In this chapter from our Transaction Management eBook, Nick Watson, Founder & Managing Director of Ruby Datum Virtual Data Rooms, discusses the opportunities for block chain in the transaction management lifecycle.
One of the key questions to ask when it comes to blockchain (or distributed ledger technology) and transaction management is, is there trust?
In more economically developed countries, the answer is typically "yes" as the parties and contracts involved are usually trusted through heavily regulated individuals/entities with a proven track record. On the flipside, in places like Hungary, the potential for technology such as blockchain is huge, and already being put forward as a solution due to its transparency and permanence.
Blockchain as a double-edged sword
The complexities of blockchain technology are, however, a double-edged sword. The immaturity of the technology presents a real challenge to transactional industries where many firms are only just starting to move to modern Virtual Data Rooms or Payment Escrow services, offerings that have been around for many years. For a technology without a proven track record, things have a long way to go.
As it is now, there are a couple of clear deterrents to committing to blockchain because of the rapid developments in the technology:
- It’s not easy to back-track
If there are mistakes from using the technology, it is hard to rectify them as they become "set in stone".
- Little or no real gain from deploying the technology
Early adopters may not see too much return on their dedication to learning, for the technology is evolving so rapidly that by the time there is any chance to implement it, it is inevitably outdated – especially with all the red tape involved and the volatility of the market.
Is change on the horizon?
Many lawyers or consultants in a transaction will still use email, despite concerns with security and privacy. This is because the 50 year-old technology is simple, universal, and easy to understand. Fortunately, this is changing, but in industries like law, many people don't understand how blockchain works (or its benefits) and as such, would be reluctant to change. It requires technical understanding, so perhaps this is something we may see evolve with the next generation (who are brought up with technology integrated so heavily into everyday lives).
The dilemma of the 50%+ rule
The 50%+ rule dictates that if you own more than half of the mining network (or at least, can compromise it, with malware for example) then you are able to take control of the whole database and manipulate it. As there is no official party governing operations, the rule is of huge concern and is one of the critical blockers to large organisations embracing the technology.
The solution is to place the mining servers with trusted parties, but how would this be any different from a managed cloud network? We're essentially back to square one. Already with Bitcoin, many of the server farms are in the hands of just a few companies in Russia and China.
The role of quantum computing
Quantum computing presents a real threat to the technology too as solving the cryptographical challenges the miners undertake will be accelerated, and suddenly controlling 50% of the network is not so much of a challenge. Of course, quantum computing will also be a huge benefit to the encryption itself, so it creates a chicken and egg situation, with plenty of uncertainty, which is far from ideal in a world built around risk mitigation.
So, how can we overcome these challenges to the technology?
The only solution to the blockchain conundrum is time. It would be advisable to run systems in parallel for a few years to feel comfortable with the technology and allow it to "prove itself". Perhaps then, we will see adoption and trust accelerate in the same way we are now viewing electric cars as "sure, they crash, but there are less crashes". Blockchain and distributed ledger technology does indeed have a place in the future of transactional management, but not for some time. Sit back, buckle up and enjoy the ride!
This is a chapter from our eBook Transaction Management: Is technology taking over the deal? You can read more insights from legal industry voices on the role technology is playing in the transaction management lifecycle in the book. Download the eBook today.