2020-04-09
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A beginner’s guide to Blockchain

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Posted by Patrick McCallum on 08 April 2020

Patrick Mccallum - Commercial Contracts Law Solicitor
Patrick McCallum Solicitor

Blockchain is one of the biggest buzzwords in the business world, but all that talk of cryptography, decentralisation and data hashing is enough to send most of us running for the hills and still none the wiser as to what blockchain is or what it can be used for.

*Blockchain explained through the Colours of the Rainbow

We all know that when a rainbow forms, the colours are arranged in the following order.

But what if you had never seen a rainbow before and it was important for you to be able to guarantee what order the colours of the rainbow are meant to be arranged in? You could ask someone you know, but that person may not be able to remember, not know all the colours, know all the colours but not the correct order or think they know the colours and the correct order but are relying on incorrect information.

Instead, you could use a rainbow blockchain like the one set out in the image to the left. Here, the same seven colours of the rainbow are set out in the correct order, but with each colour being accompanied by an additional coloured box – this box shows what the previous colour should be in the sequence. This is effectively what a blockchain is. So, in the rainbow blockchain to the left, we can see that blue is accompanied by a smaller green box, which indicates that blue should follow green. Likewise, violet is accompanied by an indigo box, which indicates that violet should follow indigo.

By referring to the rainbow blockchain, you can confirm that all the colours are accounted for and are in the correct order.

The rainbow blockchain also enables you to spot when someone incorrectly states that there are only six colours of the rainbow.

In the image to the right, someone has missed the colour green. This is immediately evident because the rainbow blockchain shows that blue is meant to follow green, not yellow. The rainbow blockchain is able to demonstrate not only that a colour is missing but what that colour is.

Secondly, the rainbow blockchain enables you to spot when someone incorrectly states that another colour is one of the seven colours of the rainbow.

In the image to the left, someone has said that grey is one of the seven colours of the rainbow. The rainbow blockchain shows that this is not the case because blue is meant to follow green, not grey. Further, because grey is not one of the colours of the rainbow, it is not accompanied by an additional coloured box which indicates what colour precedes it in the rainbow.

Thirdly, the rainbow blockchain enables you to spot when someone gets the seven colours of the rainbow in the wrong order.

In the image to the right, someone has put blue and yellow in the wrong order. The rainbow blockchain makes this clear because blue is meant to follow green, not orange, whilst yellow is meant to follow orange, not green.

* With thanks to John Anthony Rodesta (Block Chain for Dummies) for providing me with the original idea for the rainbow analogy

Guaranteeing the blockchain is correct

We have shown that our rainbow blockchain provides you with a fool-proof way to establish the colours of the rainbow in the correct order. But how do you know that the order set out in our rainbow blockchain is the correct order?

Put simply, if you were to ask lots of different people, read lots of books and visit lots of websites, the overriding consensus of opinion would be that the rainbow blockchain we have set out is correct. This is how blockchain works and is one of the advantages it has over a standard database. Whilst a database will often be reliant on a single source or a few sources of raw data, blockchain is compiled from innumerable data sources.

There will also be a code (called a “cryptographic algorithm”) underlying the blockchain which is unique to the data it is connected to. The code will allow anyone who knows it to confirm that the blockchain works. Often, the code should function as a “trap door” (e.g. it is hard to work out the code in the first place but, once you know the code, it is easy to apply)

In our rainbow blockchain, the cryptographic algorithm could be “ROYGBIV”, the anacronym of the phrase “Richard Of York Gave Battle In Vain”, which traditionally helps people remember the order of the colours of the rainbow. On the face of it, ROYGBIV is a random assortment of letters and has no meaning outside of the colours of the rainbow, making it unique to the data it relates to. However, once you know that ROYGBIV can be used to know the order of the colours of the rainbow, it is simple and easy to apply.

What are the benefits of blockchain and how can it be applied in the real world?

By compiling information from numerous data sources and being underpinned by a secure code unique to its data set, blockchain provides us with an information source which is authentic, undeniable and unchangeable as referenced in our article on Smart Contracts in 2019.

Blockchain can therefore assist us in a number of areas, including:

  • Establishing the Ownership of Assets

A blockchain could track the historic changes in ownership of an asset.

For example, if a manufacturer is seeking to buy a new piece of machinery from a potential supplier, it could use a blockchain to identify whether there was an unbroken chain of transfers of ownership in the machinery through to the current supplier. If the blockchain identified any missing links where title had not transferred to the next buyer in the chain, this could indicate that the manufacturer needed to carry out further due diligence or, in some cases, that fraudulent activity or theft had occurred.

  • Tracking the Movement of Goods

A blockchain could be used by parties within a supply chain to monitor and track the transfer of the goods from the manufacturer to the end customer.

If there are any delays, the end customer would be able to identify this at an early stage and have a better chance of mitigating its losses by procuring replacement goods from another source.

Further, if the end customer brought a claim against its supplier for delayed delivery due to a breach higher up the supplier chain, the supplier would be able to identify where in the chain the delay took place and seek to recover its losses from the party.

  • Making Payments

By tracking a company’s or an individual’s payment history, a blockchain would be able to ascertain at any given moment whether that company or individual had sufficient funds to make a purchase at any one time.

This would remove the delays caused by having to use a third party (e.g. a bank) to confirm whether a party had sufficient funds to complete a transaction whilst still ensuring that the seller does not end up out of pocket, as well creating new ways that people can pay for things.

  • Checking/Accessing Information and Data

In industries which rely heavily on customer or user data in order to deliver a high level of service, service providers could use blockchain to call up historic data relating to a customer in order to improve the quality of their services.

For example, in the health care industry, if someone is admitted to hospital with a mysterious condition, doctors and nurses might be able to use blockchain to review that patient’s medical history, in order to identify any allergies, previous illnesses, current medication which could help diagnose a patient quicker and ultimately save their life.

Conclusion

The legal issues created by blockchain are a topic for another day, but as this new technology is refined and continually improved over the coming months and years, the frequency with which it is used and the scale of the undoubted benefits it can potentially provide to a variety of sectors seems inevitable to increase.

Whilst blockchain remains a mysterious and confusing technology to many of us, we should not allow its complexity to override our desire to embrace and understand it.

Tags: Commercial

About the author

Patrick is a solicitor in the commercial team who helps clients with their commercial contracts in both a business-to-business and business-to-consumer context.

Patrick McCallum

Patrick is a solicitor in the commercial team who helps clients with their commercial contracts in both a business-to-business and business-to-consumer context.

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