Blockchain’s Definitional Problems: Analyzing the Role of Imprecise Terminology as Source of Confusion About Blockchain

An earlier version of this article appeared in the 2017 Summer Newsletter of the American Bar Association's - YLD - Corporate Counsel Committee Newsletter.

     Blockchain is hard to ignore these days. On a regular basis, numerous sources proclaim that blockchain is the type of ground-breaking technology that will disrupt how our society operates on a fundamental level.[1] The initial surge in interest relating to blockchain technologies focused mainly on cryptocurrencies (with bitcoin being the most well-known example) for which blockchain was simply the underpinning technology.[2] While the most popular forms of cryptocurrency, including bitcoin, still receive their fair share of public attention, a fair portion of the attention being directed towards blockchain-related technologies has shifted away from cryptocurrencies, towards other potential applications of blockchains.[3]

      Applications built on the technological foundation of blockchain have already been implemented across a wide-ranging spectrum of industries with further innovation occurring rapidly.[4]  The field of financial services has been one of the most active industries in development and testing of blockchain technologies, including smart contracts, in various applications. Most major banks, broker-dealers, insurance companies, and other related industry groups are all actively working on blockchain projects.[5] Supply chain management is a field where blockchain technology has already gone beyond research and testing and is being fully implemented in the field.[6] Between the rise of smart contracts based on blockchain technology and all of the other potential applications of blockchain in industries in which attorneys have clients, the legal industry has also certainly taken an interest in blockchain technology.[7] Other industries where businesses are either already actively conducting blockchain development projects or where there is a high likelihood of this soon occurring include accounting, real estate, healthcare, and compliance. Blockchain is also being deployed in a number of applications targeting artists, entrepreneurs, and others with intellectual property concerns, but I will cover those applications in a separate blog post dedicated to that topic. For purposes of this post, the key takeaway is that blockchain is likely going to have an impact of some kind (possibly, a highly significant impact) on a wide-range of industries and may cause both direct and indirect effects on the way many businesses and individuals operate on a day-to-day basis.

     Despite blockchain’s tremendous potential impact, wide-spread media coverage, and the speed at which it has begun to be adopted by major industries, an overwhelming majority of the population does not appear to understand this set of related technologies, even at a conceptual level.[8] Although the topic receives a lot of media attention, it is easy to appreciate why many people may have problems understanding the technological aspects of blockchain-related applications. The technology is new, unfamiliar, constantly evolving, and it relies on difficult concepts, such as cryptology.

 

This article will attempt to clear up (or at least point out) some of the aspects that factor into the confusion surrounding blockchain-related technology. This article contains descriptions and explanations of the technological aspects of blockchain-related technology, at least from a conceptual standpoint; however, the lens through which this article attempts to examine and explain these technologies will focus largely on the very language that has and is being used to define the concepts related to blockchain, and how a lack of clearly defined terminology—regardless of one’s familiarity with the underlying technical aspects of blockchain—is a potentially significant contributor to the difficulty so many have in understanding blockchain.

 

What is Blockchain?

      Unfortunately, there is no answer to this question that is both simple and adequately informative. The term “blockchain” itself is often used inconsistently, so—before examining any underlying technological complexities—it is necessary to address the very language used to describe blockchain and related technologies in order to begin to gain an understanding.

     The approach this article takes is to first focus on the technological characteristics of the original blockchain—the blockchain that was the underpinning technology for bitcoin—in order to flesh out and explain the fundamental principles upon which blockchain technology originated and from which it has since progressed. Then, the article’s focus will shift to analyzing how advances in technology, as well as other forces such as marketing strategies by blockchain companies, have resulted in the creation of terminology about the subject that is inconsistent and inaccurate. The lack of consistency in the words used to describe these technologies has prevented the subject matter from achieving an agreed-upon nomenclature that would otherwise allow the topic to more easily be discussed across varying academic and professional disciplines with precision. The goal of pointing out ambiguous or inconsistent language while explaining this technology is to allow the reader to get a better grasp on how blockchain technology operates and how it relates to related but differing technological aspects of blockchain-based systems without getting thrown off by terms or phrasing that may otherwise cause confusion.

 

Bitcoin as an Example of Blockchain Technology.

