Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly. —Vitalik Buterin (co-founder, Ethereum)
Donald Trump campaigned to make America the “crypto capital of the planet,” a promise he announced during his keynote address at the Bitcoin 2024 Conference in Nashville, Tennessee, on July 27, 2024.
Trump recorded his crypto promise into law on January 23, 2025, when he signed an executive order titled “Strengthening American Leadership in Digital Financial Technology,” which directs the administration to position the United States as a global leader in the digital asset economy.
Initially, cryptocurrency and its underlying blockchain technology were considered highly unstable, with minimal infrastructure and only a handful of applications. Now, blockchain technology challenges how we think about money, finance, data security, and contracts. By minimizing the need for intermediaries, enhancing transparency, and automating various procedures, the decentralized nature of blockchain can disrupt conventional financial systems.
Blockchain is a distributed database or digital ledger shared among decentralized nodes that run the blockchain’s software on a computer network. Blockchains store data in blocks that get linked together into a chain by cryptography. Cryptography is the study and practice of creating protocols, algorithms, and systems to protect information from unauthorized access and tampering.
Blockchains can store and process different types of information, including financial transfers, smart contract interactions, identity management, intellectual property, voting, notarization, gaming, Internet of Things (IoT) authentication, insurance, and peer-to-peer solar energy trading.
Users utilize blockchains to perform transactions, execute smart contracts, or use decentralized applications (dApps) built on the blockchain. Users typically interact with the blockchain through interfaces such as wallet software, web apps, or other technologies that abstract away the complexities of the blockchain itself. Users do not need to run the blockchain software.
A cryptocurrency coin is a type of digital currency that has its own blockchain. For example, Bitcoin and Ethereum are coins because they operate on their own independent blockchains.
A node is a computer running blockchain software that participates in the network’s operations. Nodes actively maintain the blockchain’s integrity, security, and consensus by validating transactions and aggregating them into blocks according to rules, ensuring they are correct before adding them to the ledger or database. Each node holds an entire copy of the blockchain, and all the copies must match for validity. Nodes participate in the consensus mechanism, either by mining (in proof of work) or by validating (in proof of stake or other mechanisms) to add new blocks to the chain. Nodes help secure the network against attacks by policing the majority of nodes for honesty and rule-following.
Blocks function in a blockchain in a similar way that a cell functions in a spreadsheet. When the block is full, the nodes run the information through an encryption algorithm to create a hexadecimal number, called the hash, which is a compact way to represent binary data. To create a new block, the node(s) include(s) the hash of the previous block in the new block’s header, along with a timestamp and the Merkle root, which is a hash representing all the transactions in the block and other information.
In a proof of work (PoW) consensus protocol, the entire network of nodes works simultaneously, trying to solve a hash. Miners gather unconfirmed transactions from the mempool, or memory pool, into a block. These transactions include the sender, the recipient, and the transaction’s details. Miners create the block header, which includes a hash of the previous block, the software version, a timestamp, the Merkle root, a difficulty target for the new block’s hash value, and a “nonce.” A nonce is “a number used once.” Each miner starts with a nonce of zero, which gets appended to their randomly generated hash. If that miner’s number (0+ randomly generated hash) is not equal to or less than the target hash, then a value of one gets added to the nonce, and a new block hash gets generated. When one of the miners generates a valid hash that solves the problem, that miner wins the race and generates a reward. The reward that a successful PoW miner earns includes a block reward of newly created coins and transaction fees, although the exact split varies by cryptocurrency. For example, Bitcoin currently offers 3.125 bitcoins per block. Miners generate random hashes until the miner finds a specific value to solve that block’s hash target, proving that the miner did the work to earn a reward. The PoW consensus model is praised for its simplicity and the security provided by the sheer computational effort required to alter the blockchain. Critics note that the high energy consumption associated with the PoW model reduces its overall utility.
Most modern smart contracts use a proof of stake (PoS) consensus protocol, wherein validators get chosen to create blocks based on the number of coins they hold and propose to “stake” as collateral. The stake acts both as a commitment to good behavior and as a security deposit. Smaller holders can often join staking pools. Validators are typically chosen randomly, but the probability of being selected is proportional to their stake. Once selected, a validator creates a block by validating the transactions. Unlike PoW, no energy-intensive mining is required; validators just sign off on the transactions. Other validators in the network can attest to the block’s validity by checking that the transactions are valid, that the proposer was legitimately chosen, and that the block adheres to the network’s rules. Once enough validators attest to a block’s validity, the block gets finalized. All nodes, including those not currently acting as validators, can verify the chain’s state against their local copy. They passively verify that the added blocks are consistent with the rules and the consensus mechanism, but they do not directly participate in block validation unless they’re also staking. If validators act maliciously, they can lose part or all of their stake by way of “slashing.” Slashing in PoS occurs when validators lose the coins they staked for dishonest acts, such as double voting. Slashing isn’t universal to PoS consensus models. For example, the Cardano cryptocurrency relies on reputation and economic incentives instead of slashing to maintain the integrity of its blockchain.
Because validating doesn’t consume resources like energy in PoW, validators theoretically could incur no cost if they vote for multiple blockchain forks and undermine the security and integrity of the network. A blockchain fork occurs when a blockchain splits one chain, which diverges into two or more, covering both accidental and intentional types. Intentional forks include soft forks, which are backward compatible and don’t cause permanent splits, and hard forks, which aren’t compatible and lead to new chains. Accidental forks create temporary splits that occur when two miners find a block at the same time. The network resolves an accidental fork by choosing the longest chain and discarding the shorter chain. Strategies such as slashing, checkpointing, quorum systems, staking periods, honesty incentives, and unique signatures can mitigate forking risks, which can compromise the integrity of the original chain.
