April 22, 2019

The Blockchain and the New Architecture of Trust

Kevin Werbach

One would have to be living under a rock the past few years to miss the hype about blockchain, and the related phenomenon of cryptocurrencies. Blockchain describes a family of decentralized ledger technologies that promise to track and transfer anything of value—money, stocks, insurance claims, goods flowing through global supply chains, datasets for artificial intelligence applications, and more—without reliance on trusted central authorities.  Yet other than a bubble and crash in financial speculation around Bitcoin and other tokens, it’s hard to see the real-world implications of these technologies. Now the crypto-promoters convinced that blockchain is the answer to virtually any question are joined by cyber-skeptics arguing it is pointless at best, fraudulent at worst.

My book aims to be the first substantive, balanced treatment of the blockchain phenomenon accessible to a general audience. It explains the business value propositions and use cases for this technology, as well as its limitations. At a deep level, blockchain is important because it’s more than a new mechanism for money or distributed computing; it represents a fundamentally new form of trust. Trust is an essential lubricant of interactions in society and in business relationships. Yet the traditional forms of trust all involve dependencies on actors or institutions. Blockchain offers a new form of trust that offers strong technical guarantees of transaction integrity, without relying on a particular trusted third party.

In the book, I unpack this new structure of trust, identifying its potential as well as its limits and dangers. Trusting a system like a blockchain-based solution means more than just trusting the integrity of the transaction ledger and its audit log. Blockchain systems have already failed spectacularly. Realizing the potential benefits of the technology, while reining in its problematic aspects, will require governance mechanisms that operate effectively in a decentralized environment.

Blockchain is relevant to law and legal analytics in at least two ways. First, eliminating central authorities could remove the mechanisms for legal enforcement. Blockchain systems are global, natively digital, decentralized, and often divorced from government-issued identities. While there are benefits to “censorship resistance,” it also imposes barriers to prosecution of criminal activity, redress for fraud, and other aspects of the legal system that promote trust. And when human variables such as intent loom large, computers may be less accurate than courts and lawyers. The book maps out the various tension points between blockchain and law, as well as the ways they may be overcome.

At the same time as blockchain poses a challenge to law, it offers new resources to lawyers. Through algorithmically executed “smart contracts,” blockchain systems can implement new kinds of legal arrangements that remove traditional frictions in transactions. Blockchain can be a tool for an emerging class of legal engineers to modularize and automate a larger percentage of transaction flows, while still adding value for the aspects that require human understanding and bespoke solutions.

In the end, for all the unreasonable hype and unrestrained speculation around blockchain and cryptocurrencies, the technology will have ongoing impacts because its underlying value is so prosaic. Virtually every transaction involves parties who do not fully trust one another. Either they must delegate some trust to a third party, perhaps an institution, or they must endure significant transaction costs to overcome the trust gap. The legal system is, at its heart, an exceptionally successful response to this basic challenge. Blockchain represents a new class of approaches toward the same goal. Lawyers, especially those with a technical orientation, should be among its most eager students. The Blockchain and the New Architecture of Trust provides the examples and frameworks needed to engage on this journey.

Kevin Werbach