• Jaap Bosman

Blockchain is a promising technical challenge, not so much a legal issue.


Not a day seems to go by without blockchain being mentioned in one way or another. Most of the hype is about cryptocurrencies such as Bitcoin. Even to the point that many people have started to think that blockchain and Bitcoin are one and the same. The creation of new Bitcoins, called Bitcoin mining, is done by solving increasing complicated mathematical puzzles, a process that huge computing power and consumes insane amounts of electricity to complete. The consequence is that people have started to believe that blockchain consumes a lot of energy. It does not.


The blockchain technology is generating a huge amount of interest amongst the technology community in Silicon Valley and elsewhere. It is widely predicted to transform huge swathes of industry over the next five to ten years and beyond. A vast number of potential applications have been identified, some of which are already applied in real world applications. Blockchain can best be described as a digital platform or database for securely storing information and recording transactions. And while blockchain technology does have genuinely interesting and potentially powerful use cases, it has enormous drawbacks for consumer applications that get little mention in media coverage:


1. Scalability

The on chain transaction processing capacity of the bitcoin network is limited by the average block creation time of 10 minutes and the block size limit. These jointly constrain the network's throughput. The transaction processing capacity maximum is estimated between 3.3 and 7 transactions per second. However, in reality the Bitcoin network is achieving maximums of 3 to 4 transactions per second. Let's compare this to Visa which uses a security protocol Verified by Visa, that guides its client banks and merchants in confirming that it is the cardholder performing a transaction. Visa processes an average of 150 million transactions each day, or around 1,667 transaction per second on average. Based on rigorous testing, Visa estimates that it is capable of processing more than 56,000 transaction messages per second. Blockchain still has a long way to go.


2. No password recovery

Blockchain wallets and their passwords are tied to a file on a user’s hard disk and are absolutely critical to users trying to access the blockchain. By their very nature they have no recovery mechanism. “You lose your password, you lose everything” is an awful user experience for mainstream consumers and a nightmare for companies attempting to build their service on a blockchain. If you use a hosted service, the risk of theft or sudden loss of assets is very real, with central targets and limited traceability. For most consumers, losing a password to an online service is a mild inconvenience they’ve grown accustomed to, since typically, it’s quickly fixed by requesting an email reset, say, or talking with customer service. Not so with blockchain.


3. Smart contracts are computer code, not legal documents

One of the terms that almost inevitably comes up in the context of legal issues and blockchain is ‘smart contracts’. Smart contracts are for example underlying Initial Coin Offerings (ICO) and are a set of coded operations that get executed automatically when someone sends an input to the contract. But smart contracts and are just like any other piece of code, and may sometimes contain vulnerabilities and bugs that can be exploited. A scan by researchers from National University of Singapore (NUS) of nearly one million Ethereum smart contracts has identified 34,200 vulnerable contracts that can be exploited to steal Ether, and even freeze or delete assets in contracts the attackers don't own.


The potential use-cases for blockchain are vast and broad ranging, reaching across multiple sectors and industries. While there are many perceived benefits (not least reduced transaction processing times and cost for financial institutions), there are some significant barriers to adoption, including the legal challenges outlined above. Nevertheless, as the use and implementation of blockchain becomes more widespread, businesses will need to be able to respond to increased customer demand for more efficient and secure service delivery methods and blockchain may offer an attractive solutions to these issues.


For the short term however blockchain is predominantly a technical issue and not so much a legal issue and it remains surprising to see how many law firms today are trying to ride this wave.

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