Just when we finally figured out how to contract for “cloud” services and SaaS, here comes blockchain—the next disruptor for IT, businesses and, yes, us lawyers.
So what is blockchain? This is one of the best definitions that we have found from the Wall Street Journal, CIO Explainer: What Is Blockchain?
A blockchain is a data structure that makes it possible to create a digital ledger of transactions and share it among a distributed network of computers. It uses cryptography to allow each participant on the network to manipulate the ledger in a secure way without the need for a central authority. Once a block of data is recorded on the blockchain ledger, it’s extremely difficult to change or remove. When someone wants to add to it, participants in the network—all of which have copies of the existing blockchain—run algorithms to evaluate and verify the proposed transaction. If a majority of nodes agree that the transaction looks valid…then the new transaction will be approved and a new block added to the chain.
Here is a good visual that was provided in the article as well. The picture on the left is a transaction not using blockchain. The picture on the right demonstrates a distributed ledger.
IBM’s website has some helpful materials and visuals on what blockchain is and how it works. IBM spells out the key attribute of blockchain technology:
- It’s distributed: Blockchain works as a shared system of record among participants on a business network, eliminating the need to reconcile disparate ledgers.
- It’s permissioned: Each member of the network has access rights so that confidential information is shared on a need-to-know basis.
- It’s secure: Consensus is required from all network members, and all validated transactions are permanently recorded. No one, not even a system administrator, can delete a transaction.
For those of us who can better understand through images, here’s a good slide from MRO-Network:
There are a lot of new terms to decipher.
Blockchain Glossary for Beginners provides some helpful definitions:
- Distributed Ledgers: A type of database that is spread across multiple sites, countries, or institutions. Records are stored one after the other in a continuous ledger. Distributed ledger data can be either “permissioned” or “unpermissioned” to control who can view it.
- Blocks: Transactions from the network fill the blocks. And, as the transactions are validated, they are compiled into the blockchain permanently. Blocks include a timestamp. They’re built in such a way that they cannot be changed once they are recorded.
- Nodes: A computer that possesses a copy of the blockchain and is working to maintain it.
- Smart Contracts: Computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that make a contractual clause unnecessary. Smart contracts often mirror the logic of contractual clauses.
As you may have heard by now, blockchain is not just for cryptocurrency exchange. There are many more projected use cases that could impact the ways companies share data, track supply and logistics, and conduct business. Look out for interest from FinTech, supply chain, record management, and logistics teams within your organizations.
Note that there are several “types” of blockchain that you will need to be aware of:
- Public (think Bitcoin)
- Private (internal to a company/enterprise)
- Federated or Consortium (permissioned to specific participants)
We documented the lifecycle of some recent blockchain transactions to serve as a checklist of what the lawyers need to start thinking about:
And now some of the top issues to consider in licensing and implementing blockchain technology:
- Use case definition
- Who owns what—base technology, use cases, smart contract technology, content, transaction data, system logs, reports, etc.
- License scope and duration
- Implementation, support, and maintenance of the different environments (e.g., build, test)
- Authorized users and permissioning
- Rights if things go south
- Data rights (watch out for use of aggregated data!)
- Monitoring the network and handling security breaches
- Performance standards
- The basics—infringement protection, compliance, dispute resolution, indemnity, liability
Stay tuned for more blockchain primers and news at Tech & Sourcing @ MorganLewis!