What You Need to Know About Blockchain
Blockchain (the open-source ledger behind bitcoin) enables the recording of each transaction chronologically and publicly. The technology has certainly been dominating the headlines in recent months - but what is it used for, and what is its future?
To understand the myriad of applications blockchain technology can have, we spoke to Dave Michels, a researcher in the Cloud Legal Project and the Microsoft Cloud Computing Research Centre (MCCRC).
Hi Dave, it’s great to be speaking with you. To get us started, tell us a bit more about how you’ve undertaken research into blockchain?
This past year, among other things, we’ve studied the legal implications of blockchain technology. We work together with computer scientists from the University of Cambridge. They provide the technical expertise and our team at Queen Mary University of London (QMUL) covers the legal angles. Together, we write articles that explain advances in technology in terms that non-techies can follow, and also unpack the relevant legal issues in ways legal professionals and non-lawyers alike can understand.
It’s a great project. Blockchain is ‘so hot right now’. Bitcoin’s value is up three or four times since I started on the project in July 2017. Every day somebody tweets about a new blockchain application. The explosion of interest and activity in this area makes for a very exciting topic.
What are the main benefits of blockchain technology?
Simply put, a blockchain allows a bunch of strangers who don’t trust each other to share an online database. While each of them can add new entries, the clever use of cryptography means nobody can corrupt the database. Before blockchain, people would usually ask a trusted third party ‑ like a bank — to keep an independent database for them. This means you have to trust (and pay) the bank! But with blockchain, total strangers can work on a reliable database together online, without any intermediaries. This is why you often hear blockchains described as ‘trustless’ systems that are ‘immutable’.
“[…] a blockchain allows a bunch of strangers who don’t trust each other to share an online database. While each of them can add new entries, the clever use of cryptography means nobody can corrupt the database.”
The database can keep track of anything you like. For example, the Bitcoin blockchain tracks transactions in ‘Bitcoins’. The underlying technology makes sure that nobody can steal anybody else’s coins, or create new ones out of thin air. The result: a digital currency without any governments or banks. You can use it to pay anyone, anywhere in the world. And that’s just one example; start-ups, governments, and NGO’s are looking at storing all sorts of information on blockchains: from identities to land titles.
What are the main commercial applications of blockchain technology at the moment?
Don’t believe the hype: blockchain is still mainly experimental technology. It’s early days when it comes to real-world use cases. There’s white papers and pilot projects aplenty. But live blockchain-based solutions operating at scale? Not many.
Outside of speculation on Bitcoin, there’s two major areas of development. On the one hand, a lot of start-ups are building applications on Ethereum’s blockchain. Ethereum works like a platform: anybody can write programs that run on top of its blockchain through so-called ‘smart contracts’. It’s basically like a big, distributed super-computer that anybody can use (also called the ‘Ethereum Virtual Machine’).
Lots of start-ups have ideas for using this machine to provide services. For example, StorJ wants to use it to offer a distributed cloud storage service. To raise capital, many start-ups sell their first batch of coins to early investors. This form of crowd-funding is called an ‘Initial Coin Offering’, or ICO. They’ve raised over US$ 3bn in 2017!
On the other hand, big businesses are looking to build their own ‘private’ blockchains. For example, banks could use a ‘closed’ blockchain like Corda to settle payments amongst themselves. The financial sector may be one of the first to adopt blockchain at scale. LLM student Jin Enyi and Professor George Walker are doing interesting work at QMUL on blockchain, fintech, and financial regulation.
Are there any challenges in the application and integration of blockchain technology?
I can see three. First, scalability: widely distributed blockchains rely on something called ‘proof-of-work’. Parties have to solve a difficult puzzle before they can add new blocks to the database. Doing this ‘work’ costs electricity and takes time, limiting the amount of information the system can process. Computer scientists are working on next-gen solutions (like Iota), but nothing’s been proven to work at scale so far.
The second is user interface. Blockchain relies on users to keep track of their private keys, which act like passwords. Lose your private key and it’s tough luck for you. This actually happened to one of our researchers ‑ he bought Bitcoin years ago, but lost his key. Today, a single Bitcoin is worth over US$ 15k!
The third is linking tokens to items in the real world (so-called ‘off-chain assets’). For instance, say you want to track cars on a blockchain. You’ll need to make sure that the coins on your chain accurately reflect the cars in the real world. QMUL Professor Chris Reed has written a research paper on this issue called ‘Beyond Bitcoin’ ‑ check it out on SSRN.
Do you see a future for the application of blockchain technology in any other sectors or areas of our society?
‘Private’ blockchains will probably be used for all sorts of dull, big-business, back office functions. They’ll be a bit like distributed databases today ‑ useful, but not exactly glamorous.
For me, the more interesting applications take advantage of blockchain’s ‘censorship-resistance’. Since the network is distributed peer-to-peer, there is no single central party to target with regulation. This makes it very hard for anyone to shut down blockchain-based services. For example, if you ran Twitter on a blockchain, an authoritarian government would have a hard time shutting it down.
Similarly, in 2010, governments pressured Visa and Mastercard to stop processing Wikileaks donations. In response, Assange simply asked supporters to donate Bitcoin instead. You can argue about whether that’s a good or a bad thing ‑ but it’s clearly a significant development for governments to consider.
For more information on the legal implications of blockchain, see Dave’s working paper ‘Blockchain Demystified’ on SSRN.