      The first blockchain was created in 2009 as a means of allowing transactions to be conducted using bitcoin.[9] Today, when the term “bitcoin” is used, it most often is meant to reference the well-known virtual currency (this article will refer to the currency aspect of bitcoin using the abbreviation BTC); however, this term is also regularly used to describe not only BTC but also other aspects of bitcoin’s digital payment system.[10] BTC is just one aspect of the overall bitcoin digital payment system. The bitcoin digital payment system has three distinct aspects: (1) the bitcoin blockchain, which stores records of the transactions that are conducted through the bitcoin decentralized protocol, and is where the BTC is stored; (2) the bitcoin decentralized protocol, which provides the rules for how the system operates and reaches a consensus on updating the transactions recorded on the bitcoin blockchain; and, (3) BTC, the currency generated according to the rules of the protocol and that is stored on the blockchain.[11]

     The bitcoin blockchain has certain fundamental characteristics, not all of which are also found in other types of blockchains. Because it was the original blockchain, the bitcoin blockchain is sometimes referred to as the blockchain, whereas other blockchains are referred to as a blockchain. The bitcoin blockchain is a decentralized, peer-to-peer network that maintains a public, distributed ledger of transactions.[12]

     This definition becomes easier to mentally digest if it is broken down into component parts. One way to break down the definition that may be helpful is to divide it into two parts: (1) a decentralized, peer-to-peer network (that maintains), (2) a public, distributed ledger of transactions. The first half of the definition refers to the network architecture (i.e. how the connected devices are linked to and communicate with one another), and the second half refers to the way the ledger is shared (i.e. where the ledger is saved and who can access it).

      The key element of the definition to keep in mind when working through all of the other components is the idea that the blockchain is like a digital ledger that records every transaction that ever occurs within the network.[13] The bitcoin ledger is distributed, which means that a full copy of the bitcoin ledger is stored on every device connected to the network (the connected devices are referred to as “nodes”) and that every node can update the ledger, can copy the ledger from all other nodes, and can make an updated version of the ledger available for copying by all other nodes.[14] The public nature of the bitcoin ledger means that anyone has permission to download the bitcoin software and have their connected device become a node in the bitcoin network and can, then, subsequently make a copy of the ledger.[15]

     Moving back to the beginning of the definition, decentralized means that no individual or centralized authority controls the network, and that there is no single server to which the all the nodes in the network are connected.[16]

     Peer-to-peer refers to a network architecture structure in which every node on a network communicates through an established protocol (the basic rules or established language of communication; in the case of bitcoin, this would be the decentralized bitcoin protocol) on equal footing.[17] The opposite of a peer-to-peer relationship is a client-server relationship.[18] An example of a client-server relationship encountered by humans rather than nodes on a digital network would be a person’s relationship with his or her bank.[19] The bank, acting as the server, controls the access to money in said person’s account and the person, acting in the role of the client, is only able to access the account on interfaces provided by the server (for example ATM’s or online banking accounts).[20]

     The bitcoin blockchain almost acts like an equivalent of the internet for the decentralized bitcoin protocol, which is the prescribed set of rules that each node agrees to abide by and that is installed on a node when the bitcoin software is downloaded onto said node. The decentralized bitcoin protocol then operates much like how the Transmission Control Protocol/Internet Protocol operates on the internet.[21]

     Transactions made on the bitcoin network will periodically be grouped together in blocks.[22] Each block is then compared to the last block posted on the chain by bitcoin miners that must solve complex cryptographic mathematical problems in order to ensure that the proposed block matches up with the previous block (this process is repeated to form a literal chain of blocks, each of which is connected, going back to the beginning of the bitcoin blockchain). While there are many more details that can be covered regarding bitcoin’s functionality and the bitcoin blockchain, in the interest of limiting this article’s length, additional details will be spared at this time.

     The bitcoin blockchain was used as an example because it is the longest existing and most commonly known blockchain. Because the bitcoin blockchain has always been the most popular and—for a while—was the only existing blockchain, it is reasonable to think that people began associating the traits of the bitcoin blockchain to blockchains in general (this is perhaps one of the reasons it is sometimes referred to as the blockchain). Until a second blockchain of any significance did exist, the definition of the bitcoin blockchain, being the first and only of its kind, was, in fact, the definition of a blockchain. Further, any of the earliest deviations from the bitcoin digital payment system likely were minor, such as creating a differently named currency that still operated on essentially the same bitcoin blockchain and protocol system. This, once again, likely reinforced the idea that the characteristics of the bitcoin blockchain were applicable to all blockchains.