The PoS consensus protocol model is growing in popularity because of its energy efficiency, scalability, and security through economic incentives. Drawbacks include regulatory uncertainty about whether staking should be considered an investment or security, inconsistent performance from randomly selected validators, initial coin distribution for new PoS networks without a mining process, more complex consensus mechanisms, and the risk of centralization amongst those who hold more coin at the start.
Some blockchain protocols allow for programmable contracts that automatically execute when certain conditions are met. In 2015, Vitalik Buterin founded Ethereum, which is often considered the pioneering platform for smart contracts. Ethereum introduced the concept of a blockchain with a built-in Turing-complete language, known as the Ethereum Virtual Machine (EVM). Turing-completeness is a concept in theoretical computer science named after the English mathematician and cryptanalyst Alan Turing; it describes a system’s ability to simulate a Turing machine, which can solve any computational problem given infinite time and memory. In the context of Ethereum, a Turing-complete language means it can express any computational function, allowing developers to create sophisticated smart contracts for various uses, from financial applications to games that can run deterministically and securely across the network.
Evidence suggests that EVM is Turing-complete, as it supports looping, branching, and state storage, essential for general-purpose computation. Looping allows a program to execute a block of code multiple times, which is useful for repeating tasks or processing data collections. Branching enables a program to make decisions based on conditions, executing different code depending on whether a condition is true or false. State storage refers to using variables to hold data that can change as the program runs, allowing the program to remember and use information over time. However, EVM does run into practical limitations to its Turing-completeness, such as gas limits, which cap computational resources and effort needed to execute transactions in order to prevent infinite loops and ensure network efficiency, which in practice, mean that EVM computations are bounded.
Smart contracts offer many benefits. The blockchain ensures that no single entity controls the contract execution, which fosters trust among users. Once deployed, smart contracts are immutable, which adds security but also means bugs or vulnerabilities become permanent unless a new contract version gets deployed. Ethereum introduced technical standards to support the creation of digital assets that can be traded or owned on the blockchain. Ethereum smart contracts follow a “gas” internal pricing system for running operations, wherein users pay for the computational steps that their transaction or contract execution requires, preventing spam and securing the network. Ethereum spurred an entire ecosystem of decentralized applications (dApps), decentralized finance (DeFi), and non-fungible tokens (NFTs; blockchain-based tokens). It also became the foundation for many blockchain innovations beyond cryptocurrency.
The immutability of smart contracts can be a double-edged sword. If a vulnerability exists in the code, it can lead to significant losses. In April 2016, Ethereum launched its Decentralized Autonomous Organization (DAO) on its blockchain to create a decentralized investment fund, which raised $150 million through a token sale. On June 17, 2016, an anonymous hacker exploited a reentrancy flaw in the DAO’s smart contract code and drained about 3.6 million ether (valued at approximately $50 million to $70 million at the time) from the fund. The Ethereum community responded to the threat by creating a hard fork, splitting what became known as Ethereum (ETH) from what they renamed Ethereum Classic (ETC). The hard fork essentially rolled back the blockchain to before the attack, moving the drained funds back into a new contract from which people could withdraw their ETH.
As Ethereum grew, it faced scalability issues, leading to high transaction fees and slower confirmation times. This prompted several upgrades, including Ethereum 2.0, which transitioned from the PoW consensus protocol to the PoS consensus protocol for better scalability, security, and sustainability.
After the split, the ETC community maintained the original chain based on the immutable philosophy and ideological purity of blockchain principles, prioritizing decentralization and resistance to external or centralized control. Meanwhile, the newly formed ETH community demonstrated a willingness to adapt the blockchain when faced with critical issues, emphasizing practical governance where community consensus could lead to changes in the protocol. The adaptability of the ETH community attracted a larger developer base, which led to broadened institutional adoption, making it the platform of choice for many in DeFi, NFTs, and institutional investors, partly because of its proactive approach to upgrades and security. ETC enjoyed a smaller but more committed community that supported its vision of an unchangeable blockchain. The development of ETC has been slower than that of ETH, but ETC focuses on maintaining a PoW network with strong emphases on security and decentralized governance. ETC carved out a niche for those who prioritize the original ethos of Ethereum, often appealing to those who are skeptical of centralized interventions or prefer the simplicity of PoW to ETH’s PoS. Although Ethereum is widely considered the pioneer of smart contacts on the blockchain, there are now many other platforms to choose from.
So now that you know the basics about what smart contracts are, how they came to be, and what kind of technology they rely on, how can you use this information to improve your law practice?
By integrating smart contracts, lawyers can streamline document management and automate routine legal processes, significantly reducing administrative overhead. By permitting the automatic execution of contracts based on predefined conditions, lawyers can enhance efficiency while minimizing errors in various transactions. For instance, in real estate, smart contracts can facilitate title transfer and manage escrow services by ensuring that funds get released only when all conditions are met. In intellectual property, they can automate royalty payments for certain milestones.
Moreover, smart contracts provide an immutable record of all transactions or changes, which is invaluable in contexts such as wills, waivers, and deeds. This permanence offers clear, tamper-proof evidence in dispute resolution, proving compliance or non-compliance with contract terms.
As a lawyer, you can leverage this technology to offer specialized services and educate clients on the benefits and risks of digital contracts in different blockchain ecosystems. You can also provide advice on the legal implications of using such contracts, audit smart contract code for security, or even develop new legal services tailored to smart contract technology. Smart contracts not only set your practice apart but can position you at the forefront of the digital transformation and make your services more appealing in an increasingly tech-savvy legal marketplace.
