Blockchain Technology & Smart Contracts in Construction Part 1: What is blockchain?

In the vast literature that has built up around blockchain technology, it often appears easier to explain what blockchain does, or is capable of doing, rather than what it is. The pop technology book Blockchain Revolution falls into that category with only one brief attempt to describe the mechanics of the tech. The remainder of the book I’d dedicated to its history, social and economic contexts and potential future.

Then, there is the hype which helps to obscure the substance. Where is blockchain on the new technology hype cycle? Are we at the “peak of inflated expectations” or in the “trough of disillusionment? In recent years there have been some notably extravagant claims made about the technology, in both the popular press and “technical writings”. Blockchains could “create a perfect transactional environment and do away with the need for banks, lawyers and courts.” Blockchains have the potential to “constitute a profound paradigm shift regarding data collection, sharing and processing” which may create associated revisions of socio-economic and political arrangements. Other commentators have asserted that blockchains are “widely regarded as one of the most important technologies of the future because of the benefits they promise to deliver in cost-savings, security, and data reliability.”

The actual substance of the technology

What is it about the nature of blockchain that lends itself to a new paradigm for transacting, the “smart contract”?

Blockchains are a form of distributed ledger technology (DLT); distributed in the sense that the data on the ledger is not stored centrally, by a bank for example, but instead the whole of the data on the blockchain is stored on every “node” in the network. Each blockchain ledger is a record of transactions – a database, but with significant additional functionality – and so called because groups of transactions are gathered together into blocks as they occur, and as each block is turned out it is added to the chain of all transactions.

Each block can be thought of as a page in a ledger. The data blocks constitute a growing list of records and the blocks are linked using cryptography. The technology was originally adapted from an older application to store payment data relating to Bitcoin transactions (the Bitcoin blockchain is now just one of many); and first described as the supporting platform for Bitcoin by its pseudonymous creator(s), Satoshi Nakamoto, in their October 2008 paper Bitcoin: A Peer-to-Peer Electronic Cash System.

In the context of digital currencies, blockchain was created to solve the “double-spending” problem. Without a bank as intermediary, who is to say whether a digital “coin” (in the form of a piece of data) may be a copy of an original which has already been spent elsewhere? Blockchains are secured against fraudulent transactions in three main ways.

1. Decentralisation

Each blockchain is a distributed ledger, accessible to all participants, storing data across its peer-to-peer network of “nodes” – the individual computers, servers or mobile phones used by the participants. Each node stores a localised but complete copy of the blockchain. Every participant in the blockchain can see every transaction. There is no need for a third party intermediary to verify and validate transactions with its approval – whether someone is attempting to spend a digital coin twice at the same time, for example, or whether a contractor is seeking payment for a steel element that has already been delivered to someone else’s site.

Every participant’s copy is the “official” copy; and because changes to the data in the blockchain can only be made by consensus, a party would need to control more than 50% of the nodes in the network in order to re-write the past to facilitate a fraudulent transaction. On a distributed network of any scale, such an event would be a virtual impossibility.

2. Cryptography

The immutable nature of data on blockchains makes the technology more than just a database. Once data has been recorded inside the blockchain, it becomes extremely difficult to retrospectively alter. Data is grouped into blocks that, once they reach a certain size, are chained to the existing ledger through a hashing process; cryptographically linked through unique codes which individually identify and timestamp each block. Every block contains its own cryptographic hash, as well as the cryptographic hash of the previous block in the chain.

In this way, any attempt to alter the content of a block of data – for example to say that a previously acknowledged transaction did not take place – would also alter its hash and invalidate all subsequent blocks in the chain.

3. Consensus

Transactions on a blockchain are authenticated by mass collaboration powered by collective self-interest. The way in which replicated data is accepted into the network and stored in blocks is synchronised through a consensus protocol. The protocol allows the nodes within the network to reach agreement as to the current valid content of the ledger. The most commonly used consensus protocol currently is “proof-of-work”.

Proof-of-work requires the party wishing to add to or alter the data on the blockchain to “work” – essentially spend money to invest in processing time to enable its own computer to solve a computational puzzle. To be effective, the proof-of-work must be asymmetrical; hard enough to require a significant investment in computing power to solve it (and establish the right to enter data on the blockchain by convincing more than 50% of the nodes to accept it), but simple for the other nodes to check and validate. The investment in electricity required to satisfy an asymmetric proof-of-work protocol is intended to make it pointlessly expensive for a malicious third party to take over control of a blockchain network.

Because of this architecture, which promotes incorruptibility of data, blockchain has moved from being an adjunct component of the Bitcoin model to become in itself the key focus of technological development initiatives in numerous sectors, including potentially the construction industry.

Blockchain, good and bad

On the flipside of the hype, there are 3 persistent criticisms of blockchain technology:

1. Utility

Does the technology have real world utility? Depending on your point of view, blockchain might just be a solution looking for a problem, or the key to the future. Where does the truth lie?

Of the many thousands of academic and practitioner-oriented blockchain articles published since the inception of cryptocurrencies in 2008, surprisingly few focus on discussing what the technology is not capable of doing, and as a result which industries do not require such technology. For some sectors the application of the technology even if it would have utility may be many years away.

2. Energy

Aside from this perception, others have criticised blockchain technology as slow and energy hungry, a problem which if unresolved would create serious doubts around its scalability. It has been noted that the security necessity of proof-of-work, and the need for each node in any blockchain network to carry a complete copy of the blockchain, gives rise to potentially serious environmental concerns. It was estimated that in June 2017 Bitcoin alone was using more energy than 150 individual countries in the world. It seems conceivable that, even if no better security solution than asymmetric proof-of-work can be developed to fit the needs of blockchain, advances in computer technology may hold the answer to this issue. For example, it is possible that transition metal dichalcogenide monolayers (TMDCs) – atomically thin semiconductors – contain properties which could be exploited through forms of quantum manipulation known as valleytronics to vastly enhance computer power and efficiency. It has been claimed by researchers in this area at Georgia State University that TMDCs “possess optical properties that could be used to make computers run a million times faster and store information a million times more energy-efficiently” than at present.

3. Anarchy

There would seem to be a clear dichotomy between the need for public blockchain networks to be permissionless – in order to remove the control of a gatekeeper whose vested interests may not reflect those of the participants in the network – and the need for regulatory authorities to maintain control over commercial transactions, and human interactions more broadly. The nature of blockchain is distributed and anonymous – almost anarchic. Is it possible to regulate blockchain? Law and lawmakers have found solutions before – law has perpetually been challenged by the emergence of new technologies, yet legal systems have never been undermined. But do the potential users of blockchain want it to be regulated if, by introducing a gatekeeper, the essential nature that made the technology so potentially exciting is lost?

Written by John Wevill, Partner and Head of Construction at Seddons LLP

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