Beyond the Hype Cycle: Blockchain explainer

Author: Michael Bacina - Partner, Piper Alderman

Piper Alderman’s Blockchain Group has been at the forefront of the blockchain revolution, advising leading Australian and international projects using this exciting new technology to gain greater business efficiencies, forge new business models and disrupt incumbent intermediaries. We regularly present explainers on Blockchain, and in this article we set out a primer and some examples of how Blockchain technology operates, to assist you in understanding some key concepts in the technology.

What is a blockchain?

There are a variety of definitions emerging in legal systems. At a high level, a blockchain is a kind of distributed ledger technology, popularised by the cryptographic token known as “Bitcoin”.  We will use the Bitcoin Blockchain in our examples below, but you should keep in mind that cryptocurrencies such as Bitcoin are but one use of Blockchain technology, much as email is a useful application built on top of internet technology.

The critical concepts underpinning blockchain (as it relates to the Bitcoin blockchain) are:

  1. It is a decentralised, as opposed to a centralised, network; with
  2. A distributed validation of transactions occurring through the network; and
  3. Those transactions are signed using public/private key cryptography and the use of hash records between blocks of records.

Centralised vs Decentralised Networks

Most of our interactions online, with or without our knowledge, involve us exchanging information, including our personal information and our financial details, when entering into a transaction. We regularly rely on intermediaries such as banks, online payment systems like PayPal, Dropbox and social media websites to store our information or transfer value (including funds).

All of this data is managed and controlled by central entities, usually at a single location or server. Such systems are susceptible to failure of that single point, via hacking, physical theft or fraud/corruption. These are what are known as “centralised” networks. The opaque nature of this kind of record keeping leads to adverse incentives in many business interactions (including within organisations themselves) and keeps the value of the data siloed.  Data siloing may make sense in the short run, but in the long run makes it more costly to unlock the value in that data.  

Blockchain promises a new era of transparency and censorship resistance, with new business possibilities and greater efficiencies.  This is enabled in part by shifting from relying upon a central party in a network, to a more decentralised or even distributed network where a consensus of parties in the network co-operate together to enable the network to operate.

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