Association’s Member Technology Officer.