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This article is the introduction to a series of writings offered from Valmas Associates, that will be dealing with blockchain technology, its applications to everyday life, the legal challenges they present for governments and existing societal structures as well as an outline of the regulatory instruments developing in response.
Blockchain technology is destined to have an increasingly central part in our social and economic lives in the coming years. We begin with an introduction of the basic terms that may help the reader acquire a deeper understanding of the mechanics of blockchain and blockchain technologies (cryptocurrency, distributed ledger technology, smart contracts, tokenized assets etc.) .
GLOSSARY OF TERMS:
Altcoin: The term altcoins refers to all cryptocurrencies other than Bitcoin.
Bitcoin (₿) (BTC): Bitcoin is a digital currency (also called cryptocurrency) launched in 2009, that is not backed by any nation’s central bank or government. Bitcoins can be traded for goods or services with vendors who accept Bitcoins as payment. Bitcoin-to-Bitcoin transactions are made by digitally exchanging anonymous, heavily encrypted hash codes across a peer-to-peer (P2P) network (blockchain). The P2P network (blockchain) monitors and verifies the transfer of Bitcoins between users. Each user’s Bitcoins are stored in a program called a digital wallet, which holds one public sending and one public receiving address, as well as a private key known only to the user.
Block: A block is a set of transactions that are bundled together and added to the chain at the same time.
Blockchain: A blockchain is a is a shared and synchronised digital database (ledger) containing a growing list of records, called blocks, that are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. By design, a blockchain is resistant to modification of the data it contains. It is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way” (Iansiti, Marco; Lakhani, Karim R., January 2017, The Truth About Blockchain, Harvard Business Review. Harvard University, accessed on the 17th of March 2020, https://hbr.org/2017/01/the-truth-about-blockchain). Once recorded, the data in any given block cannot be altered retroactively without alteration of all subsequent blocks, which requires consensus of the network majority. Recorded data is stored on multiple nodes i.e. computers that store a local version of the database. Blockchain is the key to implementing Distributed Ledger Technology (DLT).
Blockchain Consensus mechanism: Blockchain consensus mechanism is the body of rules (algorithms) and a fault tolerant mechanism, by virtue of which, each node in a network validates or rejects any proposed change to the blockchain it administers. One of its uses is record-keeping. There are different types of consensus mechanism algorithms working under different sets of rules (e.g. see below proof of work (POW), proof of stake (POS).
Consensus: It could also be said that consensus pertains to a system of ensuring that parties agree to a certain state of the system as the true state.
Cryptocurrency: A digital currency (is a digital asset) in which encryption techniques and hashing algorithms are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Cryptocurrencies achieve this by using a decentralized control based on blockchain technology. Bitcoin was the first cryptocurrency followed by thousands of altcoins (variants or other cryptocurrencies).
Digital Assets & Cryptoassets: The term digital asset and cryptoasset have been used interchangeably. Cryptoasset is a digital asset that uses cryptography, a peer-to-peer network and an electronic ledger with a view to achieving three goals: Regulate the generation of new units; verify transactions; secure these transactions without the need for an intermediary. There are different types of cryptoassets: cryptocurrencies, protocol tokens, utility tokens, security tokens, natural asset tokens, stablecoins, CBDCs, crypto-collectibles..
Distributed Ledger Technology (DLT) (shared ledger): It is a technology used for sharing an electronic ledger between multiple participants (nodes, devices) in such a way as to ensure that the ledger is secure, tamper-proof, and that all of the parties hold an identical copy of the ledger simultaneously (so long as the ledger is updated through the network and current). One iteration of a distributed ledger design is the blockchain system and it can be either public or private.
Distributed consensus: It is a collective agreement by various computers (nodes) (e.g. a ledger of transactions) in a network (P2P) that is electronically shared in identical form by these participants (eliminating the requirement for a central authority to deter dishonest participants).
Hashing algorithm: A hashing algorithm is a cryptographic hash function. It is a mathematical algorithm that maps data of arbitrary size to a hash of a fixed size. Unlike encryption, it is designed to be a one-way function, infeasible to invert. This enables verification of information without sharing: if the hash of certain data is recorded on a blockchain,one can verify they have the same data by comparing the hash, without ever seeing the original source data held by the other party.
Hash pointer: The hash function is also used in blockchains to tie each link of the chain to the previous one: Hash pointers can be used to build a linked list, which is also called a blockchain. The hash stored in the hash pointer is the hash of the whole data of the previous block, which also includes the hash pointer to the block before that one. Because any change in the input changes the output, any change to the previous block would result in a different hash pointer, and so on with each successive block, which is what makes blockchain tamper-proof.
Initial Coin Offering (ICO): An Initial Coin Offering refers to an event that does not necessarily pertain to cryptocurrencies, but rather refers to an offering of digital assets that can represent many things such as ownership in a company, app, art, to name a few. ICOs act as a way to raise funds, where a company launches an ICO in order to raise money to create a new coin, app, or service. An Initial Coin Offering (ICO) has been claimed to be the cryptocurrency industry’s equivalent to an Initial Public Offering (IPO).