      However, as we move forward on the timeline of blockchain’s existence, blockchain systems began to deviate more and more from the original bitcoin blockchain. Blockchain technology certainly attracted increased attention and related investment in early 2013, which is when bitcoin’s market capitalization began growing rapidly.[23] With the increased attention and investment in this type of technology, numerous alternatives to bitcoin began to emerge, some of which only shared a few similarities with the bitcoin blockchain.[24] For reference, as of July 25, 2017, there were 828 active cryptocurrencies.[25] Some examples of ways that blockchains can differ from bitcoin include: removing the pseudo-anonymous features, operating a system without the need for tokens (without the need for an equivalent of BTCs), using a different consensus protocol, allowing for applications to be built into individual tokens, making the network private rather than public (this is also referred to as making the network “permissioned”), etc. However, at some point, if something being represented as a “blockchain” has certain characteristics that vastly differ from the original idea of a blockchain, then a point can be reached where you are simply dealing with a database, and the aspects of blockchain that originally made the technology such a breakthrough no longer exist.

 

While many companies may be utilizing technology that more closely resembles a standard database than a true blockchain, admitting as much would not likely be good for business. This is because, since 2013, the buzz surrounding the word “blockchain” has continued to build and has become a valuable marketing device for a company operating in this area. Meaning, it is a good marketing strategy to position any technology remotely resembling blockchain as being blockchain.[26] This strategic marketing trend greatly broadened the public’s ideas as to what the word blockchain meant. The result was summed up perfectly in a 2016 Deloitte white paper, which stated “blockchain’s definition is stretching to the point where it no longer refers to a particular technology.[27]

 

Blockchain Redefined

     Slowly, the terminology surrounding blockchain has shifted in reaction to the ever-widening scope of available cryptocurrencies, protocols, and blockchain features that have emerged since the creation of the bitcoin blockchain. Since the creation of so many new types of competing technologies, updated definitions of blockchain are now frequently found in scholarly articles; although, definitions of blockchain that still simply list the characteristics of the bitcoin blockchain persist.[28] The updated definitions of blockchain accurately reflect how nebulous the term has now become by not providing many specific details. This may seem like a bad thing, but the lack of a highly descriptive definition for blockchain is likely the only way to accurately define the term at this point. Blockchains are now usually only stated as having two common features: (1) they are distributed, and (2) they apply some mechanism for reaching consensus.[29] However, even something utilizing these two features does not seem groundbreaking without the blockchain also being decentralized amongst a large group of participants (at least in relation to the constituents in question that will be using or be affected by the outcomes of that blockchain). So, in my opinion, a true blockchain would also require this third feature.

     In addition to the definition of the word blockchain becoming more nebulous, another reaction to the diversification of technology in this field was the emergence of new terms for platforms that more-recently emerged and differentiated themselves from the bitcoin blockchain’s features. One example of such a term is “blockchain 2.0” (which provides further evidence of the marketing benefits of being associated with blockchain).[30] Another example of a newer term that describes a more specific type of technology is “smart contracts.” However, this term can be confusing in its own right because some smart contracts are intended to operate as legal contracts while other times the term is used simply to refer to a code sequence that will occur automatically upon some triggering event, regardless of whether or not there where multiple parties that entered into a valid contract agreeing for this to occur.[31]

      Another phrase that began getting used, which is sometimes seemingly used as synonym for blockchain but generally is used to refer to a broader scope of technologies under which blockchain is included is “Distributed Ledger Technology.[32]

 

Wrap Up

     Blockchain technology is being implemented across a wide range of industries and will likely have an impact on a large percentage of people living in highly-industrialized countries. However, at this point in time, blockchain technology is still not easily understood or explainable. A failure to grasp how this technology generally operates not only leaves people unprepared for future impacts that blockchain technology may have but also prevents people from currently being able to utilize this emerging technology to their advantage. One way that this technology would likely become more easily understood would be if there were a significant improvement in the uniformity and consistency of the terminology used when discussing and writing about blockchains and related technology. This is no easy task given the rapid pace at which related new technologies continue to emerge and additional parties continue to enter this market. Regardless, until and unless proper designations are more consistently defined and applied, the terminology used to describe blockchain-related technology will continue to be a source of confusion rather than a helpful guide.

