Blockchain Game Changer, Part 1: Blockchain and Distributed Ledger Technology Deciphered
14 March 2016
Blockchain, also known as distributed ledger technology, is one of the most talked about tools in the technology and financial services sectors today. In January, the UK Government’s Chief Scientific Adviser, Mark Walport, published a report called Distributed Ledger Technology: beyond blockchain. The Walport report sets out the benefits of distributed ledger technology and recommendations for its widespread application by the British government. In light of the findings in the Walport report our Technology team will explore why blockchain and distributed ledger technologies are a game changer and their potential to revolutionise Fintech and other industries.
In this article, we will explore the history of blockchain and distributed ledger technologies, how they work, and their advantages. Our second article will consider the ways in which they are disrupting and innovating the FinTech and banking sectors. Our final article will discuss the major legal and regulatory issues that businesses will need to address in order to be able to fully harness the potential of blockchain.
Blockchain’s origins in Bitcoin
Blockchain was developed as part of the Bitcoin peer-to-peer cryptocurrency. Bitcoin allows an individual to transfer virtual currency to another person without an intermediary like a bank having to process the transaction.
The key technology at the heart of Bitcoin – the blockchain – is able to verify that the person seeking to transfer bitcoin actually owns the bitcoins in question and can track every step of the transaction.
Historically, tracking the transfer of financial, legal, electronic or physical assets was accomplished by keeping a manual ledger of buyers and sellers which tracked who owned an asset. Indeed, the majority of financial transactions today still rely on some form of financial bookkeeping that tracks and verifies assets as they move from one ledger to another.
Bitcoin repurposes the ledger concept for the modern age. It accomplishes this by maintaining a digital ledger - a blockchain - of every single Bitcoin transaction ever completed. The ledger is protected by a complex mathematical algorithm that verifies the ownership of the bitcoins in question. The game changer element is that the public ledger is decentralised and stored on every computer that downloaded the Bitcoin software. Each time a bitcoin transaction is successfully verified and completed, every copy of the ledger is updated accordingly.
Advantages of blockchain
The two main advantages of blockchain and distributed ledger technologies are:
- accuracy - the blockchain ledger offers proof of ownership and traceable records on the history of the asset
- security - the ledger is extremely difficult to tamper with or to make unauthorised changes to, as multiple identical copies of the database are publically shared. This feature also makes it harder for cyber-criminals to hack the ledger, as a successful attack would have to attack all distributed copies of the ledger simultaneously.
In other words, the digital distributed ledger addresses many of the problems with traditional manual ledgers by presenting undisputable evidence of who owns the asset, showing where the asset is at every point of the transaction, and stopping duplication and tampering.
Blockchain vs. Bitcoin
Unfortunately, the association in the public’s mind between blockchain and Bitcoin could, at least initially, prove to be a stumbling block to blockchain’s widespread acceptance and adoption. The use of Bitcoin in the ‘dark web’ and as the anonymous currency of choice for criminals may deter potential investors and customers. In addition, Bitcoin suffers wild fluctuations in its valuation, which may lead some to believe that the technology behind it is not reliable.
However, there is an important distinction between Bitcoin and the blockchain and distributed ledger technologies that underpin it. Bitcoin is the actual digital currency that can be exchanged for a variety of goods and services. On the other hand, blockchain is the cryptography technology that is applied to the Bitcoin protocol to offer verifiability, reliability and trust in digital economy transactions.
Potential for disruption
In a report from last year, Wedbush Securities found that the scope for disruption and change from adopting blockchain and distributed ledger technologies is substantial. In coming to this conclusion, Wedbush estimated that 20% of US GDP, or around $3.6 trillion, is generated by industries whose main function could be disrupted by blockchain and distributed ledger technologies. In Part 2 of this series, we will examine how blockchain and distributed ledger technologies are disrupting certain industries and analyse how some businesses are planning to integrate blockchain into their organisations.
Legal and regulatory risks
Even though blockchain and distributed ledger technologies can offer tamper-proof and transparent digital economy transactions, there is a current lack of consensus on the standards and versions of blockchain to adopt. It is therefore important for organisations that are considering whether to adopt or invest in blockchain and distributed ledger technologies to understand the risks that they may encounter while the technologies are in their infancy. In Part 3 we will discuss the major legal and regulatory issues that businesses will need to address in order to be able to fully harness the potential of blockchain.
What’s on the horizon?
Blockchain and distributed ledger technology have the disruptive potential to go beyond the capabilities of traditional paper based ledgers. While still at an early stage of development, their potential to transform a range of industries, such as financial services, Fintech, real estate and professional services, justifies their position as the zeitgeist of 2016.
If you are a market participant interested in learning more about blockchain and distributed ledger technology and how we can help your business, or if you have any questions about this article, please contact one of our team members below or your usual MHC contact.
The content of this article is provided for information purposes only and does not constitute legal or other advice.