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October 08, 2018 Cover Article

Blockchain: Five Things to Know

Yvonne R. Castillo

While the conventional wisdom around blockchain is that it’s a technology only affecting financial markets, the reality is that design and construction stakeholders, including lawyers, ought to pay attention too. If you don’t, you risk falling behind on an important trend that has the potential to disrupt markets, including your own.

The interesting (yet exciting) thing about blockchain is that it’s hard to predict the uptake of applications and their implications for the future because it’s still very early days and real-world applications are being developed and tested right now. Technologists warn, however, that this early stage shouldn’t be ignored and is similar to the mid-1990s when, for example, we were all being introduced to email (the “killer app” of the first generation of the internet). Many, including myself, didn’t really appreciate at that time the disruption that this simple application would have. In fact, I have a strong memory of my first encounter with email: I was working in my office as a young public defender when the “IT guy” knocked on my door to ask if he could install email on my computer. When I asked what I would do with this application and he explained that it would allow me to send messages to my colleagues in the office, I laughed. Why would I need to send messages through my computer when I could simply walk down the hall and talk to them in person?

With that in mind, here are the five things you should know about blockchain.

1. At its core, it’s just a database.

If you Google blockchain, you’ll get websites replete with technical jargon like “cryptocurrency,” “global ledger,” “distributed ledger technology,” “mining,” or “immutable record.” But when you filter through all the “technical-ese” of these resources, blockchain technology is fundamentally just a database that has special design features that make it innovative, even revolutionary. Its architecture is significantly more secure via a framework that pairs a public and a private key (the secure identity piece) that enables one-way encryption and decryption for sharing (an append-only process) that is date-stamped and difficult to tamper with, making it much more difficult to hack. So why should you care? In any circumstances in which data is shared — whether at a project level, operations level, or via legal contract — blockchain applications are relevant.

2. Its framework is decentralized so risk is distributed.

Unlike traditional databases, where one party controls the data or information in the database, blockchain technology is a decentralized transaction ecosystem where multiple parties to the database (or network) contribute transactional data in real time and all have a complete copy of the latest version and the history of previous versions. Access is decentralized and the risk is distributed so that no one single party carries the risk of a breach. Thus, hackers can’t hold data or records ransom, for example, because all parties have a full and complete copy of the database and its transaction history. The use of the word “transaction” in this article refers to any circumstances in which a “thing of value” is shared with another entity. Therefore, architectural services, engineering services, legal services, and construction services are all part of the transaction ecosystem and can be transacted over the internet, which makes blockchain applicable and valuable not just to financial services, but to all commerce — including the design and construction industry.

3. It eliminates the middle man.

Blockchain enables true digitization, where agreements to provide services are digitized with tokens (that can represent USD or other assets) and those tokens are divisible (like a dollar can be broken down into pennies) and can be transferred via the internet without needing intermediaries to process or verify the transaction. Unlike traditional transactions where a bank, credit card company, or other intermediary is required to verify and validate the release of the “thing of value,” blockchain-based transactions are processed using an algorithm through a decentralized network of computers.

For example, in a neighborhood where homeowners have rooftop solar panels and one homeowner produces more energy than needed, blockchain technology cuts out the middle man (i.e., the utility) and enables homeowners to sell their excess generated energy in real time to a neighbor. In fact, this scenario is playing out in a pilot project in Brooklyn.

The medical industry is also neck-deep in blockchain pilot projects. One such application is aiming for “womb to tomb” medical records, with the goal of breaking down silos in medical recordkeeping, giving patients the power to securely manage their health records, and ultimately deploying holistic care. With blockchain technology, an infant’s birth is recorded in a digital, blockchain-based record; all subsequent health care treatment is recorded in the same digital record for that person’s entire life. Access to health-care history is provided by the patient who gives access to the provider through a private, cryptographic key. With this use case, gone would be the days that patients have to recollect from memory (or a paper file) their medical history for future health-care providers’ use.