Merkle Tree: Andreas Antonopoulos provides on the of the most coherent definitions: Merkle trees are used to summarize all the transactions in a block, producing an overall digital fingerprint of the entire set of transactions, providing a very efficient process to verify whether a transaction is included in a block” (A. Antonopoulos, 2015, “Mastering Bitcoin”, O’ Reilly, p.168).
Node: Blockchains are maintained by a network of devices (computers, laptops or servers) called nodes, which are authorised to store a copy of the blockchain and whose purpose is to validate and implement updates to the blockchain. Nodes are connected to each other constantly exchanging the latest blockchain data thus staying up to date. In a nutshell they validate transactions and accept or reject them, they store block transactions, they broadcast the transaction history to other nodes which in turn need to update on transaction history.
Peer to Peer (P2P): In a P2P network, the peers are computer systems which are connected to each other via the Internet. Files can be shared directly between systems on the network without the need of a central server. In other words, each computer on a P2P network becomes a file server as well as a client.
Public ledgers & blockchains: They are open to the public i.e. everyone can use them, access them.
Private ledgers & blockchains: They are not open to the public (yet the public may be given access).
PLEASE NOTE: The distinction between public and private is about the right of access, use of the network.
Permissioned ledgers & blockchains: A permissioned blockchain (ledger) is one where only certain authorised parties are allowed to act as a node and administer the ledger. In these blockchain types, a control layer runs on top of the blockchain that governs the actions performed by the allowed participants.
Permissionless ledgers & blockchains: Permissionless blockchains allows any participant to act as a node i.e. to participate and do transactions or even participate in the consensus method. Bitcoin and Ethereum are two examples of permissionless (public) blockchains.
PLEASE NOTE: The distinction between permissioned and permissionless blockchain is about who can run nodes in the network.
Both Public & Private Blockchains can be either permissioned or permissionless.
Private key: In public key cryptography, the private key, also known as a secret key, is a unique piece of data that is kept secret and enables the holder to encrypt a message or decrypt any message that has been encrypted with the corresponding public key.
Proof of Work (POW): The proof of work (POW) is a common consensus algorithm used by the most popular cryptocurrency networks like Bitcoin. It requires a participant node to prove that the work done and submitted by them qualifies them to receive the right to add new transactions to the blockchain. However, this whole mining mechanism of bitcoin needs high energy consumption and longer processing time.
Proof of Stake (POS): The proof of stake (POS) is a common consensus algorithm but it has the benefit of being a low-cost and low-energy consuming alternative to the POW algorithm. It involves allocation of responsibility in maintaining the public ledger to a participant node in proportion to the number of virtual currency tokens held by that node.
Public key: In public key cryptography, the public key is a unique piece of data that can be disseminated widely to everyone and will enable, in turn, anyone to encrypt a message. However, they will not be able to decrypt it.
SHA-256: There are different hashing algorithms used for various cryptocurrencies such as SHA-256, Ethash, Scrypt, Equihash, Cryptonight, X11. SHA-256 stands for “Secure Hash Algorithm”. It generates a 256 bit (32 byte) signature for a text string. Its block processing time is generally around seven minutes and requires hash rates at giga hashes per second. This mining algorithm is used by Bitcoin.
Smart contract: A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart Contracts are an innovative, self-executing agreement between two anonymous parties, namely, the buyer, and the seller, without the need of any central authority or legal guidance. Thus, the emergence of blockchain technologies has given rise to a new generation of electronic contracts that are based on distributed ledger technologies and are executed by a network of nodes. Smart contracts already have uses e.g. in the healthcare industry.
Tamper-proof: This term describes a data structure that cannot be interfered with or changed without this becoming obvious to the administrator of the structure. In the case of blockchain, this is achieved by the chain structure of successive blocks, where tampering with any individual block creates a mismatch with all subsequent blocks.
Timestamping is a feature of blockchain technology. Each block is timestamped, while each new block refers to the previous block. Combined with cryptographic hashes, this timestamped chain of blocks provides an immutable record of all transactions in the network, from the very first (genesis) block.
Tokenized asset: The tokenization of assets refers to the process of issuing a blockchain token (specifically, a security token) that digitally represents a real world asset — in many ways similar to the traditional process of securitization. Thus, that real world assert is represented by a token on an electronic ledger, i.e. a blockchain.
Transaction: The record of an event, secured with a digital signature (using cryptography), that is verified, ordered, and bundled together into a block, forms the transaction in the blockchain. In a cryptocurrency blockchain, a transaction involve the transfer of crytpocurrency, while in other blockchains, transactions may involve the transfer of any asset or a record of some service being offered. Within the context of a smart contract transactions are executed automatically upon meeting predefined criteria.
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About the Author |
Ioannis Valmas LLB, LLM, (MSc) is Managing Partner at Valmas Associates and a Greek trial attorney and legal advisor that has represented – almost exclusively – since 2008, overseas clients (from government bodies to private individuals) for their administrative, business and personal legal matters in Greece gaining a stellar reputation abroad. He has lived abroad for almost a decade and earned several degrees from UK Universities. He has attended seminars at US Universities (Harvard and Stanford Law Schools). He has been a member of the Athens Bar Association for over a decade. He is appointed before the Court of Appeals and licensed to practice law throughout the territory of the Hellenic Republic, Greece. His writings on Greek Real Estate Law, Aviation Law and Shipping have been widely published in recent years by publishers in Greece and abroad.