How bitcoin’s blockchain technology works

MHC Tech Law: How bitcoin’s blockchain technology works

twenty one Mar two thousand sixteen 62 Shares

Blockchain and other distributed ledgers are bringing about a revolution in fintech and beyond. Mason Hayes & Curran examines how these technologies work, and how they have solved a key issue at the heart of online payments.

In January, the UK government’s chief scientific adviser, Mark Walport, published a report called ‘Distributed Ledger Technology: Beyond Blockchain’.

The alternatively titled Walport report sets out the benefits of distributed ledger technologies and the adviser’s recommendations for its widespread application by government in other areas.

In light of the report and its findings, we explore what is likely to be 2016’s zeitgeist and most talked-about device in the technology and fintech sectors: blockchain and other distributed ledger technologies.

Blockchain explained

Blockchain arose from bitcoin. Peer-to-peer digital currencies, such as bitcoin, permit someone to transfer virtual currency to another person without an intermediary such as a bank required to process the transaction.

The key technology at the heart of bitcoin is its capability to verify that the person seeking to transfer a number of bitcoins actually possesses the bitcoins in question. Historically, this verification of ownership by any payment system has been accomplished by keeping a ledger of buyers and sellers, identifying who possesses an asset and whether it is a financial, legal, electronic or physical asset. Bitcoin repurposed the ledger concept for the digital era.

Bitcoin does this by maintaining a ledger – or blockchain – of every single bitcoin transaction ever finished in history. This ledger is protected by a sophisticated mathematical algorithm which verifies the ownership of the bitcoins in question.

In a revolutionary turn, this public ledger is stored on every computer that downloads the bitcoin software. Every time that a bitcoin transaction is successfully verified and finished, every copy of the ledger is updated.

Advantages of blockchain

The two main advantages of blockchain technology are:

  • Accuracy: The blockchain ledger offers traceable records on the history of the asset and proof of ownership.
  • Security: It is enormously difficult to tamper with the ledger or make unauthorised switches as numerous identical copies of the database are publicly collective. This feature also makes it tighter for cybercriminals to hack into the ledger, as a successful attack would have to hit all distributed copies at the same time.

In other words, the distributed ledger addresses many of the problems with paper ledgers by demonstrating clear evidence of who possesses the asset, where the asset is at every point of the transaction, and preventing duplication and tampering.

While blockchain and distributed ledger technologies can suggest theoretically tamper-proof and translucent digital economy transactions, there is a current lack of consensus on the standards and versions of blockchain to adopt. Organisations considering whether to test blockchain and distributed ledger technologies, or to invest in it, will need to understand the legal and financial risks, such as privacy and security, that they may encounter while the technologies are in their infancy.

The content of this article is provided for information purposes only and does not constitute legal or other advice. For more information, contact a member of the MHC technology team.

Tech Law is a weekly series brought to you by Irish law rock-hard Mason Hayes & Curran, whose legal tech team advises the world’s top social media organisations and emerging start-ups. Check out for more.

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