4. It’s getting big attention in statehouses across the country.

Already in 2018, fifteen state legislatures (Arizona, California, Colorado, Connecticut, Florida, Illinois, Maryland, Missouri, Nebraska, New Jersey, New York, Tennessee, Vermont, Virginia, and Wyoming) are currently considering or are in the process of passing legislation related to blockchain or its potential applications. Most of this legislation explicitly enables blockchain technology (albeit not necessarily required), mandates agencies to explore the technology, or formally institutes the study of the technology for use. Compared to last year when only seven state legislatures were actively exploring legislation and just three in 2016, this year’s uptick is an indicator of a trend that will likely continue to grow.

5. The design and construction industry is ripe for the transformational change blockchain represents.

Several potential use cases may connect blockchain to the design and construction industry. No other industry needs better, more efficient ways to collaborate and transact. Projects of all sizes involve multiple stakeholders and phases — from financing and funding to planning to design and, finally, to construction, maintenance, and operations. How might blockchain bridge communications between so many stakeholders and streamline this complex process?

One particular area to watch is smart contracts. Smart contracts are self-enforcing contracts enabled with blockchain technology. What’s interesting about this application is that it behaves as a governing mechanism of the relationships between the parties, similar to a traditional contract, but more of a “governance on wheels” mechanism because the terms and conditions are connected to the flow of funds and aid in automating a sequence of events. It’s an active, self-enforcing contract that is automated through a series of coded “if/then statements.” In other words, it’s an automated contract.

In its simplest form, a smart contract operates like a vending machine: You put money in, get the good of your choice, get your change, and the machine itself is designed to be secure in that the effort required to break into it isn’t worth the amount of money it’s designed to hold.

In a more complex transactional environment such as the design/construction industry, you can imagine breaking down a more traditional contract for design and construction services into a series of actions that are connected to payments. So the contract not only governs the agreement for services between the parties, but also self-executes on payments and acts as a project management platform all in one. For example, if service X is provided, then payment X-1 is made automatically and service Y (presumably, in this example, the next task/service in line) is notified that work can begin. The question isn’t whether smart contracts are coming to the design and construction industry, but when. Innovators or early adopters of the technology will undoubtedly have the market advantage.

A Decentralized Autonomous Organization (“DAO”) is another potential application. DAOs are created through a bundling of smart contracts. A DAO is an organization, such as a non-profit or corporation, that is organized and operated through software instead of people. While still in a nascent stage of research and development, it’s feasible that buildings or facilities could be organized as DAOs. For example, as a DAO entity, a condominium project with the aid of the internet of things (integration of sensors and meters) could support self-maintenance services, collect rents through connected digital wallets, serve as the platform for tenant voting on building issues, and more.  

Finally, blockchain allows for tokenized public finance of infrastructure, which builds on crowdfunding and P3 — but in a blockchain environment that cuts out the friction and costs of traditional bond initiatives and has great potential to democratize access to wealth-building through “mini muni bonds.” (See case studies City of Denver and City of Cambridge). Indeed, more of the investment money goes directly to projects in need rather than middlemen, and the process is much more transparent and auditable. The first such project in the United States was expected to be launched in May 2018 by the City of Berkeley through a partnership with Neighborly, an online investment platform, but apparently politics has entered the fray and the process has slowed. Regardless, the cherry on top for this effort — when it finally comes to fruition — is its economic development incentive structure: If investors desire, interest earned on bonds, as proposed, may be redeemed through tokens rather than cash — which could be accepted by local retailers and restaurants which, in turn, could layer on discounts/loyalty rewards.

Blockchain technology’s impact on funding public infrastructure may very well be game-changing and deserves to be closely watched. In time, blockchain will just be a technology that runs (behind the scenes) the applications we all know and love and we’ll no longer be so obsessed with its functionality and purpose. For now, it behooves us all to understand, at an early stage, just how groundbreaking it could really be because it’s shaping markets, helping us understand how much more efficient and productive we can be, and is creating new jobs that we never imagined before.

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Yvonne R. Castillo

Victor O. Schninnerer & Co., Chevy Chase, MD