With data breach being a subject of increasingly prevalent
concern, there is an inherent value proposition in the
enhanced security of a decentralized blockchain network.
Once a node successfully solves the puzzle for a given block, it
broadcasts the results to all other nodes on the network which
independently verify the solution using simple math. If a consensus
is reached by the majority of nodes, the block is placed next in the
chain and permanently recorded on the network and time-stamped.
The successful miner is rewarded an amount of digital currency to
compensate the miner for its costs of verifying the transaction
(electricity and hardware). This particular process is referred to as
mining or proof-of-work but note that contemporary blockchains
are moving towards more efficient processes for validating blocks.
Why is blockchain technology valuable?
It’s secure. Unlike In a departure from classic conventional
computer networks in which a central database exists to which all
other nodes in the network connect, a blockchain is a decentralized
and distributed network with no central database. Each node in a
blockchain hosts its own copy of the master record of all activity
occurring on the network thereby eliminating the risk inherent in a
classic network containing a single point of failure. And given that
data breach is a subject of increasingly prevalent concern to financial institutions, large corporations (and us business lawyers), there
is an inherent value proposition in the enhanced security of a
It cuts out the middle man. A corollary to decentralization is disin-termediation. Theoretically, a blockchain can allow users to transact
with one another on a peer-to-peer basis without the need of trust
or intermediaries. The cost savings that this technology may realize
through the redundancy of escrow agents and other financial intermediaries is significant.
Legal Issues and Blockchain Assets
There is a lack of consensus on a definition for what blockchain
assets are. Fundamentally, blockchain assets exist as a state of
information stored within a database.
6 And while information is not
generally considered to be a form of property in Canadian law (with
the exception of intellectual property), blockchain assets are bits of
information that only the owner (i.e. the person with the private
key) can exercise exclusive control over, akin to private property.
Jurisdictions around the world take differing approaches to classifying these assets. In the Philippines, blockchain assets are remittances; in Japan, legal tender; in the United Sates, property or
7 But even if we agreed to classify these assets as a
form of intangible property, there would still be a number of legal
issues that would need to be addressed before blockchain assets can
be fully adopted in current market practices.
For instance, consider the need for financial lenders to be able to
perfect security interests over the blockchain assets of borrowers.
The Personal Property and Security Act (PPSA) establishes a
by entrepreneurs around the world to figure out what other problems
it can solve and what assets it can hold. For example, a Chinese
company called Onchain Blockchain Services has launched the first
open-source blockchain protocol in China. This blockchain (called
NEO) touts the ambitious goal of digitizing and recording all forms
of asset ownership in China. In Sweden, the government is consid-
ering using the blockchain to replace the land registry.1 Bext360 is
a startup with the ambition of using blockchain to pay farmers fairly
for their coffee beans.2 IOTA relies on a directed acyclic graph, as
opposed to traditional blockchain structure, to allow for feeless
transactions, unlimited scalability; it is also positioned to be the
infrastructure for data transfer for the “Internet of Things.”
Symbiont is working with the State of Delaware to transfer
Delaware incorporated companies to a blockchain register.
nies like Augur and Gnosis are using the Ethereum blockchain to
create a predictive markets platform which allow users to bet on the
outcome of any future event (i.e., a sporting match, an election or
the price of oil.) The list of use cases is seemingly endless and is a
driving force behind the exponential growth in the value of block-
chain assets over the past few years.
How does a blockchain work?
The challenge with explaining how blockchain technology actually
works lies in the way it replaces intermediaries and allows users to
transact on a peer-to-peer basis with trust. One way to think about
blockchain is to imagine just that, a “chain of blocks.”
The following describes how a blockchain using a proof-of-work
consensus algorithm works. When a transaction is submitted to the
network (e.g. John sends one Bitcoin to Todd), it sits in a pool with
all other pending transactions on the network waiting to be verified
by a node (for the purposes of this process, a “miner”). Miners scan
the network periodically for pending transactions, then combine
one or more transactions into a “block.” The miner races to solve a
type of cryptographic puzzle called a hash function to validate such
block of transactions. This cryptographic process proves, among
other things, that the purported owner of the account sending value
does in fact “control” such account (i.e., by verifying that the
account number of the sender and the “digital signature” of such
transaction, which is derived from a private key linked to the
account number as well as certain text from the transaction). This
process also verifies that the account sending token of value actually
holds the thing it purports to transfer, thus addressing the “
double-spend problem” alluded to earlier. To prevent against double-spending, the solution to each cryptographic puzzle (remember, a
transaction does not occur until the puzzle is solved) requires some
data output (i.e., the hash) from the last block of transactions
verified on the chain. So each block links to the previous block in
a linear fashion (hence the terminology, “blockchain”).
process also renders it unfeasible for anyone to alter a historic
transaction without de facto altering the data in every transaction
that has since followed; a key underpinning to the security of