Blockchain for beginners

A few personal definitions of blockchain terminology, for beginners.

Blockchain refers to the technology which allows transactions to be recorded in a digital ledger in a efficient, transparent, perpetual and accurate way. The Blockchain refers to the chain of Blocks that are recorded one after the other to form the Blockchain. Transactions are recorded in a cryptographic way in order to make transactions secure and private.

This is how the Ethereum Blockchain looks (< click here >). It shows the blocks, the transaction in each block, and other details. By clicking on the links, more details are accessible. As you will notice, it not only shows a history of transactions in the blockchain, but also the history of transaction to, and from, an adress or crypto-wallet. This history is accessible to the public, and is available to guarantee the maximum transparency of the system, with a certain degree of privacy, but not full anonymity.

Transactions recorded on a Blockchain are not anonymous, they are traceable.  Privacy is protected by advanced cryptographic methods.The principle of a Blockchain is that records cannot be modified afterward: they are recorded forever (“immutability”). This is why it is called a peer-to-peer trust system: you do not need a third party to make the system function: the mass of computers running the same consensus engine is the certification. All is taken care of by a “consensus engine” which is a software containing rules that cannot be modified by one person or entity alone but by a decentralized governance that decides if rules have to be changed and how. Eventhough it can compete with many existing services, blockchain also has the potential to save a lot of time and money for governments by organizing a direct relationship between citizens and the state, for example to organize an election where each vote is accessible to the public, or for the verification of IDs and other documents.

Bitcoin is the first application of blockchain technology. It is a monetary experiment to create an international currency available on a decentralized network undependant from any state or central institution.

Ethereum is a blockchain network allowing to run applications or services between companies and/or individuals and which is not limited to bitcoins. The purpose of Ethereum is not speculation but the execution of services (applications). For example, it is possible to create voting systems, food traceability, purchases of land, and so on, without the need to rely on intermediaries such as banks, certifying agencies or notaries, making overall costs lower.  An advantage of a network like Ethereum is that the services that run on it can be linked to regular desktop and smartphone applications, hardware wallets, or AI.

An ICO is the process by which start-ups of the blockchain find funds. An ICO is inspired by crowd-funding. Investors do not purchase stocks or equity, but “tokens” which are the means of payment of the service they are investing into. The interest is that investors get a discount on the price of the token which can be resold almost immediately after the end of the ICO allowing early-investors to make a benefit, if there is demand, or to keep it for their own use once the application is developped. The number of tokens is generally limited in order to preserve their value. There are different kind of tokens with more or less complexity as to their economy or usage. The hope of investors is generally not to resale stocks or shares of companies, but to sell tokens to other users in the close future, or to keep them for their own use. The benefit expected from tokens is not a function of the actual ROI of the company, but it may be. At the same time it is an investment directed to the general public and falls in the scope of consumers’ protection in investment and financial services (stock exchange rules and regulations). Each country or group of countries considers tokens in various ways. For example, the USA is more inclined to classify them as securities, whereas the EU has a tendency to consider them either as simple means of exchange which are neither currencies nor securities, or assets. In Asia, they can be simple assets. The issue concerns tax law in the first place. Qualification changes a lot about the legal obligations and risks applicable to start-ups, ICO and tokens.  Different rules make different countries more or less attractive to this new economy. There is an “inter-nation competition” concerning blockchain start-ups, tax revenues, and job creation. Most ICOs are for R&D and very few services are operational today. The ones that are operational took several years to develop. Additionnally, most of them use private blockchains which are less  prone to traffic saturation.

Tokens are units to purchase services. They are exchangeable against the crypto-currency of the network where they are used. For example, tokens used on the Ethereum network function with most constraints as the ETH (Ether) crypto-currency. Tokens are individualized in order to try to detach their value from the volatility of the main crypto-currency(ies), or to be adapted to a certain business ecosystem or business model. Also, tokens allow to acquire units of small value that are more adapted to the service for which they are used. Depending on the application, a token can be convertible and indexed only on fiat currencies rather than directly on crypto-currencies, in order to provide the maximum stability of the token value.

Mining is the activity consisting of validating transactions on a Blockchain. It is equivalent to computers located around the world and anyone can become a miner with the adequate hardware and software. When a transaction happens on a Blockchain, it needs to be validated quickly before being recorded as a successful transaction on the blockchain. The profits of mining reside in the validation of a lot of transactions in a minimum amount of time.  If a transaction is being validated (“mined”) by two miners at the same time, it is the first one that finish the validation process that gets the payment. That is why there are now “mining farms” concentrating a high computing capacity. The miners must also get a payment for the electricity and hardware that they use otherwise no-one would do it. The network of miners is something without which the principle of a “decentralized” Blockchain network could not work as efficiently as it does. At the same time,  it makes the system dependent on the supply of electricity, and requires more production of energy from coal, dams or nuclear plants. That is why it is criticized for adding to the degradation of the environment and global warming.

Blockchain is a “disruptive” technology because it completely changes the way things are done. It has the potential to shift power from the hands of states or other institutions to individuals. Eventhough it is acceptable for some projects, other projects may face opposition. For example using blockchain technology to fight corruption  may be rejected by those who benefit from corruption. On the other hand, democracies would benefit of a voting system backed up by Nlockchain technology, and which would allow less mistakes in election process (remember some elections in the USA). In any case, it means that it is not a technology that can impose itself against the authority of a state or government, at least not on the short term. Another issue is the number of jobs that are rendered pointless by disruptive technologies in general, and the fact that the current economy is not yet ready to offer the right conditions for such a brutal social transition.

The law applicable to Blockchain does not really exist per se as a specific field of law. The consensus engine is the law intended for the blockchain. Legislators only became recently aware (2017/2018)  of the blockchain phenomenon. There is also a  patchwork of pre-existing rules that serve as guidance tools in self-regulation efforts. Some countries have limited the use of crypto-currencies,while others display a more tolerant approach in order to let this new technology  emerge. In 2018, many countries have understood the need to regulate the blockchain industry and several bills were passed in various countries causing blockchain companies to move to these countries, while other state prefer to “wait and see”.

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