 

 


[1] See Marco Iansiti & Karim R. Lakhani, The Truth About Bitcoin, Harv. Bus. Rev. (Online) (From the Jan. – Feb. 2017 issue), https://hbr.org/2017/01/the-truth-about-blockchain; Don Tapscott, How Blockchains Coulc Change the World, McKinsey & Company (May 2016), http://www.mckinsey.com/industries/high-tech/our-insights/how-blockchains-could-change-the-world; Joichi Ito, Neha Narula, & Robleh Ali, The Blockchain Will Do to the Financial System What the Internet Did to Media, Harv. Bus. Rev. (Online) (last updated Mar. 8, 2017), https://hbr.org/2017/03/the-blockchain-will-do-to-banks-and-law-firms-what-the-internet-did-to-media; Johnathon Chester, How Blockchain Will Be The Next Big Disruptive Force in Media, Forbes (Online) (Nov. 4, 2016 at 10:04 a.m), https://www.forbes.com/sites/jonathanchester/2016/11/04/how-blockchain-will-be-the-next-big-disruptive-force-in-media/#4e3305582f94.

[2] See Ronald L. Chister, Wide Open Spaces: How Blockchain has Moved Beyond Currency, TX B. J., April 2017, at 228.

[3] Id.

[4] See Use Cases & Verticals, Coin desk, https://www.coindesk.com/category/business-news/use-cases-verticals/ (last updated Jul. 24, 2017).

[5] Todd Kornfeld, Joseph Guagliardo, & Gregory J. Nowak, Expert Q&A on Blockchain Technology in Banking and Financial Services, Westlaw Practical Law Article w-002-7866 (published Aug. 09, 2016).

[6] Shawn S. Amuial, Josias N. Dewey, & Jeffrey R. Seul, The Blockchain: A Guide for Legal & Business Professionals § 1.2, at 1

[7] Ari Juels & William Marino, Understanding Smart Contract Mechanics, (published Mar. 1, 2017)

[8] William Mougayar, Why the Blockchain Still Lacks Mass Understanding, Huffington Post (Online) (Jan. 7, 2017), http://www.huffingtonpost.com/entry/why-the-blockchain-still-lacks-mass-understanding_us_587132afe4b08052400ee2f8.

[9] Economist Staff, Blockchains: The great chain of being sure about things, Economist (31 October 2015).

[10] Amuial ET AL., supra note 5.

[11] Jim Gatto, Understanding Bitcoin and Virtual Currency, (Updated on 04/18/2017); accessed on Lexis Advance; at pg 1.

[12] Id.

[13] Amuial ET AL., supra note 5.

[14] Kornfeld, ET AL., supra note 4.

[15] Gatto, supra note 10.

[16] See Peter Evans-Greenwood, Ian Harper, Robert Hillard, & Peter Williams, Bitcoin, Blockchain & distributed ledgers: caught between promise and reality, Deloitte (2016).

[17] Andreas M. Antonopoulous, The Internet of Money, 16 (Merkle Bloom ed., 2016).

[18] Id.

[19] Id.

[20] Id.

[21] The TCP/IP protocol is the basic language of the internet. The TCP aspect of the protocol takes the data in question that is being transmitted and breaks it into smaller pieces. The IP address informs every member of the network where to send the data, and then the smaller blocks are reassembled once they reach the proper IP address.

[22] Rainer Bohme, Nicolas Christin, Benjamin Edelman & Tyler Moore, Bitcoin: Economics, Technology, and Governance, 29 J. ECON. PERSPECTIVES 2, 215 (Spring 2015).

[23] Evans-Greenwood ET AL., supra note 16.

[24] Id.

[25] Coin Market Cap, https://coinmarketcap.com/currencies/views/all/ (last visited July 25, 2017)(cryptocurrency listing website)

[26] Evans-Greenwood ET AL., supra note 16.

[27] Id.

[28] Lou Carlozo, What is Blockchain?, pg. 29. J. Acct., July 2017.

[29] Amuial ET AL., supra note 5, § 3.2.

[30] Kariappa Bheemaiah, Block Chain 2.0: The Renaissance of Money, Wired (Jan. 2015), https://www.wired.com/insights/2015/01/block-chain-2-0/.

[31] Amuial ET AL., supra note 5, § 2.

[32] Juels ET AL., supra note 6.