Over the past year, the term blockchain is one which is garnering much attention. The concept of a cryptographically secured chain of blocks, however, is not of something new. Dating back to 1991, Stuart Haber and Scott Stornetta questioned the prospect of time-stamping on digital documents. So, why does this matter and what is the impact on the world of contract management?
Blockchain Defined
As a first step, let’s understand what a blockchain is and how it works. According to The Wall Street Journal, 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." Once a block of data is recorded on the Blockchain ledger, it becomes immensely difficult to edit or delete – and in each block, there is a secure UNIX timestamp (as Haber & Stornetta figured out years ago!)
So, how does blockchain work? These blocks contain digitally recorded data that are stored in a linear chain. To maintain the anonymity of the transaction data, each block is cryptographically hashed. According to Alan Morrison’s article on blockchain, “a hash is a unique identifier and shortcut that was created when actual transaction data is passed through a cryptographic tool in order to keep transaction data secret." Each block of hashed data draws upon the prior block in the chain, thereby creating a strong link of blocks.
Blockchain for Contract Management
Despite the hype and its potential to transform an organization’s operating model, Blockchain technology is relatively new, and requires much more research and validation. For example, during a panel discussion at a Health Conference in Nashville, Andrew Beal, a Blockchain and Distributed Infrastructure Lead at Ernst & Young (EY), noted that “The tech is immature. Everything is in proof of concept (PoC) stage with dummy data and a couple partners." Wayne Vaughan, the founder and CEO of Tierion, a global platform for data verification, chimed in and agreed that the market is still too immature for production-ready services. James Moreau, from The Economist, also explains why blockchain technology will not progress as fast as others have predicted. The author believes that the technology will only be successful if a large number of organizations start adopting and collaborate blockchain technology– which is not exactly the case right now.
In the world of contract management, blockchain-based technology has been used to produce smart contracts (i.e., contracts that can be completed without human interaction). However, the International Monetary Fund (IMF) suggested that the lack of use cases [in smart contracts] results in an ambiguous legal status. In addition, one of the few real-world implementations of blockchain technology in contract management (Decentralized Autonomous Organization, DAO) gained a notorious reputation of launching smart contract software with an astounding US$150 million in mid-2016 but was hacked in less than a month. This hack resulted in a loss of approximately US$50 million in cryptocurrency. In an article published by the Business Insider in June 2016, not only did the value of the specific cryptocurrency (Ethereum) significantly depreciate against the US dollar within a few hours of the hack, but the transaction volume of Ethereum spiked tremendously, stipulating “panic selling."
Blockchain & Contract Management Top 5 Predictions
Regardless of its challenges, blockchain technology is a much-needed element to an era of disruption. Our top 5 predictions of how Blockchain will impact the world of contract management:
1. Blockchain may be the epitome of global searchable database and/or repository as it is a global distributed ledger (i.e., database) that can be viewed by the general public and records every single transaction, i.e... titles, deeds, money, art and votes on the network, storing them securely and privately. Note that this does not mean that everyone can see the actual content of the transaction as the information is protected by a private key.
2. Blockchain presents the ability to contract more easily in an open market as it is a new platform for originators of intellectual property to get the value they create without the need of a third party. For instance, Grammy-winning artist Imogen Heap developed “intelligent songs" with built-in smart contracts that allow artists to sell their work directly to consumers without going through a third party.
3. Tighter security as each record within the database (or blockchain) has a specific timestamp and link to the previous block. On top of that, blockchain’s decentralized approach presents some advantages to resist modifications to the data once recorded – although, this does not entirely remove the possibility of data being altered.
4. The genesis of a new regulatory framework as blockchain is such a new technology – laws surrounding consumers, investor protection, security, money laundering, and so on has yet to be defined.
5. Microsoft Azure continues to play a crucial role in the Blockchain space. Microsoft first joined the blockchain league in late 2014 when it announced its partnership with BitPay, a bitcoin payment provider. In November 2016, Microsoft announced its plans to “enter the next phase of its blockchain work with the formal launch of its Ethereum Consortium Blockchain Network."
_________________________
¹ Haber, S. & Stornetta, W.S. J. Cryptology (1991) 3:99. Doi: 10.1007/BF00196791. Retrieved from: https://www.anf.es/pdf/Haber_Stornetta.pdf
² The Wall Street Journal (2016). CIO Explainer: What is Blockchain? Retrieved from: blogs.wsg.com/cio/2016/02/02/cio-explainer-what-is-blockchain/
³ International Monetary Fund (2016). Virtual Currencies and Beyond: Initial Considerations IMF Discussion Note. International Monetary Fund. P. 23. ISBN 9781513552972. Retrieved 5 January 2016.