Blockchain: Decentralized Ledgers Enabling Peer to Peer Payments without a Trusted Intermediary

By Alon Harnoy, Esq., Adam Valko, Associate, and John Michael Dieng, Intern

With the introduction and increasing popularity of digital cryptocurrencies (whether Bitcoin or other cryptocurrencies), we are seeing a rapid increase in the utilization of a non-centralized record keeping protocol, known as blockchain.

Blockchain technology offers a way for parties who do not know or trust each other to reach consensus on a common digital history. A common digital history is important because digital assets and transactions can easily be faked and/or duplicated. Blockchain technology provides a solution without using a trusted intermediary by operating an electronic decentralized, sometimes referred to as a distributed, public ledger to record transactions and assets in a business network. Anything of value, whether or not it is tangible, can be tracked and traded on a blockchain network. Blockchain is a literal block and chain format, as digital blocks of information are secured and held together by chains of code and data. Blockchain serves as the foundation for various cryptocurrencies, such as Bitcoin and Ethereum, and provides a de-centralized ledger of information across a collection of computer networks.

Blockchain technology is not owned by anyone in the traditional sense, as it functions as an underlying network which is processed and managed by a network of personal computers. The blockchain format, as we now understand it, was invented in 2008 by an anonymous individual calling themselves “Satoshi Nakamoto” to serve as Bitcoin’s public ledger.  Blockchain does not have to be run be an army of people, not even an arsenal of servers. Rather, it is made up of various networks which collectively chain, store, and equally distribute information so that no one network is overloaded. Blockchain information can be accessed by anyone with the appropriate credentials.

Blockchain operates on the basis of cryptography, the study of techniques for secure communication, which seeks to prevent records from being compromised or manipulated by any unauthorized users. Thus far, the most evident and effective use of blockchain has been for overseeing and managing the transactions of Bitcoin currency. The blockchain is able to monitor transactions to verify that money is not being spent more than once, and that each currency only has one owner at a time.

As blockchain continues to envelop a larger segment of our corporate and financial sectors, it will be imperative that the networks operating the blockchain maintain the security of those using it, and do not become susceptible to hacking. This security, for the time being, continues to serve as one of blockchain’s largest selling points.  Blockchain helps prevent (but does not eliminate) hacking, because information contained on the blockchain is not stored in one main place, but instead spread across thousands of computers. For example, when you make a bank transaction, one central location holds and maintains your account information, and, upon each attempted transaction, such location confirms that you have sufficient funds in your account. On the blockchain, this ledger is distributed widely to every user, who can all confirm and update the ledger upon each attempted or completed transaction. “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value,” said Don & Alex Tapscott, authors of Blockchain Revolution.

In addition to serving as an electronic ledger, blockchain can also be used to issue shares, execute an equity swap, and by enabling peer-to-peer payment systems, run a de-centralized marketplace. For example, currently, users who want to hail a ride-sharing service still have to rely on an intermediary like Uber to book and pay for a ride. By enabling peer-to-peer payments, the blockchain opens the door to direct interaction between parties and perhaps in the not too distant future, blockchain could enable passengers and drivers to connect for paid rides without having to go through intermediaries.

In a forthcoming article, we will analyze how blockchain is changing asset management, financial transactions, and the global marketplace.

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