Bitcoin, Blockchain, and Smart Contracts – Part 1

Posted on Categories Business Regulation, Computer Law, Corporate Law, Public, Student Contributor

Photo of a Bitcoin Cash wallet on a mobile phone and a copy of Mastering Bitcoin written by Andreas AntonopoulosOver the past year and a half Bitcoin and other cryptocurrencies have been taken a place under the mainstream spotlight, meaning the public at large has witnessed the speculative behavior in the cryptocurrency market. In December 2017 the price of one Bitcoin surpassed $20,000, only to encounter a bear market where the market price today is around $6,500. This volatility is not new to Bitcoin. For example, on December 4, 2013, Bitcoin was $1,175 and shortly after, on February 10, 2014, the price hit a low $100.  I point out price volatility to show that the cryptocurrency market is a unique speculative market. With that being said, let’s put money to the side and focus on the technology on which the Bitcoin network runs – blockchain technology. As we will see, using blockchain to create and maintain a currency is only the beginning.

At its essence blockchain technology is linked data between computers. It is defined as a digital, decentralized, append-only, distributed ledger that allows unrelated individuals to transact with each other without the need for a third-party or controlling authority. Because no third-party transaction confirmation is needed, the network becomes trustless. I want to make a note on the ‘append-only’ characteristic because it is crucial to the high security value blockchain provides. Append only means that data can only be added to the blockchain, it cannot be removed. Blocks that are already on the chain cannot be altered in any way. You can only make a change by noting it on a future block that is not on the chain yet, and every participant of the blockchain can see this change. At very technical levels advanced cryptography is what allows blockchain to exist, but diving into a discussion of these technicalities requires a scientific discussion, which, while interesting, would not serve a legal purpose. However, something of high-relevance to the legal community is a discussion of smart contracts. Working closely with coders and blockchain experts, attorneys can draft smart contracts that provide a more efficient, secure, and cost-effective way of facilitating transactions between individuals.

Most smart contracts today run on the Ethereum Network, but as the space matures more smart contract platforms will emerge. In a smart contract the terms of the agreement are written into the code. The contract is self-executing upon a series of conditions taking place (also known as “if-then” statements). A very simple example of the use of smart contracts can be seen in a blockchain specifically designed for property rentals – Individual A contracts with Individual B to use his property for 30 days. Individual A deposits the agreed rental amount of cryptocurrency (or regular money) into an escrow account. Because the payment condition has been met, Individual B sends a digital entry code to individual A on the first day of the rental term. If Individual B does not send the entry code to Individual A on time, the amount in escrow automatically reverts back to individual A. If individual B sends the digital entry code as agreed upon, the amount in escrow is automatically deposited in Individual B’s account or digital wallet. These transactions all take place on the blockchain, therefore everyone with access to the ecosystem can see if they took place as agreed upon in the smart contract. This creates trust and safety throughout the entire eco-system, even if the individuals do not know each other personally.

Clearly, the above is a very simple example for the use of blockchain and smart contracts, but the goal is for readers to develop a sense of how blockchain in general can enhance, and perhaps transform, how we transact with each other, and how we share and store information. Having set a basic framework for blockchain technology, the following posts will discuss some of the more prominent emerging uses for blockchains and smart contracts, and also a deeper analysis of the financial implications of Bitcoin.

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